The missing pieces in Iraq’s first EITI report

The next few months are an incredibly crucial time for Iraq as an implementing country of the Extractive Industries Transparency Initiative (EITI). It has until August 2012 to achieve EITI Validation, following the beginning of its candidacy in February 2010. As such, any issues with regards to the activities designed to display their increase in transparency which have taken place as part of their EITI workplan need to be addressed immediately, or risk being forgotten about among the celebrations which would otherwise take place in just 5 months time.

As the principal global standard for transparency in the extractive industries, countries implementing the EITI should see a real difference in transparency in their respective industries following their validation and subsequent EITI Compliant status. But as things stand currently, will this be true for Iraq?

On December 20th, 2011, Iraq published its first EITI Reconciliation report, a report which was heralded as “a historic step toward oil sector transparency” by the international community, as the report outlined in great detail the money received from export sales by the Baghdad government. However, as already noted by Johnny, there were many questions raised by the report itself, and over the past couple of days I’ve been seeing how much information already in the public domain can answer just some of those questions.

The sole revenue stream covered in the EITI report is that of export sales. At the time that the terms of reference for the this EITI report were agreed, in 2009, the Iraqi oil industry was entirely state run and without foreign participation. However, with the re-entry of international oil companies in 2009, revenue streams into the Baghdad government are no longer limited to export sales.

The first licensing round, which began proceedings in 2008 and was concluded in 2009, saw only one field- Rumaila- being awarded, although two further fields, Maysan and West Qurna Phase 1, were subsequently awarded in bilateral negotiations.

Under the second licensing round which took place in December 2009, seven of the ten oil fields offered in the round were awarded to various consortia of companies. The technical service contracts (TSCs) signed under this licensing round included a number of clauses that have created multiple revenue streams. These TSCs included clauses for cost recovery mechanisms, signature bonuses, and remuneration fees, none of which were included in the EITI report.

I began looking at the most clear cut of these revenue streams; the signature bonuses. These bonuses, which were widely reported upon in the media, ranged from $100 million, which Sonangol paid for the Qayara field, to $500 million, paid by a consortium led by BP for the Rumaila field.

One point of uncertainty was the form in which these payments were made. Some, such as the $500 million Rumaila field signature bonus, was reportedly paid by the company as a ‘soft loan’, to be paid back in 20 quarterly payments, in either crude oil or cash as decided by the company. Others appeared to have been renegotiated, such as the $300 million paid by Eni and Oxy for the Zubair field, reportedly slashed to $100 million in April 2010.

Bearing in mind these uncertainties, the total of the signature bonuses reported to have been paid by international oil companies to the Baghdad government during the period of November 2009 until January 2010 comes to $2.25 billion, as you can see in the spreadsheet I created. Even taking into account the discrepancy of reducing the Zubair field signature bonus, that still leaves a figure of around $2 billion dollars that is unaccounted for in the EITI first report.

As stated in a model TSC published by the Ministry of Oil, the signature bonus should be “deposited in cash into a bank account designated by the Ministry of Oil” ; so finding and reporting these amounts should not require much more work on the part of the MoO.

The second revenue stream I researched was that of remuneration, the fee that the government pays back to an operating company, in this case, after they’ve reached a pre-agreed production level. Evidence of these payments only begins in May 2011, which makes them inapplicable to the period of time covered in the first EITI report. However, with the scope of EITI as it stands, they still wouldn’t be included in future reports. To show how important the remuneration payments are to government revenues, I compiled another spreadsheet showing payments that the Baghdad government made to international oil companies, the first of which began with a payment in kind of 2 million barrels of crude oil to BP in May 2011.

The main hole in this spreadsheet came from being unable to find the date and amount of the second remuneration payment to CNPC for their activities (as partnered with BP) in the Rumaila field.

To put these figures into context, I used the average monthly price of a barrel of Basra light from the Ministry of Oil website and multiplied it by the number of barrels taken as payment by the IOCs to get an estimate of the market value of each shipment. Here, the total in barrels of oil comes to 11.65 million barrels of Basra Light, which comes to an estimate of $1.25 billion. Clearly, these payments constitute a large enough amount to need to be included in the scope of the next Reconciliation report.

The research done here does not seek to be exhaustive with regards to payments from the Iraqi oil industry. Rather, it is intended to highlight that there may well be many other avenues of revenues flows both in and out of the Iraqi oil industry. These multi-million or even billion dollar payments need to be addressed before August 2012, when the EITI will face the decision of whether or not to grant Iraq EITI Compliant status.

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