Sidestepping politics in Iraq

tauringhuang.

Oct 15th 2008
From the Economist Intelligence Unit ViewsWire

Iraq's government struggles on


The launch of the country’s first post-war oil licensing round is evidence of a government increasingly determined to press on with economic development, against the political and bureaucratic odds.

When it emerged in a report by the US Government Accountability Office in August that Iraq had amassed a budget surplus in 2005-07 of some US$29bn, while the American administration had disbursed some US$48bn towards reconstruction since the 2003 invasion, there was predictable outrage among certain congressmen—calling for the Iraqi government to deploy more of its own revenues towards capital spending. However, the problem is less a desire on the part of the Iraqis to sponge off hard-pressed US taxpayers rather than an investment programme hampered at every point by political infighting and labyrinthine bureaucratic processes. Yet, in economics as in security, Iraqi politicians are eager to wrest back control of their own destiny.

Clear as oil
The economically critical oil sector provides a natural litmus test for the wider process of boosting the country’s GDP and attracting foreign investment—the results of which have so far boded poorly. The Petroleum Law governing the relative federal and provincial powers to sign contracts with international oil companies (IOCs) and the distribution of revenues has been languishing in draft form before parliament for months, while the federal authorities have openly clashed with the Kurdistan Regional Government (KRG) over contracts signed independently by the latter and deemed unconstitutional by the former. Foreign firms involved in such deals—including, most recently, the UK’s Premier Oil—have been barred from pre-qualifying for federal contracts.

Having wisely decided that IOC involvement could not await more protracted political wrangling, the government decided to go ahead with development within the parameters of existing legislation, but this process also proved messy: a select group of major IOCs, including the Royal Dutch/Shell Group, the UK’s BP, the US’s ExxonMobil and Chevron and France’s Total, was lined up for controversial two-year technical service contracts—which offered little beyond a foot in the door and were subsequently reduced in planned duration to a single year before complete abandonment as the first long-term licensing round took shape. The short-term maintenance deals were designed to add 500,000 barrels/day (b/d) of the 2m b/d increase to the 4m b/d target set by the Iraqi government over the next five years.

More recent developments, however, have offered renewed hope. Representatives of 34 of pre-qualified IOCs attended a roadshow in London on October 13th to hear an outline of terms and timetable of the country’s debut licensing round, which will offer 20-year service contracts, linking rewards to production levels—without ceding the sacrosanct national ownership of natural resources—and asking companies to propose a cost fee and guarantee minimum investment. Bids are due in six months with awards expected by the middle of the 2009. Full contract details will be published only after further negotiations with the concerned companies, according to the oil minister, Hussein al-Shahristani.

The six oilfields and two gasfields included are all already producing, but well below potential. Foreign firms will enter 49:51 joint ventures with either North Oil Company or South Oil Company, both state-owned. A second licensing round is due to be launched by the end of the year, in a signal of the new-found urgency of efforts to capitalise on the country's vast, but historically underexploited oil and gas reserves.

Furthermore, the thorny question, periodically re-emerging since the invasion, of the status of major Saddam-era contracts is being resolved, albeit in a piecemeal manner: in early September, a deal with China National Petroleum Corporation for the US$3bn development of the Al-Ahdab field was revived, although the terms were altered to a service contract rather than a production-sharing agreement; on the other hand, the much-discussed contract for Russia’s state-owned Lukoil to proceed with development of the West Qurna-2 field was finally declared void, with the acreage instead to be offered in the next bid round.

tauringhuang.

Shell's gas coup
Separately—to a degree of puzzlement and criticism at the direct negotiation approach—Shell signed a deal in early September worth an estimated US$4bn to invest alongside the government in capturing and processing gas currently flared from the southern fields around Basra. The Anglo-Dutch firm has emerged as one of the most eager to be an early-mover in foreign entry to the industry, doggedly pursuing the short-term deals shunned by others in order to secure a foothold and earn the new authorities’ goodwill. Gas development is also under way in the KRG-administered north by UAE-based Dana Gas and its biggest shareholder Crescent Petroleum—supplying 150m cu ft/day from the Khor Mor field to a “gas city” where it will be processed for domestic use in the power generation and industrial sectors, escaping the legislative controversy of deals potentially involving exports.

Power shortages
Dana Gas and Crescent have expressed their desire to replicate the model in Basra and Al-Anbar, in the west, and certainly such sectors are in need of a fillip from all angles. With years having passed since the toppling of the old regime, the electricity sector in particular remains in a perilous state—producing less even than the theoretical capacity of 5,500 mw in the face of demand estimated at some 11,000 mw. In power, as in oil, the prime minister, Nouri al-Maliki, has belatedly recognised the need to streamline decision-making structures to avoid political and bureaucratic bottlenecks and thus staunch politically dangerous popular discontent at the lack of basic amenities. In July, a National Council for Reconstruction & Development was created with the power to bypass ministries in negotiating and signing contracts in strategic sectors. Since the summer, multibillion-dollar memoranda of understanding have been signed with the US’s GE and Germany’s Siemens to supply equipment under a generation expansion programme aimed at closing the demand/supply gap by 2012.

Progress in the cement industry—critical for reconstruction but at present dependent on imports—has been swifter, with contracts in place for the rehabilitation of three plants as part of a plan to restore potential nationwide capacity estimated at about 25m tonnes/year from the 4m-5m t/y currently churned out. Petrochemicals have been identified as another industrial priority, while further down the line, tourism evidently offers massive potential given the wealth of historic sites dotted around the country. The Abu Dhabi government-affiliated Al-Maabar real estate consortium in mid-October announced plans for a US$10bn mixed-use project in Baghdad, including residential, tourism, commercial and leisure facilities, while, more fancifully, Iraq’s tourist board the previous month revealed plans to seek investment in Al A’arass island on the Tigris river near the capital’s Green Zone, reviving a resort once popular with honeymooning couples. For the time being, however, while suicide bombings and sectarian violence persist, oil and industry appear a safer bet than lovelorn newlyweds for investors seeking to exploit Iraq’s myriad potential riches.

hunancrystal

thank  you!!