| 2007: Golden opportunity ahead for Iraq to use its oil wealth |
|
August 10, 2007 The optimal development of Iraq's enormous oil and gas reserves is the most critical economic element for the future of the country. After decades of mismanagement, under-investment, and political manipulation, Iraq has a golden opportunity to set the right policy and regulatory framework to achieve this vital goal. What does 'optimal development' mean in practice? Simply put, Iraq's primary objective must clearly and simply be to maximize production in the shortest time possible, while maximizing returns to the State. This can only be achieved by having Iraq National Oil Company (Inoc) focus on currently producing fields only, to rehabilitate them and maximize production to four million barrels per day - a huge task in itself. In the meantime, the Inoc should invite private-sector companies (both Iraqi and international) to make the hundreds of billions of dollars of investments necessary to develop the remaining fields and carry out exploration, all under risk-reward (not service) contracts which achieve maximum investment and while ensuring highest returns to the State. A critical element of a successful legislative framework will be the clear and unequivocal separation of powers and roles between the 'regulator' (i.e. the Government), and the 'regulated' (all the investing companies, including Inoc and the private-sector companies). With this in mind, there are eight key principles that could make or break the success of Iraq's petroleum policy and regulatory framework: 1) The central objective As far as petroleum policy and regulatory framework is concerned, the objective for Iraq is actually straightforward: it must simply be to maximize the economic return to the Iraqi people. This is essentially a function of three elements: maximizing optimal production, as rapidly as possible, and under the best commercial terms for the State. Just that, without embellishment or confusing complication. 2) The role of the state The role of the state is important and required as a powerful and effective policymaker and regulator, overseeing the entire sector and all the companies operating within it, while setting the necessary policies and standards, and focusing on maximizing the economic rent to the state from these operations. If the government engages in operating and commercially managing the sector, it compromises its own role as an effective regulator. 3) The need for the private sector Iraq's current oil production of around two million barrels is at the same level as it was in 1975, at the time of nationalization, and a fraction of where it ought to be given Iraq's hydrocarbon reserves. There ought to be no doubt whatsoever that petroleum exploration, and the development of undeveloped oil and gas fields going forward, needs to be undertaken through the private sector. Awarding proper 'risk' contracts, in whatever form, is the only way to engage the private sector, including Inoc's, into aligning their interests with those of the State and put their full resources - financial, technical, and managerial - behind the effort. Indeed production sharing agreements are not some tool of foreign domination as it has been claimed and maligned by some. This model is simply a way of ensuring the minimum required reward for the investing company to maximize benefits to the state. 4) Rationale for Inoc Inoc should not divert its attention and resources from the crucial task of managing and rehabilitating currently producing fields, and therefore should not be permitted to engage in other work such as development of Iraq's undeveloped fields, or in exploration, or in foreign investment, or in petroleum services. Above all, Inoc must not in any way take on the role of a regulator, which must remain the exclusive and separate function of the regulatory bodies of the State such as the Federal Oil and Gas Council, and the concerned ministries at federal and state level. Finally and critically, attempts by some politically-motivated parties to grant between 80 and 90 per cent of Iraq's reserves to Inoc would kill any hope for rapid economic progress for Iraq and risk a permanent retardation of the development of Iraq's vital energy sector. 5) Use of state funds The estimated required investments to fully and properly develop the Iraqi oil sector range from the tens to hundreds of billions of dollars. It is therefore clear that the needs are huge, and Iraq today has large debts already of the same order, and competing higher priorities for state funds such as basic infrastructure, security, health and education. In any case state funds or credit lines should not be used up for commercial enterprise investments when private sector investment is available. 6) Commercial terms Some responses to the bill have accused the drafters of 'selling out to foreign interests' or 'giving away 70 per cent of Iraq's oil wealth'. This is nonsense of course. Empty nationalist rhetoric must not cloud the reality of practical economic logic. As the world's last major undeveloped oil basin, Iraq can and should extract excellent commercial terms from companies, given its relatively low cost of production, large reserves, and today's high oil prices. 7) Ambiguities in the current draft law The draft law appears to grant Inoc the right to develop undeveloped fields, and even undertake exploration, yet without accountability or forethought as to the cost to the state's treasury. If Inoc is given the right to take over everything, then we will in practice have not advanced one bit and an oil and gas law to regulate investment in this sector will be unnecessary. 8) Iraqi private sector A final but important element of a successful policy must be the development and encouragement of an active indigenous Iraqi private sector in all aspects of Iraq's petroleum industry. This not only gives the best chance of maximizing Iraqi employment, positive economic multiplier effects, technology transfer, and a globally competitive management and workforce, but it is also the best answer to the xenophobic critics of 'foreign domination' Source: Gulf news |