Oil companies & Syria – outlining the “Dictator Fine”

The United States applied an embargo on Syrian oil sales yesterday, and the EU has tasked its diplomatic force with drawing up similar plans for an oil embargo. But what can the Syrian opposition do? They can establish sticks and carrots for oil companies, both those currently operating in Syria and those who might in the future, to encourage them to disengage from the Assad regime now. Kimberly Ann Elliott proposed DIRT sanctions in a blog for the Center for Global Development last week – the idea that governments such as the United States, the EU and perhaps also regional bodies such as the Arab League would announce that from now on all contracts signed with the Syrian state were not regarded as legally binding, meaning a future Syrian government could renegue on them without penalty. At the very least, this would likely prod the regime’s business partners to demand better terms, weakening the regime’s market positions. But the Syrian opposition can and should go further. There should be no more drilling while Hama burns. Suppose it were to declare a certain day, say September 6th, the end of the Muslim festival of Eid, Zero Day in terms of the oil industry in Syria. Any company currently operating in Syria should declare its intention to withdraw on that day. If they do so, the opposition guarantees on behalf of a future Syrian government full compensation for associated business losses. First, all withdrawal and re-rentry costs would be counted as cost recovery in addition to the standard terms of cost recovery in the contract, and compensated at 100% with no cap, in contrast to the current Syrian production sharing agreements. Second, losses to the company from that point on would be compensated by a future government. So, for example, if company X lost $500,000 a day as a result of losing their take in the production, this figure would be paid back to them, again through a cost recovery mechanism in addition to the standing contract. Third, a future government would waive corporate tax on the joint venture involved for a specified period. This could perhaps be set in a declining order to encourage the leap – that is to say, the first company to declare its withdrawal would receive a tax holiday of 10 years, the second of five years, the third of three years, and so on. These measures could cost a few hundred million dollars (depending on which company with what level of production declared first and got the longest tax holiday) over the next few months, but they would be worth it in terms of the political gains in this period. A tax holiday maintains the principle of open competition and transparency – this is a justifiable remuneration against a service to the Syrian people, not preferential treatment in terms of the contracts, and does not prejudice a future government’s rights to review existing contracts to analyse the terms under which they were struck. By contrast, any company not standing on the right side of history after this date would not only not be compensated for their own loss of production after that date, they would also be considered liable for funds paid to an illegitimate entity, the Assad regime. The mechanism for this would be a windfall tax imposed by a new government calculated against the amount of money that their ongoing production contributed to the Assad regime’s coffers. So, for example, if company X (keeping it anonymous) continued to operate a field which produced 50,000 barrels a day, the government take of that at market value, say roughly $3 million a day, would be calculated and a bill created which would be presented to them by a future government. The opposition would declare as of now that while it would honour other terms in existing contracts, it would unilaterally abrogate any stabilisation clause in these contracts which would prevent them from imposing such a windfall tax. This means that a company doing the right thing would be guaranteed full commercial compensation, while one refusing to would be racking up a “Dictator Fine” of perhaps hundreds of thousands of dollars a day. Any company on the right side of history would also gain preferential status in new bidding. Specifically, they would be exempt from posting bid bonds or buying seismic data. These are not huge costs as far as the oil industry is concerned, typically costing only a few hundred thousand dollars per bid, but at least the companies would enjoy strong publicity for their stand. This is a particularly important aspect as, amid the bloodshed, Syria’s oil ministry is continuing preparation for an auction of three offshore blocks next January (bids due by October 5th), and some 12 companies are already said to have bought the initial bidding documents. Any of these companies who now declares they will not do business with the Assads should similarly enjoy future exemption from exploration bid costs – as indeed should any oil company in the world. Tied with the right kind of campaigning by the Syrian opposition and other activists, this could trigger a flow of declarations which would continually enforce the message now that the regime is delegitimised, at relatively little cost to a future government. These measures would strike the right balance of acknowledging the oil companies’ commercial interest, while not buying their loyalty. The principles of open competition, contract review and potentially transparency of contracts and joining EITI would all remain open to the future government. The financial rewards/punishments are all public, quantifiable, and against a very real service performed to the Syrian people. What this needs, of course, is a joint declaration by as many currents and parties of the opposition as possible. And for the policy to be backed by some very aggressive campaigning. Suppose, for example, that the opposition were to be linked to some skilled computer technicians, who were to find a way to email notification of it to every single employee, worldwide, of the offer and terms, so that it was clear and undeniable that the company would suffer no commercial loss? Suppose that Syrian protesters inside the country were to be filmed holding up placards asking Shell, and Total, and others, to stand on the right side of history and take this offer?

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