Iraq seeks field service contract renegotiations

Iraq's oil ministry has opened talks with the foreign oil companies developing its 10 largest fields to renegotiate the terms of their service contracts in light of the fact that Baghdad is unable to fully pay cost recovery and remuneration fees due to the companies.

The oil ministry said it is negotiating with foreign companies to increase the share of state-owned companies in each of the projects governed by the service contracts to 25pc from 5pc. That is the original share that the state-owned companies had in those projects when they were awarded five years ago. But that percentage was reduced to 5pc last year to compensate the companies in return for agreeing to reduce their target plateaus at the fields they operate.

Increasing the share of the state-owned companies in projects will decrease the share of the foreign oil companies' profit, and hence increase the government take from each of the projects.

The negotiations with the foreign companies include development programmes, target plateaus, contract durations "and other points, as well as increasing incentives for the companies on the one hand, and reducing the financial burden to the state on the other hand," the ministry said.

The oil ministry refers to proposals "to link the company's profits with oil prices, rather than only to a fixed remuneration fee per barrel of incremental crude, so that their profits would rise when oil prices rise, and fall when prices fall." The oil ministry did not specify whether that proposal has been made by one or more foreign companies, or by the ministry itself.

Another proposal calls for "linking profitability to lowering costs to avoid amounts owed to the companies from accumulating." But the statement does not suggest a mechanism for how this would work.

Following the formation of the current Iraqi government of prime minister Haidar al-Abadi in early September "two pressing problems emerged, which were the accumulation of money owed to the companies and the collapse of the oil price," the ministry said.

Outstanding amounts owed to the foreign companies for last year total $9bn, it added, and cost recovery and remuneration fees for 2015 are estimated at a collective total of $4.5bn per quarter, or an estimated total of $18bn for the entire year.

The amount allocated in the 2015 budget for paying cost recovery and remuneration fees to the foreign companies "barely covers the amounts owed for 2014."

"The oil ministry has therefore acted with foresight by including in the budget provisions that allow the prime minister and the finance minister to issue treasury bonds worth $12bn, which will reassure the companies regarding what they are owed and preclude repercussions that are detrimental to both sides," the oil ministry said.

Baghdad has not made clear whether the proposed treasury bonds are being issued to the companies in lieu of the amounts they are owed, or whether they will be sold on domestic and international financial markets to raise the cash needed to pay the foreign companies. The foreign companies had hitherto been collecting payment in crude oil volumes equivalent to the value of the cash they have been owed.

Iraq defaulted on paying the companies what they were owed last month, and an executive from one foreign oil company told Argus that the crude allocated to companies in February by way of cost recovery and remuneration payments was around 20pc or even less of what they were owed.

The oil ministry said the ability to issue treasury bonds to cover the cost of payments to foreign companies "will enhance mutual confidence, protect Iraq's reputation and its ability to meet its obligations and open the door to negotiating in a positive atmosphere to arrive at the best formulas in keeping with what has been learned from previous experiences and actual current circumstances." Negotiations should also focus on commitment to already-agreed programmes and to removing the biggest obstacles and deficiencies — an oblique reference to dealing with the infrastructure bottlenecks and bureaucratic hurdles that the foreign companies have long complained of.

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