Tag Archives: psa

Tullow sues Heritage – Uganda pays the price; court papers published for $300m oil trial

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Guestblog by Taimour Lay, Former Platform researcher, Uganda and DRC. Download the full court papers (30 megabytes)

A court case in London between Tullow and Heritage will reveal much of what went wrong in the battle over Uganda’s oil.

It is a long way from the shores of Lake Albert to the new commercial court building in central London, from fishermen and farmers in poverty, the heat and dust of Kaiso-Tonya, to £500-an-hour barristers and the concrete cold of a British autumn.

"Royal Courts of Justice" - London

But on Friday 18 November Tullow and Heritage, former oil exploration partners in Uganda, began their preparations for a $313 million legal fight. The case is about Uganda’s oil, Uganda’s tax laws and, ultimately, Uganda’s politics, but it will be decided by an English judge in an English court.

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Oil activist in DRC slams repression & Perenco secrecy during interview

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Pastor Jacques Bakulu has been campaigning against oil companies operating in western Congo for over 20 years. The secretive Anglo-French company Perenco took over Chevron’s concession in 2004 and claims to be producing 25,000 barrels a day. None of its four contracts are publicly available. In February this year Perenco were once again accused of pouring toxic waste into the Atlantic.

There are other companies looking to exploit onshore and offshore fields in the next few years, including UK-registered Surestream. On the other side of the country, two unknown companies have just been granted a license to explore at Lake Albert and the government has plans to carve up the massive cuvette centrale in the search for more oil.

Bakulu has witnessed at first hand DRC’s first foray into oil production and worries that Bas-Congo’s experience will be replicated across the country.

What are communities angry about in Bas-Congo?

Lack of jobs. Always. We know the oil is there and for twenty years it has been coming out of the ground but there are no jobs and there is no development. There is no electricity in Moanda [the capital of the province]. The environment is being damaged every day. Gas flaring happens all the time and the air is polluted. And it’s all kept secret.

What have you seen of the contract Perenco is operating under?

We have never seen the concession contract! We are still trying to see it after all these years. But we know the type of contract is the first mistake. With the concession arrangement the government only receives tax, we don’t know the real amount of oil and the company says they have no obligations to the people. We have always asked ministers to change the contract to a Production Sharing Agreement (PSA). We’d have more control that way. But the problem remains that we still don’t have an oil law! It’s with Parliament only now. And the government is incapable of making contracts and negotiating.

DRC does not have a national oil company; not really. Cohydro trades, that’s it. That’s why all our technicians are in Cabinda or Angola. We need to build expertise.

A PSA would not necessarily be that much better, depending on the terms. Many PSAs are actually thinly disguised concession agreements.

Well, I once said to Perenco, ‘We want a PSA’ and they said to me, ‘Sure, we have no problem with that, we and the government will have the same rights as now. It’s no different!

How do people protest?

It’s difficult because there is so much poverty. Also, oil is offshore as well as onshore. Our organisation CEPECO is always with communities seeking to build awareness and encourage opposition. There have been many demands for jobs. People have blocked roads for a day and the technicians have not been able to get to their platforms. In January 2010, in Boma people protested inside an installation itself demanding work. The company actually invited people inside for a meeting but when they got in they were put in cars and taken to the police. 16 people were arrested.

Do people also protest specifically about the environmental damage?

Yes, they do. But people do want the oil to be produced. I can’t be against oil completely. We need it. It’s the only way out of poverty for Bas-Congo because we have nothing.

This interview was conducted by Taimour Lay with Pastor Jacques Bakulu in Kinshasa in May 2010.

Cleaning up Museveni’s oil mess in Uganda

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Taimour Lay envisions the potential for a new government in 2011 to renegotiate and restructure Uganda’s oil contracts with Tullow, Total and CNOOC:

“Faced with the mess Museveni has bequeathed, the new president will find that the most important thing he ever does in power is to mobilise support for renegotiation of the oil agreements. Even if he ensures changes are made and the PSAs are significantly improved, oil extraction will bring upheaval, pain and dislocation to Uganda. So the new president’s role in amending the existing deals is to reduce the impacts of the ‘oil curse’, share what benefits are derived and help Ugandans weather the coming changes. This is an opportunity that could still be lost without sustained democratic engagement with the issues and radical institutional reform.”

See the full article published in Sunday’s Monitor.

BG fined while villagers resist in Kazakhstan

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The Western consortium developing the enormous Karachaganak natural gas field in Kazakhstan was fined $21 million yesterday for excessive dumping waste. British BG, Italian Eni and American Chevron, the companies developing the field on the the border with Russia, were convicted of environmental violations in 2008 by a regional court.

Analysts and reporters believe that the penalty is part of a pressure drive by the Kazakh state aiming to renegotiate or change contracts with private foreign oil companies. Kazakhstan is currently scrutinizing seventeen landmark oil deals it signed in the early 1990s when it had a much weaker negotiating position, many of which are now seen as being unfairly skewed towards the international oil companies by locking in favourable tax regimes.

While the Kazakh state has only recently begun to raise these issues, villagers from Berezovka, a small village located within a kilometre of Karachaganak’s sanitary protection zone have been fighting back for years. According to Crude Accountability, the gas field is spewing toxins into their community, causing serious environmental and health damage among the residents. To stop this damage, a committed group of villagers created the public organization Zhasil Dala (Green Steppe) to fight for compensation and relocation to a safe and environmentally clean location of their choosing.

Earlier in February, the first ever lawsuit filed by NGOs against the Kazakh government received a continuance. In 2004, the Kazakh government illegally reduced the Sanitary Zone around Karachaganak from five to three kilometres, exposing the villagers to highly toxic levels of pollutants. The 1,500 residents of Berezovka believe that as a result, they live in a zone that is dangerous to life. The case taken by the Ecological Society “Green Salvation” and local villagers accused the federal government of “failing to undertake measures to protect and defend the rights and freedoms of citizens”. Five other villages, consisting of nearly nine thousand people, are situated on the perimeter of the Karachaganak Field’s sanitary protection zone and experience significant negative health impacts.

If the new legal process ends positively and the lawsuit demands are satisfied, the villagers of Berezovka will be relocated. As a rule, the expenses in such cases are incurred by the company that is operating the field. However, according to a recent article in a Kazakh paper, the Karachaganak PSA ensures that all charges on foreign investors are compensated for by the Kazakhstani government – another reason to renegotiate!

 

PLATFORM leaks Uganda’s oil contracts – not such a rosy deal after all

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Held secret by the Ugandan government and oil companies Tullow Oil and Heritage Oil, PLATFORM today is revealing the terms of the contracts for oil operations by Lake Albert on the Uganda-Congo border, and their economic implications.

For the first time, one of Uganda’s Production Sharing Agreements is available to the public to read, after a leaked copy was placed online. PLATFORM’s analysis of the contract reveals that the repeated claims by the Ugandan government and the oil companies that Uganda has received a very good deal and the best in the region are not only a fiction, but were reliant on the real terms of the contracts being kept secret. While the contracts will deliver vast profits to Tullow Oil and Heritage Oil, the contracts will prevent the Ugandan people from receiving their due benefits. The terms of the contracts and the lack of openness are placing Uganda on a track set for the “resource curse”.

Download:

“A Bad Deal Made Worse – How the PSAs are ripping off Uganda” - PLATFORM’s preliminary economic assessment of the contract

(A full qualitative and quantitative analysis will follow at a later date)

Leaked copy of Heritage’s Production Sharing Agreement for Block 3A signed in 2004: Part 1 Part 2

Summary of “A Bad Deal Made Worse – How the PSAs are ripping off Uganda”

* There is currently no transparency over Uganda’s oil contracts, on the part of the Ugandan government or the foreign oil companies. This will prevent positive development outcomes while enabling corruption and environmental degradation on the part of the oil companies. Past experience indicates that without public debate and accountability, the “resource curse” is largely inevitable.

* The Production Sharing Agreements signed in Uganda do not represent the great deal publically claimed by the government. Internal figures modelled by the government indicate that the state will receive 67.5% – 74.2% of total revenue. A Credit Suisse analysis of Heritage Oil predicts government take of between 55% and 67%. PLATFORM’s assessment indicates the government will received between 47.4% and 79.5% of revenues, depending on the price of oil, size of fields, development costs and other factors. The highest figures will only be achieved if the government takes up the possible 15% state participation. These figures are all below the 80+% regularly trumpeted by the government and the oil companies.

* The contracts are highly profitable for the participating oil companies. In the most likely scenarios, Tullow Oil could make a 30-35% return on its investment. This represents a very high profit level for the oil industry, even for risky projects, and indicates excessive profit-taking at the expense of the host government. Even in the least promising (and less likely) scenarios, Tullow would received a 12-14% return – a comfortable profit margin.

* Compared to contracts in other countries, Uganda is receiving a worse deal. Modelling the same field under the terms of Heritage’s contract in Iraqi Kurdistan (a more dangerous environment) indicates that the Kurdistan Regional Government will receive a greater proportion of revenues than Uganda, while Heritage will receive a higher rate of return in Uganda.

* Uganda’s contracts fail to capture increased rent as the oil price rises. This is a major flaw, especially in light of the recent high oil prices. As prices rose through the 2000s, there was a recognition amongst producer governments that the state has a duty to its citizens to capture the rent from higher prices and that the private companies do not have a right to excessive profit-taking. As the oil price rises, the oil companies make a higher and unlimited profit. However, the state take plateaus at under 80%. Thus the oil companies will take close to one quarter of oil revenues, whether the oil price is $70 or $200 – raking in enormous profits.

* Most of the risks lie with the Ugandan state, not the private companies. Price risk lies primarily with Uganda, with the private companies virtually guaranteed a profit even at low prices. While project risk (eg increased costs) are shared between both, Ugandan revenues will fall significantly further if the project runs over-budget.

Iraq: New contracts will undermine Iraqi independence

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The mega-oil deals signed and pledged in Iraq in last week have been major news, marking another step by the oil majors back into a country that liberated itself from the “robbery and exhaustion practiced by the monopolistic oil companies” in 1972. But the full consequences of the agreements have been hard to untangle.

BP and Chinese CNPC last week signed the full contract to develop the Rumaila field, which was awarded to the consortium in July. Rumaila is a supergiant field, with 17-25 billion barrels of recoverable reserves – 3 times Azerbaijan’s total. BP’s contract pledges to increase Rumaila’s oil production from under one million barrels per day to 2.85 million. On 4th November, Exxon and Shell were awarded the right to develop West Qurna-1, proposing to raise extraction from 270,000 barrels a day to 2.35 million. Eni will similarly increase Zubair’s production from 200,000 barrels.

Iraqi Oil Minister Hussein Shahristani has been claiming victory in the negotiation battle, presenting an image of having withstood oil company demands (and US government pressure) for better terms. In July, Baghdad insisted that $2 was the maximum it would pay as a “remuneration fee” per barrel of crude extracted. Apart from BP/CNPC, all the oil companies walked away, grumbling that they deserve higher profits. Now they’re back, signing what appear to be the same contracts. E.g. Exxon/Shell’s fee for West Qurna-1 is for $1.90 per barrel.

However, there are various reports indicating that the terms were sweetened to tempt the oil companies back. Referring to Eni’s deal for Zubair, Carola Hoyos writes on the FT blog :

“Privately, oil executives say Iraq sweetened other fiscal terms that brought the entire project’s economics to about half way between the minimum Eni was willing to bid and the maximum $2 Baghdad was willing to pay during the June auction, in which every western oil company except BP walked away complaining about Iraq’s unrealistic terms. In June Eni was willing to accept no less than $4.80 a barrel. The new terms make the deal equivalent to the Iraqis paying about $3.80, one executive said.

Others claim that the oil companies had misunderstood the 35% corporate tax rate – that it only applies to the fee paid per barrel, not to net profits, thus improving their rates of return.

Either way, a recent interview with BP Chief Executive Tony Hayward in Petroleum Intelligence Weekly indicates that the oil companies will still be taking major profits from Iraq’s oil:

“Q. You’ve made a very bold move with the Rumaila contract in Iraq. Why did you go so low and isn’t the margin so small that it’s almost immaterial to you as a company?
A. It’s a 65 billion barrel oil-in-place field, the third or fourth largest in the world, of which 12 billion bbl have been recovered and we estimate there’s probably 20 billion bbl to be recovered — the range is probably 17 billion-25 billion bbl. Over the last five years we’ve worked with the South Oil Co. (SOC) exclusively, providing technical support to the field, so we know a lot about the reservoir. That’s the first thing — we understand the rocks. We are confident that the returns from this investment will be compatible with other opportunities in our portfolio. That means a 15%-20% return. […]
Q. A return of 15%-20% even with this fee-based structure of $2 per barrel?
A. Yes. It’s material because it’s a small margin times very many barrels. We are going to take the field from around 1 million barrels per day to nearly 3 million b/d, so 2 million b/d will be incremental production and that adds up to a lot — it’s material for BP.”

 

The interviewer was surprised at Hayward’s response, as a 10-12% rate of return provides comfortable profit levels. So 15-20% is not what you’d expect given the repeated complaints from Western oil companies and governments that Iraq wasn’t giving them fair terms. Furthermore, it reveals the greed behind the previous demands for $4 fees per barrel or Production Sharing Agreements and the lies spun in arguing that these were the minimum terms possible.

Interestingly, Hayward also points to something else important – that BP have been “providing technical support to the field, so we know a lot about the reservoir”. Greg Muttitt of PLATFORM warned about this in 2005, that Shell and BP were providing “technical assistance” for various fields to get access to all the geological data. By “understanding the rocks”, the companies are able to make a well-targeted pitch for the development licence and beat off competition.

However, the real clincher on why BP will be able to make such high profits is in Haywards’s next statement:

“The field is already in production. As you get cost recovery immediately you never have to make very large investments, so even to go from 1 million to nearly 3 million b/d the amount of capital we have to expose at any one moment is not very great as we’re getting our money back as production grows.”

 

 

Iraq’s oil, especially in mega-fields like Rumaila, is cheap and easy to get out of the ground. You don’t need to invest much to begin receiving large revenues in return. The current comparatively low level of output from these fields is due to the legacy of war and sanctions, which means that boosting production is simple. Former Oil Minister Esam Chalabibelieves that

“During the first months, BP and CNPC will not do much work, because they have to raise output in Rumaila by 10% in three years and that is an easy job for them. The first phase of the Rumaila contract does not need a lot of cash or much effort. South Oil Company did a good job recently, but BP and CNPC will collect the fruits.”

 
BP and CNPC are only committed to spending $300mn in the first 33 months, a small amount for oil majors and a very comfortable length of time in which to guarantee the production increase.

Hayward also inadvertently refers to an issue that has caused much opposition in Iraq:

”Now, people don’t really understand the contract and we haven’t sought to explain it because we haven’t signed it yet. When we have concluded it we will explain it to the investment community.

 

 

Hayward is focused on the investment community – BP’s true stakeholders. But it doesn’t seem to occur to him that the Iraqi people might want to understand a contract that governs 20% of Iraq’s proven reserves. With oil making up 95% of Iraqi government revenues, Rumaila alone could be responsible for one fifth of government income.

The lack of full transparency around the terms of the contract, including revenues and who controls development, undermine accountability of the Iraqi government and the ability of civil society to challenge problems with the contracts. This has led to opposition within Parliament, with MPs insisting that oil contracts require Parliamentary oversight. Noor Adin al-Hadyi, an opposition member of the Parliament’s oil and gas committee, said the committee could decide to take the issue to court to ask that the contracts be cancelled.

This licence round previously caame under major criticism from both the oil workers’ union and the management of the South Oil Company. The Iraqi Oil Ministry went as far as firing Fayadh al-Naama, head of the South Oil Company, in late July for opposing the current contracts.

As neither BP nor the Iraqi government have sought to explain the terms of the deal, it has been particularly difficult to assess the impacts on management and control over Iraq’s oil industry. Iraqi oil analyst Munir Chalabi has raised particular concerns over how the contract creates “field operating divisions” (FODs), which exist as legal entities and give BP/CNPC a major role in “their decision-making, control, management, development and operation of all the giant fields.” Chalabi feels that these FODs would also would “mean the fragmentation” Iraq’s North Oil Company and South Oil Company, which currently produce Iraq’s total of 2.4 million barrels per day. Having operated Iraq’s oil & gas fields through 30 years of sanctions and war and built up enormous experience, “their role will be reduced to no more than sub-holding companies for the giant oil fields, and limited in their management to distant and marginal fields.” The contracts undermine the national oil companies, creating greater pressures towards privatization, threatening a situation where Iraq is no longer able to produce its oil autonomously.

These fears about the carving up of the Iraqi oil companies appear to be confirmed by a further comment by Hayward:
“The model we have agreed with the Iraqis is to carve out of SOC [South Oil Company], which currently operates the field, the operating part for Rumaila. We are going to create a Rumaila operating company which will be principally Iraqi staff into which we are going to put BP technical specialists, much as we did in TNK-BP. So, sprinkle BP and CNPC technical specialists and then have the leadership populated between BP, CNPC and Iraq. It means we get an enormous amount of leverage from not having many people there. So we don’t have to deploy hundreds of people to Iraq. The model is exactly what we did with TNK-BP, particularly what we have done at Samotlor.”

So BP will maintain “an enormous amount of leverage”, while removing Rumaila from the existing Iraqi national oil companies. The state will only retain a minority 25% stake in the Rumaila operating company, down from an originally proposed 51%, leading to further marginalisation.

Hayward’s unfortunate example of TNK-BP formally operates as a private company pursuing corporate interests (of BP and its Russian oligarch shareholders), without regard for Russian public interests or needs. The arguments between BP and its rivals over control of TNK-BP can in large part be traced to the Russian shareholder’s unhappiness with the level of leverage available to London.

Hayward’s comment indicates that BP sees this model as a recipe for success. Increased leverage for BP means reduced leverage for Iraqi national oil companies, the Iraqi state, Iraqi workers and the Iraqi public.

The fact that these contracts are not Production Sharing Agreements is a testament to the successful campaigning and resistance on the part of the Iraqi oil workers and the international solidarity behind them.
However, in their current form, BP and Shell’s new deals signal a major threat to Iraq’s future ability to control extraction of its natural resources.

“Worst kept secret? Tullow Oil’s contract” in Uganda

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Great article by Taimour Lay in Uganda’s Independent:

The full release of Uganda’s Production Sharing Agreements (PSAs) with Tullow Oil and Heritage Oil & Gas is the fundamental first step towards forging a democratic and socially responsible extraction of oil in the Albertine rift.

Instead, Ugandans are being subjected to a disinformation campaign coordinated by the government and the oil companies, consisting of selected leaks to state-owned newspapers, off-the-record briefings to chosen NRM Parliamentarians, and disingenuous public statements from ministers and company executives alike.

The latest stage in this deliberate attempt to throw Uganda’s growing opposition off the scent came last weekend with Tullow Oil founder Aidan Heavey’s ‘’exclusive’’ interview with New Vision (‘’Details of oil deal revealed’’, September 26), in which the chief executive claimed that ‘’for every 10 barrels of oil the Ugandan government gets eight, which is 80%.’’

Heavey, who earned $46m in the last financial year, also – astoundingly – asserted that ‘’the [production sharing] deals have been published. There are IMF reports about it.’’ The interviewers allowed this manifest untruth to go unchallenged.

Given that the PSAs are still secret, why was Heavey able to ‘’reveal’’ the 80% figure so freely? Now that these details are being thrown to the public piecemeal through unofficial channels, it makes the government’s current position – that it is bound by a strict confidentiality clause – increasingly untenable.

This isn’t the first time parts of the contracts have supposedly been released at a politically sensitive juncture beneficial to the government; ‘supposedly’, since FDC members of the Parliamentary Natural Resource Committee still vehemently deny they were shown the PSAs in June 2008. As MP Beatrice Atim directly told a Ministry of Energy representative at an oil conference on September 10: ‘’We have not seen the PSAs. [NRM] MPs lie and say ‘we were shown it’. But I can assure you we were not.’’

As recently as September 22, Mitzi Westwood, finance director at Heritage Oil & Gas, used the Daily Monitor to complain that high rates of tax in Uganda were affecting the company’s ability to attract new investment partners. That Heritage is contractually obliged to pay corporation tax at 30% came as news to observers who had repeatedly been given to understand that such details were part of the ‘’confidential PSA’’. Why are the oil companies free to release key information when it suits them but Ugandans still have no right to a full view of the contracts that their government has signed?

And now we have Heavey using a newspaper to proclaim the 80% profit-oil share – ‘’Best deal in the world’’, the frontpage headline unabashedly declared. The reality is that the ‘’80%’’ figure – even if superficially true – confuses more than it clarifies. The PSAs will reveal the relative share of ‘profit oil’ between the government and the companies but these complex agreements cannot be reduced to a headline figure in this way, however much Heavey would like us to believe otherwise.

The profit oil percentage is merely one measure – and a misleading one at that – of whether the existing contracts are a good deal for the country. The terms of a production sharing contract determine not just how the extracted resources will be shared between state and investor but also the legal rights and obligations of both parties. The devil is all in the detail: it is of the greatest urgency that Ugandans are informed of the PSA clauses over duration, cost recovery, economic risk, and where financial responsibility will lie in the event of economic delays and environmental problems.

Heavey is predicting two billion barrels of reserves on the Ugandan side of Lake Albert. In 5-10 years, the country could be producing 100,000-150,000 barrels a day. But before we can begin to assess what this means in dollar terms for the national treasury, the 80-20% profit-oil split has to be viewed in the context of the ‘cost recovery’ provisions which will dramatically reduce Ugandan proceeds in the short to medium term. This means that in the first years of production, the company will be taking up to 60% of the profits to recoup the capital it has invested over the exploration period. Only once that money has been made will the ‘normal’ profit split become relevant.

Moreover, the profit-oil split is designed on a sliding scale which reduces the government take as a whole. Using the draft PSA negotiated with Hardman Petroleum Africa (taken over by Tullow two years ago) for Block 2 in 2001 – it is of course unclear how this was modified prior to final signature – the highest government share of 65% only kicks in for each barrel produced over the 40,000 mark. In other words, at potential production of 100,000 a day for that particular block, it is not simply a case of dividing total profit by, say 80%, to find the government share. Rather, Uganda’s incremental proceeds will be levelled down as a whole.

If President Yoweri Museveni has signed good deals, then he has nothing to lose by making them public – now, and in full, as opposed to the current cynical drip-drip of leaked information. If, as many now fear, the government is simply desperate to conceal the terms of PSAs that are dangerously skewed in favour of international companies, maximum democratic engagement and participation must be brought to bear to ensure amendment before it is too late.

Biden eats Iraqi pie with American fork

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Obama’s administration is continuing Bush’ policy of demanding that the Iraqi government hand over highly profitable oil contracts to Western oil companies.

According to UPI, during a visit to Baghdad this month, Vice-Pres Biden was

“hustling on behalf of the U.S. oil giants who have long dreamed of getting their hands on what may be the largest untapped oil reserves in the world. “

Biden lobbied Iraqi PM Maliki hard for the oil law (to guarantee long-term profits for foreign corporations) to be “passed at the earliest possible date” and to “make their terms more attractive to foreign investors”. During the visit, a senior US official traveling with Biden declared that

“Ultimately, in our judgment, it’s in the interest of every Iraqi to accept a smaller piece of a much bigger pie.”

The reality is that Iraq’s “pie” of oil is pretty fixed – there’s a certain number of barrels of oil under Iraq’s surface. Of course, it’s possible to increase current production rates – but that’s merely using a bigger fork to eat the pie, not baking a bigger pie.

It’s unclear how the Iraqi population will benefit from a larger fork, if US-promoted terms mean the hand holding the fork (controlling production levels) and the mouth eating the pie (receiving revenues) is increasingly a foreign company. And how will the very young Iraqi population benefit from creating laws that fix the type of fork to be used for the next 20 years?

The US aide’s comment raises questions of power over Biden’s visit & Obama’s policies towards Iraqi oil – whose hands are holding the knives cutting up Iraq’s oil pie? Is the US administration taking advantage of the low oil price to rip off Iraq’s population in the interests of Exxon & Chevron?

PLATFORM’s report “Crude Designs – The Rip-Off of Iraq’s Oil Wealth” exposed how the Production Sharing Agreements being pushed by the UK & US & oil companies including BP and Shell could lead to Iraq losing well over $100 billion of revenues.

Biden hustles terms on Iraq oil contracts

BAGHDAD, Sept. 18 (UPI) — U.S. Vice President Joe Biden’s visit to Baghdad earlier this week — his third this year — came hot on the heels of a lightning visit by Russia’s energy minister as the scramble for Iraq’s oil riches heats up.
Just as Sergei Shmatko sought favorable terms for Russian companies in an upcoming oil contract auction, Biden was hustling on behalf of the U.S. oil giants who have long dreamed of getting their hands on what may be the largest untapped oil reserves in the world.
Biden urged Prime Minister Nouri al-Maliki to resist the temptation to demand hefty payments from the international oil companies as the price for doing business with the new Iraq when a new auction of contracts is held in Baghdad in December.
The first auction in June fizzled when only one consortium — BP and China National Petroleum Co. — made a deal by accepting Baghdad’s offer of only $2 for every barrel of oil it produced. Nine other licenses were rebuffed by major oil companies.
Like every other bidder in that auction, BP and CNPC had wanted $4 per barrel. The others refused to budge from their bids.
Iraqi officials have said Baghdad has lowered its demands for the December auction. But it is not known what figure they will go with when they put up 10 projects covering more than a dozen fields for development.
There is speculation that this time around the oil companies will demand higher fees to compensate for the worsening security situation, a crisis that is likely to worsen as U.S. forces continue their withdrawal.
Still, Oil Minister Hussain Shahristani remains optimistic. “We expect a better match between our expectations and what the companies will bid in the second round,” he said this month.
Biden stressed that the Iraqis must make their terms more attractive to foreign investors if they are to amass the $50 billion they say they need to upgrade their long-neglected energy industry and boost production to provide the revenue required for reconstruction.
A senior official with Biden calculated that a deal on a single oil field could reap $50 billion to $60 billion in outside investments, produce $600 million a year in revenue and create as many as 200,000 jobs if Baghdad lowered its demands at the December auction.
Another major problem is the government’s failure to produce an oil law that would regulate foreign participation in Iraq’s oil industry.
It languishes in Parliament, paralyzed by sectarian rivalries, particularly between the Kurds, who claim the northern Kirkuk oil fields, and Iraq’s Shiite-dominated Arabs.
In the absence of a parliamentary ruling, the Oil Ministry has decreed that a Cabinet decision will be sufficient to legitimize foreign participation stemming from the auctions.
But the oil companies remain extremely wary of investing vast sums of money in those circumstances.
Biden apparently went out of his way in meetings with Maliki and half a dozen other top officials during his three-day visit to emphasize that the critical hydrocarbon law must be passed at the earliest possible date if Iraq is to determine its economic future.
But there was no sign that an agreement on this was in the cards any time soon to ward off the possible fragmentation of the country into Shiite, Sunni and Kurdish zones.
Maliki is increasingly beleaguered and seems powerless to find a solution to the problem.
He is currently fighting for his political survival amid a deteriorating security crisis triggered in part by the U.S. troop withdrawal and being abandoned by his Shiite political allies who will challenge him in the January polling.
Before he left, Biden conceded that “a number of problems, whether it is the oil law or some of the disputed internal boundaries, are going to have to wait for final resolution until after the election.”
His visit ended on that note of uncertainty, with the senior American official commenting, seemingly with more hope than expectation, “Ultimately, in our judgment, it’s in the interest of every Iraqi to accept a smaller piece of a much bigger pie.”

BP keeps digging deeper under Caspian

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The main workhorse of Azeri oil production – the Azeri-Chirag-Guneshli field – will peak in 2010, due to BP and consortium members driving an aggressively fast extraction programme. As the revenues poured in over the last eight years, the state budget soared, covering military expansion, President Aliev’s opulent lifestyle and doubtful infrastructure projects including a billion-dollar road bridge in the middle of Baku.

With those in power loath to cut their budgets, the Azeri government is desperate to increase future oil extraction potential. Hence the State Oil Company (SOCAR) is opening up Azerbaijan’s last oil prospects. BP seemingly got first pickings in mid-July, signing an agreement to explore Shafag & Asiman zones deep below the Caspian.

As part of the government’s plan to ensure that all of Azerbaijan’s offshore waters are fully exploited this MOU gives BP the exclusive right to negotiate a production sharing agreement to explore and develop the block, which lies some 125 kilometres (78 miles) to the south east of Baku.

The seabed below the Azeri-controlled section of the Caspian is already well explored – this is a step closer to “full exploitation”. But this agreement is not only the product of the Azeri elite opening up its oil fields further and BP’s management pursuing future profits. Since the early 1990s, British foreign policy has placed an emphasis on prising oil reserves in the former Soviet Union away from Russia. Hence, while the agreement will have been previously negotiated elsewhere, the signing ceremony was orchestrated during a meeting between British Prime Minister Gordon Brown and Azeri President Ilham Aliev.

The MOU was signed today in London, in the presence of HE Ilham Aliyev, President of the Republic of Azerbaijan, and UK Prime Minister Gordon Brown, by Rovnag Abdullayev, President of SOCAR, and Andy Inglis, BP’s Chief Executive of Exploration and Production.

The man responsible for landing this deal is already on his way elsewhere. BP Azerbaijan President Bill Schrader has been appointed Chief Operating Officer for TNK-BP, the Russian joint venture that has faces a struggle for control between Russian shareholders and BP. Before spending three years expanding the Baku-Ceyhan pipeline and bringing the mega Shah Deniz gas field on stream, Schrader was based in Indonesia, making the controversial Tangguh LNG project in occupied West Papua a reality.