The Governance of the Iraq Energy Sector and the Relevance of

Association with Energy Charter Treaty

Ahmed Mousa Jiyad
Iraq/Development Consultancy & Research
Norway
Email mou-jiya@online.no
!"his is an e#tended a$stract o% &ower&oint slides and interventions I
delivered durin' the E#ecutive "rainin' &ro'ram %or (oun' Ener'y
)eaders Addressin' Ener'y Challen'es at Re'ional and *lo$al )evels $y
Applyin' Common Rules and *ood *overnance &ractices+ or'ani,ed $y the
Ener'y Charter -ecretariat+ .russels durin' /01/2 May 34/56
http//www6encharter6or'/%ileadmin/user7upload/8nowled'e7Centre/34/579i
se'rad/May734/57a'enda6pd%
I am very than:%ul to Ener'y Charter -ecretariat %or the :ind invitation and
to Dr6 Marat "erterov and the competent EC- sta%% %or their e#cellent
support and wor: well done;
Governing frameworks of the energy sector in Iraq are many and differ substantially not
among the main two sectors of petroleum and power/electricity but also within each sector
sub-sectors. While the governance modalities and their related frameworks of power sector is
less matured those for petroleum sectors are more advanced. Within petroleum subsectors
there e!ist many and diversified frameworks including long term service contracts" #oint
venture" revenue sharing" ma!imum $up to %&&'( private $local or foreign( investment" build-
own-operate-and transfer among others. )his contribution focuses on petroleum sector
leaving power sector for another occasion.
In its first part this contribution reviews the evolution of the Iraqi governing frameworks in
petroleum sector while it deals with I*+, in its second part and the countrys international
cooperation efforts regarding energy and petroleum governance. )he paper concludes by
arguing for establishing formal relation between Iraq and the +nergy -harter ,ecretariat.
.etween /&&0 and /&&1 the 2inistry of 3il-2o3 concluded some 0& memorandums of
cooperation-2o-s the purpose of which was to undertake #oint technical studies" training and
development and technical consultancy. I3-s cover all costs related to these 2o-s. 4t the
end of this phase two strategies pertaining to upstream petroleum development were
considered5 a gradual strategy and big push strategy-.6,. )he gradual strategy focused on the
biggest brown oilfields" capture their decline" increase production by 7&&kbd" use national
effort with foreign firms for engineering procurement and construction-+6- and
conventional service contracts if needs be. )his strategy was proposed by oil technocrats
spearheaded by ,outh 3il -ompany- ,3-. )he .6, calls for ma!imum e!pansion of
production capacities at a fast pace" grand opening of petroleum sector to I3-s" bidding
rounds licensing using long term service contracts-8),-s. .6, was advocated by the 9new
management: of the petroleum sector thinking of making Iraq a 9game changer:. +vidently
.6, prevailed though in reality it comprises the basic components of the gradual strategy.
1
)he governing frameworks of upstream petroleum development that followed 2o-s phase
was affected by ambiguous constitutional provisions" by dysfunctional incoherent ill
perceived and ill-fated federal oil and gas law-;3G8 that has be stalemated ever since its
inception and by the emergence of two distinct petroleum regimes5 8),-s adopted by the
2o3 and production sharing contracts-6,-s adopted by <=G. )hat has led to a difficult
comple! situation with unclear prospect due to too much politici>ation sensitivities and
contrasting orientations.
)he .6, was e!ecuted beginning with the conversion of 4l-4hdab oilfield old agreement into
8),- and so far through four bid rounds comprising si! brown oilfields seven green-field
three gas fields and four e!ploration blocks. )he combined proven reserves of the awarded
oilfields $both brown and green( total ?@ billion barrels" constituting 71' of the countrys
proven reserves at that time. %7 I3-s from %/ countries are involved in these %0 oilfields.
)he bid rounds were conducted following similar procedure and each round takes
appro!imately one year of preparation" all bid events were held in .aghdad in an open )A
covered and attended by all involved I3-s the press among others.
-ontractually these concluded 8),-s could bring total plateau production from these
oilfields to %/.B million barrels per day-mbd within seven/nine years and sustainable for
seven years before start declining. )he bidding parameters had contributed to inflate plateau
targets much above what 2o3 had envisaged initially prior to commencement of the first bid
round.
2any had questioned the feasibility achievability and sustainability of such plateau targets"
and this prompted the government to ask the World .ank to commission a study on this issue.
4n international consulting firm was contracted and after %1 months of work they produced
the Integrated *ational +nergy ,trategy-I*+,. )hree plateau scenarios were considered based
on different production targets year of commencement and duration of the related plateau. It
appears the authorities are accepting the middle scenario of Cmbd by /&/& sustainable beyond
/&B&.
)he reduction of plateau production targets entails re-negotiating the related 8),-s which
has been done so far for WD/ and Eubair oilfields and those for =umaila WD% and 2a#noon
are to be followed in /&%0. In the beginning the oil companies wanted to have some
sweeteners like increases in the remuneration fee but the government refused and instead
granted them a longer plateau period and from that they have been compensated rather
handsomely.
2arketing Iraqi oil has shown increasing trends towards +ast 4sia since /&&1 and by end of
/&%/ the 4sian markets share has reached 7%'. ;or variety of reasons this trend appears to
continue as evidenced by the e!pansion of e!port terminals in north 4rabian Gulf thus
giving Iraq some strategic advantages though the country is adopting a strategy of e!panding
and diversifying its e!port outlets. In this regard Iraq is advocating new contractual modalities
for cross-border oil and gas pipelines based on build-own-operate and transfer- .33) e.g.
Iraq-Fordan pipeline.
2
)he utili>ation of associated gas has been very disappointing and with increasing oil
production associated gas flaring has been on the rise as well causing further economic loss
and inflicting environmental damages. )hree different contracting modalities governing
associated gas utili>ation are in operation. .G- is formulated on Foint Aenture model"
=emuneration ;ee for processed gas $under .=/-8),-s(" and 8ukoil/2I2- 2oG to assess
the outlooks for constructing chemical plant to utili>e the associated gas from the West Durna-
/ field which probably be based on Investment 8aw $of /&&?(. )he same could also apply to
the construction of a petrochemical factory- *ebras %./mn tons/year capacity polyethylene
pro#ect- in southern Iraq petroleum hub city of .asra pro#ected to cost H%% billion. )he pro#ect
involves 4nglo-Iutch ma#or ,hell the ministries of oil $2o3( and industry $2I2(" and
*ebras Jead of 4greement is progressing but not yet final for signing.
=efining capacity e!pansion and moderni>ation has been very slow despite incentives to
foreign investors provided by the =efinery Investment 8aw $of /&&@(. ;our new modern
refineries aiming to add @0&kbd of refining capacity have been on offer for the last few years
waiting for the private investors- both national and foreign. Iue the lack of 9serious: private
investors and increasing annual cost of imported petroleum product compelled the
government to finance one of these new refineries5 <arbala %0&kbd refinery. *assiriya
B&&kbd refinery is scheduled for special bidding in Fune /&%0 in combination with the filed
development-*I6. )he *I6 is based on a new type of contracts5 =evenue ,haring generated
from petroleum products sold domestically and through e!port. If *I6 fails in the forthcoming
bid round it will represent a blow and the government will be compelled to do it on its own.
In an attempt to broaden vertical and hori>ontal economic diversification I*+, presents
coherent vision to harmoni>e development efforts between petroleum sector power sector and
selected number of 9linked industries: within industrial sector in which Iraq possess
significant comparative advantages. If things go as foreseen by I*+, the share of non-oil/gas
in GI6 would increase from 7@' in /&%/ to ?B' in /&B&. ;or this purpose I*+, proposed a
governance structure comprising specific 9)ask ;orce: and 9Institutional =eform -ommittee:
in each of the three ministries of oil electricity and industry" and all these organs are linked to
the 6rime 2inister 3ffice. .ut in Iraq reality seldom coincides with e!pectations.
International cooperation in the area of energy governance is important for Iraq which has
concluded many of such instruments on both bilateral and multilateral levels. -ooperation
modalities with +G and +I)I are highlighted here and could have significant contribution to
enhance energy governance in the country. Iraq has concluded many of such modalities with
the +uropean Gnion-+G including the 2oG on ,trategic 6artnership in +nergy-,6+ $/&%&("
Foint Ieclaration-FI $/&%%(" 6artnership and -ooperation 4greement-6-4 $/&%/(" )he +G
Iraq +nergy -entre +GI+- $/&%//B-/&%0(. +GI+- is currently in the early stage of the
+uropean -ommission bidding process with many consulting firms submitted on %? 2ay
their +!pression of Interest as the first step in the bidding process for the +GI+- which its
implementation phase could start probably by the end of this year. 3nce established +GI+-
could have the potential to be a regional center.
3
4lso Iraq has been complying rather well with +!tractive Industry )ransparency Initiative-
+I)I requirements and so far I+I)I issued three annual reports and the fourth one is in
preparation which is due for release in Iecember /&%0. Good progress has been evident
though much more is needed under the +I)I new ,tandard. 4 9Gap 4nalysis: was presented
to the 2inistry of 3il few days ago in an attempt to enhance the quality and coverage of the
compliance as +I)I requires" contributing to more and comprehensive transparency and
governance of the energy sector. *owadays more is publically known about the e!tractive
activities in Iraq than any time in its history. 4s it stand today and despite their shortcomings
the learning and improvement curve demonstrated by the I+I)I annual reports would make
Iraq the best compliant country in 2+*4 region" but this should be a cause of inspiration not
complacencyK
)he presentation ends with the following remarks5
)he success of development in Iraqs petroleum sector is vital for Iraq and for global energy
balance. Jowever this faces serious and formidable challenges. Iomestic challenges
$political stability and security situation" policy coherence and sound planning" .ureaucracy
and program management" infrastructure and logistics(" =egional challenges $determinants of
landlocked-ness L geopolitical factors(" International challenges $global energy balance"
36+- politics and oil prices(.
=isk analysis based on Impacts and 8ikelihood would indicate the importance of domestic
and regional challenges in the short-medium terms while international challenges in the
medium-long terms.
Iraq e!perience with +I)I shows that comprehensive regular and annual reporting on
petroleum governance improves governance standard and enhances transparency especially of
e!port revenues. 4lso the establishment and functioning of the +GI+- would contribute to
enhance the good governance of the Iraqi energy sector. Jence effective formalised
international cooperation $bilateral and multilateral( plays critical positive role in this respect.
It might be worthwhile for Iraq and the +nergy -harter ,ecretariat- +-, to e!plore
cooperation opportunities and possibilities. Javing direct dialogue between them aiming for
more formal and institutional relationship could be beneficial for both sides.
Iraq is increasingly becoming a ma#or producer and e!porter of oil with potential to be
e!porter of gas and petroleum products as well. .ut being a semi-landlocked country cross-
border pipelines have strategic significance and thus play critical role in the reali>ation of its
e!port ambitions. 2oreover Iraq itself could also be a transit countryK )hus having and
utili>ing international legal frameworks and modalities covering producingtransit
consuming countries has distinct relevance to Iraq.
4lso for +-, Iraq could be the pivotal resource rich country in 2+*4 region in the efforts
for 92odernisation: of the +nergy -harter and transforming it from +urasian-focused into
more global energy governance. 4 successful Iraq-+-, cooperation could prompt and
promote other regional oil and gas producers- the G-- even those having 3bserver status
and possibly Iran- to #oin and thus have their effective say in the formulation of a possibly
World +nergy -harter. 2oreover awareness gap and acute perception problem appear to e!ist
4
since 9)he +nergy -harter is hardly known in 2+*4 and the +nergy -harter ,ecretariat
hardly knows 2+*4:" Iraq-+-, cooperation could bridge awareness gap address perception
issue and enhance the outreach efforts.
.oth Iraq and +-, may consider seriously establishing a contact and +-, could act
proactively and take the necessary initiative in this effort.
;rom my direct involvement and constant follow-up I am of the opinion that Iraqs e!perience
with 6-4 +GI+- and +I)I could very well furnish the necessary ground and encouraging
premises for mutually beneficial cooperation between Iraq and the +-," but the dialogue
between the two sides has to take place first and the sooner the betterK
*orway.
%C 2ay /&%0
5