Developing Iraq’s Oil Industry to Maximize Government Net Revenues
1
DEVELOPING IRAQ’S OIL INDUSTRY TO MAZIMIZE GOVERNMENT NET
REVENUES
June 2009
Mohammad Mazin Hamid Ali Al-Moumen
Department of Economics
Stanford University
Stanford, CA 94305
[email protected]
under the direction of
Professor Geoffrey Rothwell
ABSTRACT
This paper seeks to determine whether (1) nationalizing Iraq’s oil industry or (2) developing it
through production-sharing agreements with international oil companies (IOCs) will generate the
highest amount of net revenues for the Iraqi government. I propose to use the development of the
Majnoon oil field in southern Iraq as a case study to answer this question. I consider a timeframe
of forty years and construct the estimated revenues and costs associated with developing
Majnoon under nationalization, comparing them to those associated with developing Majnoon
under a PSA similar to that employed in Oman. I conclude that if the Iraqis believe that the Iraq
National Oil Company (INOC) can be at least 87.5% as efficient as an IOC, then Majnoon would
be more profitable under nationalization. If the INOC cannot be at least 75% as efficient, then
Majnoon would be more profitable under a PSA. If the INOC’s relative efficiency is between
75%-87.5% (deemed the “Indecision Interval”), then Iraqi decision-makers must engage in
further analysis to determine the profit-maximizing option. The case of Majnoon provides
insights important for the decision-makers to consider when deciding on whether to nationalize
Iraq’s oil industry or not.
Keywords: Iraq, oil, Majnoon, international oil company, Iraq National Oil Company
*Acknowledgments: I would like to thank Professor Geoffrey Rothwell for his guidance,
kindness, support, patience, and mentorship; Junko Pierry and Koren Bakkegard for their
administrative support; Tzvetan Tchoukalov, Andrew Nigrinis, and Bilal Badawi for their time
and insight on analytical methods; Mohammad Ali, Ulugbek Baymuradov, Myles Bradley,
Kevin Danna, Ali Habib, Samy Hamdouche, and Ahlia Kattan for their constant support;; the
Alis and Hilfis for being family; and Mazin Al-Moumen, Nidal Douba Al-Moumen, Manaf AlMoumen, and Mishaal Al-Moumen for being my spirit.
Developing Iraq’s Oil Industry to Maximize Government Net Revenues
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1. Introduction
1.1 Developing Iraqi Oil
After three wars, 12 years of sanctions, and nearly 30 years of dictatorship, Iraq is
desperately in need of reconstruction. With the world’s third largest proven reserves of oil, the
importance of Iraq’s hydrocarbons industry to the country’s redevelopment is unquestioned. The
debate, rather, pertains to the means by which to develop this industry.
While some believe that nationalizing Iraq’s petroleum industry best serves the country’s
interests, others argue that privatizing the industry – through production-sharing agreements
(PSAs) – would be more beneficial for Iraq. To contribute to the debate, this paper examines the
possible development strategies of the Majnoon oil field in southern Iraq. I compare the
government’s net revenues from nationalizing Majnoon to its net revenues when employing an
Omani-style PSA, and I determine the breakeven efficiency level that the government must
achieve before privatization becomes the more lucrative option. The analysis concludes that Iraqi
decision-makers face an Indecision Interval of 70%-87.5%: if the Iraq National Oil Company
(INOC) can achieve an efficiency level – relative to an international oil company (IOC) – of
87.5% or greater, then the Majnoon study suggests that nationalization maximizes government
net revenues. If the INOC cannot achieve at least a 70% relative efficiency score, then a PSA
would maximize government net revenues. At any efficiency score between 70% and 87.5%, it is
unclear which development strategy is more profitable to the government, so further studies must
be conducted.
Concessions, PSAs, and nationalization are the three major methods employed to develop
a country’s hydrocarbon industry (Muttitt 2005). Under the concessionary model, a government
will grant an IOC, or a consortium of IOCs, the right to extract oil. Once extracted, this oil
becomes property of the IOC. In exchange, the IOC pays taxes and royalties to the country.
Developing Iraq’s Oil Industry to Maximize Government Net Revenues
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Concessionary agreements were more common in the early 20th century, as they are currently
viewed as a threat to a country’s sovereignty. Today, concessions also cover smaller areas and
last for a shorter period of time. In 1901, William Knox D’Arcy signed a concessionary
agreement with the Persian Shah Qajar, securing exclusive rights to potential oil discoveries in
most of Iran for 60 years – this was the first Middle Eastern concessionary agreement (Kinzer
2003).
Under a PSA, a country will grant an IOC the right to extract oil (Muttitt 2005). The IOC
provides the capital investment necessary for exploration, infrastructure, and drilling, but the oil
legally remains property of the country. Once production begins, the IOC retains cost oil, which
is a percentage of production that makes up for the company’s costs and capital investment.
After the company recuperates its costs, the country and the IOC divide the remaining
production – known as profit oil – according to contractual agreements, with the state taxing the
IOC’s share. The Energy Information Administration (EIA) states that PSAs administer only
12% of the world’s oil reserves. Smaller nations with minor oil fields are most likely to employ
PSAs: lacking the financial means and technical know-how, and facing high extraction costs,
these countries engage in PSAs so that IOCs provide capital as well as de facto insurance in case
oil is not discovered.
The third form of development is nationalization. Currently employed in Iraq, the
nationalization model stipulates that a country owns 100% of the oil and has complete decisionmaking power. The state may employ IOCs only through a technical service contract, in which
the IOC provides technical and consulting services in exchange for a fixed fee (Muttitt 2005).
The Iraqi government will not entertain any discussions on concessionary agreements
(Draft Iraq Oil and Gas Law 2007), as they are politically infeasible in a country still under
foreign military occupation. Thus, Iraq has two basic options: it can either develop its
Developing Iraq’s Oil Industry to Maximize Government Net Revenues
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hydrocarbons industry nationally, with technical assistance provided by IOCs, or it can engage in
PSAs with IOCs.
According to the Iraq Study Group, a panel appointed by the US Congress and led by
James A. Baker, Iraq’s stabilization depends heavily on its economy (EIA 2007a). Hydrocarbons
are the staple of this economy: oil exports account for nearly 90% of the government’s revenue
and 60% of the country’s GDP (EIA 2007a). The U.S. Government Accountability Office
(GAO) states that Iraq generated a total of $90.2 billion in crude oil export sales between 2005
and 2007 (2008), while Iraqi Ministry of Oil (MoO) spokesman Asim Jihad announced that oil
revenues in 2008 alone amounted to $61 billion (AFP 2009).
Iraq, however, has failed to meet hydrocarbon production and export targets since 2004
(EIA 2007a). The Special Inspector General for Iraq Reconstruction (SIGIR) reported in January
of 2007 that the industry was plagued by procurement, transportation, and storage issues and
struggled with managing pricing controls and budget execution. The report also highlighted
corruption and smuggling as major factors hampering production.
Significant investment is thus required to modernize the hydrocarbons industry.
International organizations have estimated that total reconstruction costs for the oil, gas, and
electricity sectors will amount to over $30 billion (Sakmar 2008), and the World Bank estimates
that maintaining current oil production levels would require an additional $1 billion (EIA 2007a).
1.2 Oil in Iraq
Iraqi oil was discovered in the early 20th century, and it has been subject to periods of
nationalization as well as privatization (Muttitt 2006). In 1925, King Faisal granted a concession
to a consortium of IOCs known as the Iraqi Petroleum Company. Granting the IPC full control of
Iraqi oil for 75 years, the agreement drew widespread dissatisfaction among Iraqis, who also
objected to the revenue-sharing terms and the degree to which the IPC controlled the industry’s
Developing Iraq’s Oil Industry to Maximize Government Net Revenues
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development. Thus, Iraq began nationalizing its oil in 1961, and by 1972 the state reclaimed all
Iraqi oil (Behn 2007). Today, the INOC controls virtually all oil production.
Iraq possesses 115 billion barrels (bbl) of proven oil reserves, according to the Oil and
Gas Journal (EIA 2007a). Nearly 65% of proven reserves are located in the south – particularly
in Basra – but there are also significant deposits near the northern cities Kirkuk, Khanaqin, and
Mosul, which account for 20% of Iraq’s proven reserves. According to the Iraqi government, the
country possesses nine “supergiant” fields and 22 “giant” fields. The southern fields historically
accounted for nearly two-thirds of production. But only three fields account for most of the
current production: North Rumaila, South Rumaila, and Kirkuk.
Estimates of the amount of unproven reserves vary: while oil industry consultant IHS
estimates that Iraq possesses up to 100 billion bbl of unproven oil, the US Geological Survey
believes this figure to be closer to 45 billion bbl (Blanchard 2007). Iraq’s former Oil Minister,
Thamer al-Ghadban, however, believes that Iraq possesses up to 214 billion bbl of unproven oil.
Appendix 1 shows production figures from 1960-2008. In 1960, Iraq produced an
average of 0.97 million bbl/day (EIA 2007b), and throughout this decade production generally
increased. In 1973, Iraq attained the 2 million bbl/day mark, but its most impressive feat
occurred in 1979: that year, the country produced approximately 3.5 million bbl/day, a 36%
increase over the previous year’s production and, to this day, the highest level achieved by Iraq.
But the onset of the Iran-Iraq War in 1980 put a dent in Iraq’s progress. By 1981, Iraq
was producing only 1 million bbl/day, and while this figure rose back to 2.9 million bbl/day in
1989, the Gulf War precluded a full recovery. In 1991, Iraq’s oil production plummeted: the
country produced an average of approximately 0.3 million bbl/day that year, an 85% decrease
from the previous year. This was a direct consequence of the heavy bombardment Coalition
forces inflicted on Iraq’s infrastructure as well as the economic sanctions imposed by the United
Nations, which prevented Iraq from exporting oil. Production remained below 0.6 million
Developing Iraq’s Oil Industry to Maximize Government Net Revenues
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bbl/day until 1997, the year after the UN Oil-for-Food Programme was initiated. Under the
program’s stipulations, the government could export oil in exchange for what were deemed to be
essential products. This newfound demand for Iraq’s oil boosted production, and by 2000, Iraq
was producing nearly 2.6 million bbl/day. The 2003 invasion of Iraq reduced production to levels
below 1.4 million bbl/day; but since 2004, production has hovered around 2 million bbl/day.
While Iraq is currently producing nearly 2.4 million bbl/day, the MoO aims to increase
production to six million bbl/day by the end of 2010 (EIA 2007a). To achieve this goal, the Iraqi
government has prioritized the development of four southern oil fields: Halfaya, Nahr Umar,
West Qurna, and Majnoon. Majnoon ranks among the largest oil fields in the world, with an
estimated 21 billion bbl of oil (Muttitt 2005). Actual output has never topped 60,000 bbl/day, and
the field currently produces only 40,000 bbl/day. Yet Thamer Al-Ghadban, the former Minister
of Oil believes that Majnoon’s potential output could peak at around 600,000 bbl/day. According
to Deutsche Bank, this would entail development costs of approximately $4 billion. The Iraqi
government firmly believes that succeeding in modernizing the petroleum sector will depend
heavily on Majnoon’s development.
1.3 Legal Background
Developing Iraq’s hydrocarbon industry requires a hydrocarbon law that outlines the
terms dictating the development and management of Iraqi oil and natural gas. In 2007, the Iraqi
Cabinet approved the Draft Iraq Oil and Gas Law, which included stipulations for restructuring
Iraq’s Ministry of Oil, creating an Iraqi National Oil Company, and defining revenue-sharing
policy. Appendix 2 is a translated version of the Draft Law.
One of the central elements of the proposed legislation is the creation of the Federal Oil
and Gas Council (FOGC), which “would become the most powerful body in Iraq’s oil sector”
(Blanchard 2007, p. 4). Along with the power to approve or reject the transfer of exploration and
Developing Iraq’s Oil Industry to Maximize Government Net Revenues
production rights, it would also possess the authority to review all petroleum contracts and
determine all oil and natural gas industry policies. The Prime Minister or his nominee would
serve as the President of the FOGC, which would also include: the federal government’s
Ministers of Finance, Oil, and Planning; the Director of the Iraqi Central Bank; a regional
government minister from each region; a representative from any producing governorate not
included in a region; the CEOs of major petroleum companies like the INOC and the Oil
Marketing Company; and up to three experts in the fields of economics, finance, and petroleum.
The MoO’s mandate is also laid out in the draft law. Along with the FOGC, the MoO is
responsible for drafting legislation and federal petroleum policies (Blanchard 2007). It also
monitors activities in the industry and enforces legislation. It oversees petroleum operations,
ensures that documented costs are accurate and properly recuperated, and keeps track of
government revenues. The MoO also represents the Iraqi government in regional and
international forums, negotiating multilateral and bilateral treaties with other countries and
organizations. Essentially, the MoO is involved in proposing and enforcing legislation,
monitoring petroleum operations, and representing the Iraqi federal government within and
beyond Iraq.
The INOC is fully owned by the central government, but it “is financially and
administratively independent and runs on commercial bases” (Draft Oil and Gas Law 2007, p.
13). Its main function is to participate in exploration and production operations. It must sell the
crude oil it produces to the Oil Marketing Company at a price that covers delivery costs as well
as a “reasonable” profit. But it is also involved in the downstream processes of transportation,
storage, marketing, and sales. The INOC has the right to participate in international projects
involving both upstream (exploration, development, and production) and downstream
components, to acquire assets in local and foreign entities, and to form fully-owned subsidiaries
throughout Iraq. The federal government, however, must approve all decisions.
7
Developing Iraq’s Oil Industry to Maximize Government Net Revenues
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The proposed law, however, is in legal limbo. Parliament has yet to approve the draft law
due to various points of contention (Blanchard 2007). While issues related to provincial
sovereignty, revenue sharing, and management of petroleum reserves remained pertinent, the
draft legislation’s provisions for foreign participation were the major stumbling block. While the
draft does not mandate the use of PSAs, Part 5 of Article 9 states, “The Model Contracts may be
based upon Service Contract, Field Development and Production Contract . . .” (Draft Oil and
Gas Law 2007, p. 16), essentially legalizing PSAs. Many Iraqis have expressed concern about
this de facto “denationalization,” pointing to the fact that Iraq would be the only major
petroleum-producing country in the region that would permit IOCs to control upstream
operations (Muttitt 2005).
1.4 What Course of Action Should Iraq Take?
Muttitt (2005) argues that Iraq should nationalize its petroleum industry. He looks at
PSAs employed in Russia, Libya, and Oman: Libya and Oman both share similar physical
conditions with Iraq, while Russia is the only country employing PSAs that has reserve amounts
comparable to Iraq’s. Comparing revenues generated under these three PSAs to expected
revenues from a nationalization scheme, Muttitt calculates that at a price of $40 per bbl, Iraq
would lose between $74 billion and $194 billion over the lifetime of the proposed PSAs. This
represents around two to seven times the current budget of the Iraqi government. Muttitt also
finds that the PSAs under examination would grant the oil companies annual rates of return
ranging “from 42% to 62% for a small field, or 98% to 162% for a large field.” (2005, p. 23) Oil
companies generally consider projects with internal rates of return of 12% to be profitable. He
also points out that Iraq’s oil-rich neighbors constitutionally ban PSAs, and that Iraq has more
lucrative investment-generating options. These include financing development through
government revenues, using future oil production as collateral to borrow money, or employing
Developing Iraq’s Oil Industry to Maximize Government Net Revenues
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IOCs to provide technical and consulting services. He therefore concludes that Iraq should
nationalize its oil industry to maximize revenues.
The purpose of this paper is to determine whether Iraq should nationalize its
hydrocarbons industry or open it up for IOCs to develop. I compare (1) the net revenues the Iraqi
federal government would generate over a period of 40 years by nationalizing Majnoon to (2)
those that would be generated under a PSA similar to that employed in Oman. I initially assume
that the INOC is as efficient as any IOC, because Iraq can employ IOCs for consulting services
and technical expertise under a technical service agreement (this assumption is not founded, so I
correct for this by multiplying production figures under nationalization by values between zero
and one. This is to account for the national company’s inherent relative inefficiency and also to
price the value of the technical service agreement, which is treated as an inefficiency).
For now, I assume the INOC is as efficient as an IOC and that a service agreement is free,
and I find that nationalization generates approximately $18.8 billion more in net revenues than a
PSA. Once I account for the aforementioned inefficiencies, I calculate a threshold inefficiency of
approximately 81.5%: this means that nationalization remains the net revenue-maximizing
option so long as it is at least 81.5% as efficient as an IOC. The Iraqi decision-maker must
therefore decide whether Iraqi nationalization with the use of a service agreement would meet
this threshold.
I would propose that if Iraq believes that the INOC can achieve 86.5% efficiency, it
should proceed with nationalizing Majnoon. If, on the other hand, it does not believe the INOC
can achieve at least 76.5% efficiency, then nationalization should be abandoned. This leaves an
interval of 76.5%-86.5% efficiency, which I term the “Indecision Interval”. If the INOC can
achieve an efficiency level within the Indecision Interval, then further study would be required to
determine whether nationalization is the most profitable alternative. How I drove these initial
results will be discussed in subsequent sections.
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2. Literature Review
2.1 Productivity and Demand/Supply Functions
The comparison between a national oil company (NOC) – like the INOC – and major,
integrated IOCs like ExxonMobil, Shell, and BP is essential to analyzing how a country’s
hydrocarbons industry should be developed. But how exactly does one rate the performance of
different firms within the same industry?
The essential function of a firm is to convert inputs into outputs (Coelli et al. 2005). One
basic performance measurement is productivity, which is a measure of the amount of input
required to attain a certain level of output. The basic productivity equation divides firm output by
its inputs:
Productivity ≡ Outputs/Inputs
(1)
Yet firms often utilize multiple inputs to produce single or multiple outputs. In such cases, inputs
would need to be aggregated into a single index of inputs. This facilitates the calculation of Total
Factor Productivity (TFP), which is a productivity measure that includes all factors of
production.
An industry is made up of firms with many different productivity levels. Yet the industry
as a whole has a theoretical frontier that represents the maximum production that can be attained
by any given amount of inputs. This is known as the production frontier, and it represents the
current state of technology in the industry. Any firm that produces at the production frontier is
considered technically efficient: for a given level of inputs, it has produced the greatest possible
amount of output. Figure 1 illustrates the production frontier:
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Figure 1: Production Frontier
Coelli, Timothy J, D.S. Prasada Rao, Christopher J. O’Donnel, George E. Battese. 2005. An Introduction to
Efficiency and Productivity Analysis. New York; Springer Science + Business Media, Inc.
The y-axis denotes the output produced by the inputs, which are represented by the x-axis. The
industry’s production frontier is depicted by the curve OF’. As seen, Firms B and C are at the
production frontier: they produce the maximum amount of output given the level of inputs they
utilize. Firm A, on the other hand, does not: although it uses the same amount of inputs as Firm
B, it produces less. Thus, Firms B and C are considered technically efficient, while Firm A is
not.
It is important to touch on the issue of productivity versus efficiency. Although a firm
may be on the production frontier and therefore technically efficient, it may still be able to
increase its productivity. Efficiency only means that a firm has maximized output at a given level
of input, but a firm may be able to achieve greater productivity at another level of input. This is
an issue of scale: the optimal scale of inputs is that level which maximizes productivity. Figure 2
illustrates this concept:
Developing Iraq’s Oil Industry to Maximize Government Net Revenues
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Figure 2: Optimal Scale of Productivity
Coelli, Timothy J, D.S. Prasada Rao, Christopher J. O’Donnel, George E. Battese. 2005. An Introduction to
Efficiency and Productivity Analysis. New York; Springer Science + Business Media, Inc.
In this graph, productivity is measured as the slope of the line going through the origin and the
point of production (y/x ≡ output/input ≡ productivity). As Figure 2 illustrates, line OA has a
smaller slope than line OB, demonstrating that Firm B is more efficient than Firm A. However,
line OC has an even larger slope than line OB, illustrating that while Firm B is technically
efficient, Firm C is more productive. In fact, theoretically speaking, a firm that is not efficient
can technically boast a greater productivity level than another firm that is.
While the production frontier defines the maximum output level for any given level of
input, technical changes in the industry can shift the frontier out. This implies an increase in the
maximum output level for all input levels. Technical changes may be spurred by new technology
or improvements in production processes. Graphically, these changes shift the production
frontier outward.
Essentially, if a firm’s productivity increases, it is due to one of three effects: firm-level
efficiency may have improved and drawn closer to the production frontier, a firm may have
exploited scale economies, and/or technical changes may have occurred in the industry.
Developing Iraq’s Oil Industry to Maximize Government Net Revenues
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In the case of a firm that utilizes N number of inputs to produce a single output, the
firm’s technical possibilities can be summarized in a production function:
Q = f(x)
(2)
x ≡ (x1, x2,…, xN)’
Q denotes the quantity of output, while x is an N x 1 vector of inputs. There are four properties
that are generally assumed:
1. Non-Negativity: the value of f(x) is real, finite, and non-negative.
2. Weak Essentiality: at least one input is required to produce positive output.
3. Monotonicity: increasing input cannot reduce output. If x0 ≥ x1, then f(x0) ≥ f(x1). If the
function is continuously differentiable, this implies that the marginal product of all inputs
is non-negative.
4. Concave in inputs: any linear combination of vectors x0 and x1 will produce an output
whose amount is greater than or equal to the same linear combination of f(x0) and f(x1).
Mathematically, f[φx0 + (1-φ)x1] ≥ φf(x0) + (1-φ)f(x1). If the production function is
continuously differentiable, concavity implies that all marginal products – the output
produced by the last unit of input – are non-increasing. This is the phenomenon of
diminishing marginal productivity, which is calculated as:
MPn = δf(x) / δxn
(3)
Figure 1 graphically illustrated the production function representing a single-input,
single-output firm, where output is plotted on the y-axis and input is plotted on the x-axis. In the
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case of a two-input firm, however, this is not feasible; rather, the two inputs are plotted on either
axis, while the output is held constant. Figure 3 illustrates this:
Figure 3: Isoquants for Two-Input Firm
Coelli, Timothy J, D.S. Prasada Rao, Christopher J. O’Donnel, George E. Battese. 2005. An Introduction to
Efficiency and Productivity Analysis. New York; Springer Science + Business Media, Inc.
In the graph above, the inputs are variable, while the output is fixed. The curves are known as
isoquants, since they represent the different combinations of inputs that produce a fixed quantity
of output. Another important element of the graph is the relationship between inputs: the
marginal rate of technical substitution (MRTS) measures the rate at which the input on the x-axis
must be substituted for the input on the y-axis to keep output unchanged. MRTS is calculated by
dividing the marginal product of the input on the y-axis by the marginal product of the input on
the x-axis, and multiplying the result by -1:
MRTSnm = - MPm / MPn
(4)
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The relationship between the outputs and inputs is also important and is captured in the output
elasticity, which is a measure of the change in output quantity associated with changes in one of
the input’s quantity:
En ≡ %Δ in output quantity / %Δ in input quantity = (δf(x) / δxn) *(xn / f(x))
(5)
The relationship between firm output and individual inputs is captured by the inputs’
marginal productivities. Another important relationship is that between output quantity and
simultaneous input scaling. What happens to output, for example, when both inputs are doubled?
The answer to this question determines the scalability of a firm:
If f(kx) < k(f(x)), then the firm experiences decreasing returns to scale (DRS)
If f(kx) = k(f(x)), then the firm experiences constant returns to scale (CRS)
If f(kx) > k(f(x)), then the firm experiences increasing returns to scale (IRS)
In an environment of DRS, doubling inputs leads to a less than doubling of outputs. This may
suggest that a firm is too large, as increased inputs have a diminished effect on output production
(possibly due to overcrowding or less-centralized management). With CRS, doubling inputs
leads to a doubling of outputs, while IRS implies that doubling inputs leads to a greater than
doubling of outputs. A firm experiencing IRS should consider expanding, as growth could, for
example, facilitate the specialization of labor.
Transformation functions can be used to generalize the production function of a firm that
produces multiple outputs:
T(x, q) = 0
q ≡ (q1, q2, …, qM)’ ≡ M x 1 vector of inputs
(6)
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However, economists often circumnavigate transformation functions by one of two ways: either
they aggregate outputs into a single index measure, or they use price information and represent
technology using cost, revenue, and profit functions.
Up to this point, only technical efficiency has been discussed. With price information,
however, and the behavioral assumptions that firms minimize costs or maximize profits, we can
determine allocative efficiency – a firm’s ability to select the mix of inputs that produces a given
amount of output at minimum cost. Combining allocative and technical efficiency generates an
overall measure of economic efficiency.
A major firm objective is to minimize costs. In deciding the mix of inputs it will utilize to
do so, a competitive firm takes input prices as given. The cost minimization problem can be
depicted mathematically:
c(w,q) = min w’x so that T(q,x) = 0
x
(7)
w ≡ (w1, w2,…, wN)’ ≡ vector input prices
Thus, w’x ≡ w1x1 + w2x2 + w3x3, which is the total cost faced by the firm. A firm’s cost function
satisfies five properties:
1. Non-negativity: costs cannot be negative.
2. Non-decreasing in w: an increase in input prices cannot decrease costs. Mathematically,
if w0 ≤ w1, then c(w0,q) ≤ c(w1, q).
3. Non-decreasing in q: an increase in output means an increase in costs. Mathematically, if
q0 ≤ q1, then c(w,q0) ≤ c(w, q1).
4. Homogeneity: multiplying all input prices by an amount k > 0 will lead to a k-fold
increase in costs. Mathematically, k[c(w, q)] = c(kw, q), for k > 0.
Developing Iraq’s Oil Industry to Maximize Government Net Revenues
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5. Concave in w: any linear combination of vectors w0 and w1 will produce a cost which is
greater than or equal to the same linear combination of c(w0, q) and c(w1, q).
Mathematically, c[φw0 + (1-φ)w1,q] ≥ φ c(wo, q) + (1-φ) c(w1, q). This implies that input
demand functions cannon slope upwards.
In the case when the cost function is twice continuously differentiable, one method of deriving
the conditional input demand of a firm producing multiple outputs using multiple inputs is
known as Shephard’s Lemma:
xn(w, q) = ∂c(w, q) / ∂wn
(8)
Essentially, Shepard’s Lemma states that the conditional demand for an input is equal to the
change in total cost associated with a change in the price of that input. If the cost function is
twice-continuously differentiable and satisfies the five aforementioned properties, then Shepard’s
Lemma shows that a firm’s input demand satisfies the properties of non-negativity, homogeneity,
symmetry (∂xn(w, q) / ∂wm = ∂xm(w, q) / ∂wn), and is non-increasing in w and non-decreasing in
q. Either Shepard’s Lemma or the constrained minimum cost approach can be used to determine
the minimum cost of producing a given output vector q.
Another approach taken by firms is that of maximizing revenues for a given input vector
x. For a multiple-input, multiple-output firm, revenue maximization can be illustrates as:
r(p,x) = max p’q so that T(q, x) = 0
q
p ≡ (p1, p2,…, pN)’ ≡ vector output prices
(9)
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Thus, p’x ≡ p1q1 + p2q2 + p3q3, which is the total revenue generated by the firm. A firm’s
revenue function satisfies the properties of non-negativity, homogeneity, convexity in p, and it is
non-decreasing in p and x.
We have looked at how firms decide input demand to minimize costs and output demand
to maximize revenues. In reality, however, firms simultaneously decide on the levels of inputs
and outputs to maximize profits:
π(p,w) = max p’q – w’x so that T(q, x) = 0
q, x
(10)
The profit function satisfies the properties of non-negativity, homogeneity, convexity in p and w,
and is non-decreasing in p and non-increasing in w. If the profit function is twice-continuously
differentiable, then Hotelling’s Lemma can be used to derive input demand and output supply:
xn(p, w) = - ∂π(p, w) / ∂wn
(11)
qm(p, w) = - ∂π(p, w) / ∂pm
(12)
2.2 Data Envelopment Analysis
The two most prominent methods of estimating the production frontier – and hence firmlevel inefficiency – are data envelopment analysis (DEA) and stochastic frontier analysis.
DEA involves the use of mathematical linear programming methods to estimate the
production frontier (Coelli et al. 2005). Graphically, the analysis builds a non-parametric
piecewise surface over firm data. After it has estimated the frontier, DEA determines the
efficiency of individual firms relative to this frontier. While previous authors had used similar
estimation techniques, DEA owes its prominence – and coining – to Charnes, Cooper, and
Developing Iraq’s Oil Industry to Maximize Government Net Revenues
19
Rhodes (1978), who proposed an input-oriented, constant returns to scale (CRS) model. Later,
papers by Fare, Gosskopf, and Logan (1983), and Banker, Charnes, and Cooper (1984)
introduced models assuming variable returns to scale.
Linear programming involves the maximization or minimization of a function, subject to
constraints. These constraints are vital: not only do they limit the domain of this optimization
problem, but their vertices also hold the optimization’s solution (Tchoukalov 2009).
Take the example of an industry with I firms, N inputs, and M outputs. The input matrix
A is made up of column vectors xi, which consist of the various inputs a firm employs for
production. The output matrix B is made up of column vectors ci, which represent the outputs
produced by a firm. Further, I define k as a vector of input weights and w as a vector of output
weights. The linear programming model solves for the values of k and w that maximizes each
firm’s ratio form productivity (Coelli et al. 2005):
max w, k (w’ci / k’xi)
st
(13)
w’cj / k’xj ≤ 1, j = 1, 2,…,I.
w, k ≥ 0
However, there are infinite solutions to this problem: for any solution (w, k), there are other
solutions in the form of (ρw, ρk). To come up with a single solution, the additional constraint of
k’xi = 1 is added. This yields a new linear programming problem:
max η , γ (η’ci)
st
κ’xi = 1
η’cj - κ’xj ≤ 0, j = 1, 2,…,I.
(14)
Developing Iraq’s Oil Industry to Maximize Government Net Revenues
20
η, κ ≥ 0
The change in notation – from w to η and from k to κ signifies that this is a different linear
programming problem.
The dual nature of linear programming can then be utilized to simplify the problem.
Through duality, a linear program can be converted into another, unique linear program
(Tchoukalov 2009). In this conversion, the number of constraints becomes the number of
variables, and vice versa. The dual form has fewer constraints (Coelli et al. 2005), thus making
the problem easier to solve:
min ϕ ,µ ϕ
st
(15)
-ci + Bµ ≥ 0
ϕxi - Aµ ≥ 0
µ≥ 0
where ϕ is a scalar whose value is a firm’s efficiency score and µ is a vector of constraints. A
score of one implies that the firm is on the production frontier.
It is important to note, however, that the above analysis assumes constant returns to scale,
implying that firms are operating at optimal scale. But issues like regulation and imperfect
competition often prevent firms for operating optimally. Thus, the model must be adjusted to
account for production that exhibits variable returns to scale. To do so, the convexity constraint
of I1’µ = 1 is added to the above minimization problem to yield:
Developing Iraq’s Oil Industry to Maximize Government Net Revenues
min ϕ ,µ ϕ
st
21
(16)
-ci + Bµ ≥ 0
ϕxi - Aµ ≥ 0
I1’µ = 1
µ≥ 0
where I1 is a Ix1 vector of ones. This constraint ensures that firms are only compared to those of
similar size, which was not the case in the CRS model.
2.3 Stochastic Frontier Analysis
Stochastic Frontier Analysis (SFA) is a second method of measuring firm-level
efficiency, introduced simultaneously by Aigner, Lovell, and Schmidt (1977), and by Meeusen
and Van den Broeck (1977) (Coelli et al. 2005). One problem with the frontier estimated under
DEA is it assumes that any deviation from the production frontier is due to technical
inefficiency; it does not account for measurement errors and statistical noise. Adding a random
variable representing statistical noise is a solution to this problem, which produces a stochastic
production function. Without the random variable, the production frontier can be written as:
yi = f(xi, β) * TEi
(17)
where yi is the scalar output of Firm I, xi is a vector of inputs, β is a vector of technology
parameters to be estimated, and f(xi, β) is the production function. TEi is Firm I’s technical
efficiency, which is defined as the ratio of observed output over maximum possible output. Its
Developing Iraq’s Oil Industry to Maximize Government Net Revenues
22
value lies between zero and one. A stochastic component accounting for random shocks
independent of the firm or technology can be added, modifying the above equation:
yi = f(xi, β) * TEi * exp {νi}
(18)
Although each firm faces different shocks, it is assumed that the shocks are independent and are
described by a common distribution. TEi is assumed to be a stochastic variable with a specific
distribution. It can be rewritten as TEi = exp{-ui}, where ui ≥ 0. Assuming that the production
function f(xi, β) takes the log-linear Cobb-Douglas form, then the above equation can be written
as:
ln yi = β 0 + Σ β nlnxni + νi - ui
n
(19)
where n is the number of inputs, νi is the “noise” component, and ui is the technical efficiency
component.
2.4 Studies on Firm-Level Efficiency
Eller, Hartley, and Medlock (2007) compare the revenue-generating efficiency of
national oil companies (NOCs) and private IOCs. They find that, in most cases, national oil
companies tend to be less efficient due to differences in the structural and institutional features of
a private firm (Eller, Hartley, and Medlock 2007). These differences tend to arise from different
firm objectives. A private firm focuses solely on financial objectives, while a national company
accounts for non-commercial goals – such as maximizing employment and “shifting resource
extraction away from the future towards the present” (Eller, Hartley, Medlock 2007, p. 1) – when
Developing Iraq’s Oil Industry to Maximize Government Net Revenues
23
making decisions. In the petroleum industry, an NOC may also be forced to sell some of its oil
domestically and at subsidized prices. Such non-economic considerations hamper an NOC’s
ability to maximize revenues and thus make it less efficient at generating revenues for a given
level of inputs (labor and reserves).
Eller, Hartley, and Medlock (2007) also discuss principle-agent motivations as reasons
why private firms are more efficient at generating revenues. While managers generally try to
maximize their own income rather than their owners’, some privatization mechanisms limit this
problem. Tradable ownership shares, for example, give owners an incentive to monitor managers
and reduce inefficiency. On the manager’s side, maximizing the firm’s return is important to
maintain a good reputation, increase job security, and increase the value of shares or stock
options the manager may own. From an organizational standpoint, private firms’ decisionmaking processes tend to be more decentralized and transparent. These qualities allow private
firms to better focus on strictly financial goals.
The authors collected data on 80 oil companies between 2002 and 2004, and they apply
DEA and SFA. SFA generates the following equation:
ln yn,t = 4.3644+ 0.4847* ln Lk ,n,t + 0.0463* ln OilRsvk ,n,t + 0.1695* ln NGRsvk ,n,t
(0.6561)
(0.0666)
(0.0415)
+ 0.3022* t2003 + 0.4767* t2004 + vn,t ! un
(0.0307)
(0.0493)
(20)
(0.0312)
where y ≡ revenue, L ≡ labor, OilRsv ≡ oil reserves, NGRsv ≡ natural gas reserves; t ≡ time
effects (prevailing market prices of oil and gas, which are not constant, affect revenue), n refers
to the firm under study, vn ≡ stochastic component assumed to be normally distributed, un ≡ timeinvariant technical efficiency component, and e^(-un) ≡ firm-specific efficiency. The authors
Developing Iraq’s Oil Industry to Maximize Government Net Revenues
24
conclude that major IOCs – BP, Chevron, ConocoPhillips, Exxon Mobil, and Shell – are the
most efficient firms, while NOCs tend to be the least efficient. Results are found in Appendix 3.
Al-Obaidan and Scully (1991) examine the efficiency of state-owned or controlled
enterprises – which they define as organizations that are at least 30% government-owned – in the
petroleum industry relative to private firms. They note that private firms and state-owned
enterprises (SOEs) differ in the function they seek to maximize: owners of private firms allocate
resources to their highest-valued use within their firm, and thus their objective function has a
single maximand (Al-Obaidan and Scully 1991). SOEs, on the other hand, pursue multiple goals,
many of which are mutually exclusive. They differ from government entities in that they are
susceptible to market pressures, but government intervention softens these market forces.
Because SOE ownership cannot be easily transferred like shares of a private firm, it is difficult to
meter an SOE’s performance; this reduces the incentive for management to achieve optimal
results. This, along with government intervention, contributes to a misallocation of resources.
The authors “estimate an Aigner-Chu deterministic frontier function, a maximum
likelihood stochastic frontier function, and a maximum likelihood Gamma frontier function” (AlObaidan and Scully 1991, pp. 237) to examine a firm’s ability to use assets and employees to
produce output. They find that NOCs are only 63% - 65% as technically efficient as private firms
(Eller, Hartley, and Medlock 2007), and they conclude that “state firms could satisfy the demand
for their output with something less than half of their current resource inputs simply by being
converted to private, for profit enterprises” (Al-Obaidan and Scully 1991, pp. 245-246).
Developing Iraq’s Oil Industry to Maximize Government Net Revenues
25
3. Methodology and Empirical Evidence
3.1 Revenue Assumptions
The purpose of the paper is to determine whether nationalizing or privatizing Majnoon
will generate the most net revenues – discounted over time – for the Iraqi government. This
entails calculating the revenues and costs associated with each development strategy. As
previously mentioned, I begin with the assumption that because Iraq can employ IOCs to provide
technical and consulting services, production figures under nationalization are equivalent to
those under a PSA. I first estimate the revenues and costs associated with nationalizing Majnoon
over 40 years, from 2009 to 2049. This length of time is convenient for comparisons involving
PSAs, which often last between 25 and 40 years.
The project begins with a three-year exploration and feasibility period, during which no
production is achieved. Thus, Iraqis will only be able to extract Majnoon oil beginning in 2012. I
estimate that Majnoon will produce only 30% of peak production in 2012, 60% of peak
production 2013, and 90% of peak production in 2014. According to Muttitt, three years of
production are required before a field begins to produce at its peak levels (2005). At that point, a
large field like Majnoon will continue to produce at its peak for 20 years, after which its
production declines exponentially at a rate of three percent per year. Thus, Majnoon will produce
at its peak level of 600,000 bbl/day from 2015 until 2035. After that, its production will decrease
exponentially at rate of three percent until 2049.
To calculate revenue, I need to predict the real price of oil over the next forty years. If the
price of oil is expected to rise at a rate greater than the risk-free real interest rate, then an oilproducing nation has the incentive to reduce current production: the country expects that
producing oil in the subsequent time period will generate more revenues than producing it now,
selling it, and generating interest from the funds (Book 2 – Economics 2008). If, on the other
Developing Iraq’s Oil Industry to Maximize Government Net Revenues
26
hand, the price of oil is expected to rise at a rate less than the risk-free real interest rate, then a
country has an incentive to produce more oil now, sell it, and invest the funds to generate the
risk-free rate. Based on this Hotelling Valuation Priciple (HPV), the equilibrium real price of oil
is expected to grow at the risk-free real interest rate. It should be noted, however, that this only
takes financial aspects into account. Other strategic, political, and utilitarian factors also affect a
country’s rate of extraction and the price of oil.
I assume that the risk-free real interest rate is 3%, and I use the current price of crude oil
– $56/bbl – as the initial real equilibrium price of oil. Therefore, I predict that the price of oil in
2010 will average $56*(1.03), or $57.68; in 2011, the price will be $56*(1.032), or $59.41, and
so on. Table 1 shows these calculations up to 2049:
Developing Iraq’s Oil Industry to Maximize Government Net Revenues
Table 1: HVP Forecast of Real Price of Oil, 2009-2049
Year
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
2036
2037
2038
2039
2040
2041
2042
2043
2044
2045
2046
2047
2048
2049
Real Price of Oil Prediction (2009 $)
56.00
57.68
59.41
61.19
63.03
64.92
66.87
68.87
70.94
73.07
75.26
77.52
79.84
82.24
84.71
87.25
89.86
92.56
95.34
98.20
101.14
104.18
107.30
110.52
113.84
117.25
120.77
124.39
128.12
131.97
135.93
140.00
144.20
148.53
152.99
157.58
162.30
167.17
172.19
177.35
182.67
27
Developing Iraq’s Oil Industry to Maximize Government Net Revenues
28
3.2 Costs Under Nationalization
There are five major costs associated with oil production, and those are feasibility,
development, fixed, and variable costs, along with the cost of a technical service agreement
(Muttitt 2005). The onset of a project consists of a feasibility study to assess whether a field
contains economically-extractable oil. Muttitt estimates that feasibility costs amount to
approximately $10 million a year for the three years prior to production, which I will assume.
Development costs consist of expenditures associated with developing a production plan and
establishing facilities to optimize production. Deutsche Bank pegs Majnoon’s development costs
at approximately $4 billion. I assume that half of these costs – $2 billion – are incurred up front
(2009), while $1 billion is incurred in 2010. An oil production project typically incurs
development costs until two years after peak production, so I divide the remaining $1 billion
equally from 2011 until 2037. This amounts to an annual cost of approximately $37 million.
Fixed and variable costs are also accounted for in this analysis. Muttitt estimates that
fixed costs generally amount to 5% of development costs, which in Majnoon’s case would
amount to $200 million. Iraqi authorities estimate the variable costs per barrel of oil to be
approximately $1-$1.5. I assume a variable cost of $1/bbl until the field ceases to produce at
peak level, at which point variable costs rise to $1.5/bbl. Multiplying the per-barrel variable cost
by the production amount yields total variable costs (VC).
The final – and most difficult – cost that must be accounted for is the cost of the technical
service agreement. Terms of such agreements are often kept secret and rarely published, thus
making it difficult to estimate their cost. For now, I assume that the technical services provided
by the IOC are free; I will account for this cost later in the analysis.
Net revenues are calculated by subtracting yearly costs from yearly revenues. But the
Iraqi decision-maker is interested in the net present value (NPV) of future net revenues, because
the value of future payments are discounted due to the opportunity cost of delaying payment: the
Developing Iraq’s Oil Industry to Maximize Government Net Revenues
29
revenues could have been invested in other revenue-generating projects. NPV is the discounted
difference between future cash inflows and future cash outflows. It compares the value of a
dollar in different periods, taking into account rates of return. Generally, if the NPV of a project
is positive, a decision-maker should engage in the project. In my analysis, however, I am
comparing the NPV of nationalization to the NPV under a PSA to determine which project
possesses a greater NPV. NPV is calculated as follows:
NPV = ∑ [(Rt-Ct) / (1+r)t
(21)
where Rt ≡ revenue at time t, Ct ≡ cost at time t, and r ≡ discount rate. How should a nationalized
oil company discount future cash flows? One method is to simply use the country’s real interest
rate: the Iraqi Central Bank has currently set a nominal interest rate of 11% (Iraq Directory
2009), while inflation has hovered around 5% (Index Mundi 2008), producing a real interest rate
of 6%. However, another method is to calculate the social discount rate; this is the discount rate
applied to social investments, and it measures the rate at which a society is willing to trade
present for future consumption. The social discount rate can be estimated by summing a
country’s population growth rate with its depreciation rate (Rothwell 2009), as this summation
yields the rate at which a country’s economy must grow to sustain itself. Iraq’s population
growth rate in 2009 is 2.5% (CIA 2009). There is little information on the rate of depreciation of
Iraq’s hydrocarbon capital. The depreciation rate of India’s oil and gas pipelines in 2005 was
adjusted to 3.17% (Mukul 2005). After years of destruction and underinvestment, Iraq’s
hydrocarbon infrastructure is sure to be in worse condition than India’s. Thus, I estimate that
Iraq’s hydrocarbon capital depreciation rate is 8.5%. Adding this rate to the population growth
rate yields an estimated social discount rate of 11%. I discount future cash flows from the oil
Developing Iraq’s Oil Industry to Maximize Government Net Revenues
30
field using the social discount rate, as it is tailored to social projects and, in this case, to the oil
industry as well (later I will test this assumption).
Appendix 4 presents all of the revenues and costs associated with nationalization,
discounting future cash of net revenues over the next 40 years from Majnoon. The sociallydiscounted cash flows are worth $98.5 billion in today’s terms.
3.3 Development under an Omani-style PSA
Under the terms of the Omani PSA, the IOC pays neither royalties nor taxes to the
government (Muttitt 2005). Cost oil is limited to 40% of production, and profit oil is split 80:20
in favor of the government. The government rewards the IOC with a $3 million bonus for
discovering oil in a field and with a $1 million bonus for every 25,000 bbl/day increase in
production levels, until the IOC produces at a rate of 150,000 bbl/day. For its part, the IOC
compensates the government with a signing bonus of $250,000.
This analysis adopts all of these terms except for the signing and discovery bonuses.
Since the presence of oil has already been confirmed in Majnoon, the hypothetical PSA
employed for Majnoon will not include a discovery bonus. As for the signing bonus, it is not
reflective of the sheer potential of Majnoon’s production. In 2007, Reliance Industries, India’s
largest private-sector conglomerate, paid a signing bonus of between $15.5 - $17.5 million for
the rights to explore and develop two Iraqi Kurdish blocks (Earth Times 2009). I therefore
include a signing bonus of $25 million for the Iraqi government as part of the PSA analysis, to be
paid up front.
Appendix 5 presents the revenues and costs associated with developing Majnoon through
a PSA. The timeline and production levels of the Majnoon field under the PSA are assumed to be
identical to those under a nationalized scheme. This is based on Muttitt’s assumption that, with a
technical service agreement, a national oil company is as efficient as the major international
Developing Iraq’s Oil Industry to Maximize Government Net Revenues
31
companies. More formally, this assumption states that the INOC would be at the production
frontier of the oil industry, achieving the highest level of industry efficiency (an assumption that
will later be relaxed). Therefore, production under the PSA is identical in timing and value to
that under nationalization. With the exception of the additional $25 million in the first year of
project development (2009), government revenues under both scenarios are identical.
Under a PSA, all costs are absorbed by the IOC, which subsequently recuperates them
through cost oil. The feasibility, development, fixed, and variable costs incurred by the IOC are
identical to those incurred by the government under nationalization. The IOC begins to
recuperate cost oil once it achieves production (2012). In this year, it will begin recuperating the
capital costs it has injected into the project, which are illustrated in the table below:
Table 2: IOC Capital Costs, 2009-2011
Year
Feasibility
Costs ($)
2009
10,000,000
2010
10,000,000
2011
10,000,000
Development Fixed Costs Variable
Costs ($)
($)
Costs ($)
2,000,000,000 200,000,000
1,000,000,000
0
37,037,037
0
Total
Total Costs ($)
0
0
0
2,210,000,000
1,010,000,000
47,037,037
3,267,037,037
Thus, by 2012, the IOC wants to recuperate approximately $3.267 billion in initial capital costs.
However, under the terms of the PSA, it can only recover up to 40% of annual revenues, which
amounts to $1.608 billion (0.4 x 2012 revenues). Subtracting this payment from the $3.267
billion initially invested by the IOC, the IOC still needs to cover $1.659 billion of capital
investment. Thus, in 2012, the IOC will claim this amount, along with new capital investments
made that year, when recuperating cost oil:
Developing Iraq’s Oil Industry to Maximize Government Net Revenues
32
Table 3: IOC Capital Costs, 2012
Year
Unpaid
capital costs
from 20092011 ($)
Feasibility
Costs ($)
2012 1,658,855,529
Development Fixed
Costs ($)
Costs ($)
0
37,037,037
Variable
Costs ($)
0
Total Costs
($)
65,700,000 1,761,592,566
The cost oil from 2012 is recuperated from revenues in 2013. Forty percent of these revenues
amounts to $3.313 billion, which is greater than the cost oil of $1.762 billion. Therefore, in 2013,
the government reimburses the IOC only $1.762 billion, covering all of the IOC capital
investments up to this point. From 2014 until the end of the project, the IOC recovers whatever
annual development and variable costs it incurs. These costs do not amount to the 40%-ofrevenue limit imposed on cost oil.
Once cost oil is accounted for, the government keeps 80% of net revenues, while the IOC
lays claim to the remaining 20%. Finally, the government must pay the IOC its production
bonuses: as seen in Appendix 5, this amounts to payments of $2 million in 2012, $3 million in
2013, and $1 million in 2014.
After accounting for the signing bonus, cost oil, the 80:20 net revenue split, and the
production bonus, we are left with government net revenues, which must be discounted to
generate the NPV of these future cash flows. It is true that a national oil company’s discount rate
will differ from that of an IOC, but the cash flows being analyzed in each situation belong to the
government. Thus, I will use the same discount rate as that employed under nationalization, 11%
(we will test this assumption later).
Appendix 5 reveals that the NPV of net revenues under the PSA amounts to $79.7 billion,
which is approximately $18.8 billion less than the NPV of net revenues under nationalization.
However, the inherent relative inefficiency of a national company – even with technical support
Developing Iraq’s Oil Industry to Maximize Government Net Revenues
33
from an IOC – has yet to be taken into account. Neither has the cost of the technical service
agreement.
3.4 Comparing Alternatives
To this point, the analysis has revealed that nationalizing Majnoon would generate $18.8
billion more in NPV than developing it under a PSA. Yet the analysis made two assumptions that
must be relaxed. The first assumption made – namely by Muttitt – was that the INOC, with
technical support from an IOC, would be as efficient as an IOC. In fact, this is not realistic: if
providing technical services makes a national oil company as efficient as an IOC, this would
make a country favor a technical service agreement rather than a PSA. This is not in the best
interest of the IOC, as it prefers engaging in a PSA. Thus, I must account for the inherent
inefficiency of the INOC relative to a major IOC.
The second assumption that must be relaxed is related to the cost of a technical service
agreement. Until now, my analysis has assumed that the technical service agreement is free. But
it is not, and if accounted for as a cost to the government under nationalization, it may be
expensive enough to make a nationalized Majnoon less profitable than Majnoon under a PSA.
Unfortunately, it is difficult to assess the INOC’s efficiency relative to an IOC, and it is
even more difficult to determine whether the inefficiency is manifested in the form of lower
production levels, higher costs, or both. At the same time, determining the cost of a technical
service agreement for a major field like Majnoon is challenging, because negotiations between
governments and oil companies tend to be highly secretive.
The first step in dealing with these issues is to treat the technical service agreement as an
“inefficiency”: it is a cost incurred by a national oil company, but not by an IOC. Therefore, it
contributes to the relative inefficiency of the INOC. This allows me to classify both crucial
assumptions in terms of inefficiency.
Developing Iraq’s Oil Industry to Maximize Government Net Revenues
34
My analysis estimated that nationalization generates $18.8 billion more in NPV, not
accounting for the assumptions. The Iraqi decision-makers must now determine whether
nationalization is still more profitable when accounting for the cost of technical services
provided by an IOC as well as the national company’s relative inefficiency. Thus, the decisionmakers are interested in determining the threshold efficiency level, the point at which
nationalization becomes less profitable than a PSA. With this knowledge, they can use
information on the cost of a potential technical service agreement as well as information on the
inefficiency of the INOC – both of which they are privy to – to determine whether
nationalization generates greater net revenues. As such, it is not required for me to determine
these values. All I need to provide them with is the threshold efficiency level, and from there
they can use the information available to them to make a decision.
Therefore, I must address the general issue of inefficiency – whether in the form of
production, costs, or the technical service agreement – and I do so through production
reductions. Specifically, I multiply the production levels under nationalization (Appendix 4) by
factors less than one. In summary, I treat the two assumptions as inefficiencies, and I account for
all inefficiencies as production reductions.
For example, to test whether nationalization is more profitable when the INOC is 90% as
efficient as an IOC, I multiply the annual production figures in Appendix 4 by 0.9 and observe
the change in the NPV of the net revenues generated. If net revenues under nationalization
remain greater than $79.7 billion – the NPV of net revenues under a PSA – then I multiply
production by a smaller percentage, say 85%, and continue to test different efficiency levels until
I find the level at which the NPV of net revenues first dips below $79.7 billion. At this
inefficiency level, a PSA is more profitable for Iraq. Appendix 6 reveals that the threshold
efficiency level is approximately 81.5%; this is the point at which net revenues are
approximately equal under both development strategies.
Developing Iraq’s Oil Industry to Maximize Government Net Revenues
35
4. Initial Conclusions and Sensitivity Analysis
4.1 Efficiency Intervals
The decision-makers will need to price inefficiency information in terms of barrels of oil.
For example, if the technical service agreement costs $3 billion up front, they must divide this
number by the current price of a barrel of oil ($56), to come up with 53.5 million barrels of oil.
Other inefficiencies can also be translated into barrels of oil in a similar fashion. In this way, the
decision-makers can shift all inefficiencies to production reductions and assess whether
nationalization remains more profitable. To generate an efficiency “score” for the INOC, the
decision-makers would subtract the barrels representing total inefficiency – I term these
“Inefficiency Barrels” – from the total barrels produced under a PSA, then divide this number by
the total barrels produced under a PSA:
Efficiency % =[(Total Barrels PSA –“Inefficiency Barrels”) / Total Barrels PSA] x 100 (22)
In Iraq’s case, if this percentage is greater than 81.5%, then the decision-makers would generate
more net revenues by nationalizing Majnoon. If not, then they should consider engaging in a
PSA with an IOC. However, due to the estimative nature of many of the assumptions, I propose
that the Iraqi government distinguish between three efficiency intervals, which are created by
first adding five percent to the threshold efficiency level and subtracting five percent from it:
efficiency levels below 76.5%, between 76.5%-86.5%, and greater than 86.5%. At efficiency
levels greater than 86.5%, the analysis would unequivocally conclude that nationalization of
Majnoon generates more net revenues. At efficiency levels below 76.5%, Majnoon’s
nationalization would undoubtedly generate less net revenues that under a PSA. Efficiency levels
between 76.5% and 86.5% represent the “Indecision Interval”. If the Iraqis believe the INOC can
Developing Iraq’s Oil Industry to Maximize Government Net Revenues
36
achieve an efficiency level within this interval, then it is unclear which alternative is more
profitable. Further study would be required to determine the optimal strategy.
What relative efficiency can the INOC realistically achieve? This is a difficult question to
answer, but Iraq’s previous experience of nationalizing its oil industry provides interesting
observations. The country began nationalizing its oil in 1961, a process that was complete by
1972. In 1960, when foreign oil companies had concessionary control over the industry, Iraq was
producing an average of 0.97 million bbl/day. As the nationalization process intensified in the
1960s, production growth showed no signs of stagnation, with the one exception being 1967.
This suggests that Iraq was able to increase production despite its movement towards
nationalization.
In 1972, however, production declined by 13% from the previous year, hinting that the
completion of the nationalization process that year may have contributed to the production drop.
But 1973 witnessed a 37% rise in production, and by 1975 production spiked to 2.26 million
bbl/day. In 1979, at the dawn of the Iran-Iraq War, this figure rose to 3.48 million bbl/day.
These numbers suggest that once Iraq had fully transitioned to a nationalized oil industry, its
production rose dramatically.
This alone, however, is not enough evidence to conclude that the INOC was more
efficient than the IOCs. First, these figures only illustrate output performance, but they say
nothing about the amount of input required to achieve them. While Iraq was producing more oil
under nationalization, it is quite possible that the INOC had to spend much more than an IOC
would have had to in order to achieve these figures. Thus, I can make no conclusions on the
INOC’s relative efficiency. The second issue is that while Iraq’s oil industry was nationalized, it
had already benefited from years of capital investment and knowledge exchange from the IOCs.
Thus, the IOCs’ effects on the INOC cannot be completely isolated. Finally, while production
increased under nationalization, there is no telling how much more it may have increased under
Developing Iraq’s Oil Industry to Maximize Government Net Revenues
37
IOC management. The observed increase may have just been a result of technological
advancements in the industry in general. Thus, little can be concluded from Iraq’s nationalization
in 1972, but it is clear that maintaining and even increasing absolute production levels is not
unimaginable.
4.2 Sensitivity Analysis: Testing the Assumptions
I have determined the implications of the various efficiency intervals, but I made
assumptions to do so. How much do these assumptions actually affect the results? I conduct a
sensitivity analysis on three of the major assumptions made: the discount rate, the price of crude,
and Majnoon’s peak production level. If the sensitivity analysis finds that manipulating these
factors has little effect on the efficiency results that I have driven, this would legitimize my
analysis’ conclusions. If, however, the efficiency results change drastically, then more research
will have to be conducted to estimate these three factors more accurately.
I first test the discount rate assumption’s effect on the findings. In the analysis, I
discounted future net revenues by 11%, because I assumed this value to be Iraq’s social discount
rate. However, Iraq’s current real interest rate is 6%, and Muttitt used 12% in his analysis,
claiming this is a typical rate of return that oil companies use to evaluate projects (2005). Thus, I
recreate the analysis, discounting net revenues by 3%, 6%, 9%, and 12%; I compare the
threshold efficiency level determined under these discount rates to the threshold under my initial
assumption of 11%:
Developing Iraq’s Oil Industry to Maximize Government Net Revenues
38
Table 4: Discount Rate Sensitivity Analysis
Discount Rate
PV Net Rev. Nationalization, $ Billion
PV Net Rev. PSA, $ Billion
Threshold Efficiency Level
Indecision Interval
3%
396.9
318.3
0.805
6%
218.8
175.9
0.810
9%
132.2
106.6
0.810
11%
98.5
79.7
0.815
12%
86
69.7
0.820
75.5%76.5%85.5% 76%-86% 76%-86% 86.5% 77%-87%
Holding all other factors constant, the threshold efficiency increases with the discount
rate, from a level of 80.5% at a discount rate of 3% to a level of 82% at a discount rate of 12%.
Thus, the Indecision Interval also increases slightly with the raise in the discount rate. As the
discount rate rises, the INOC must achieve a higher relative efficiency score for nationalization
to be as profitable as a PSA. The intuition behind this result is that, while raising the discount
rate reduces the present value of all net revenues, this effect has more of an impact for the
government under nationalization. In a nationalized scheme, a government sacrifices current
revenue – in the form of capital investments – in return for keeping 100% of all net revenues
from the project. Thus, the benefit of nationalization materializes in the future, while its costs are
incurred now. By raising the discount rate, this benefit is reduced, thus making nationalization
less attractive relative to a PSA. To compensate for this effect, the INOC must achieve a higher
efficiency score.
The sensitivity analysis finds that manipulating the discount rate has no major effect on
the efficiency threshold. Increasing the discount rate from 3% to 12% causes the threshold to
increase by only 1.5%, a change that represents only 1.8% of the original threshold value. Thus,
my decision to discount net revenues by 11% does not – on its own – have a significant impact
on the results.
The second assumption I test is the real interest rate used to predict crude oil prices. I
assumed a risk-free real interest rate of 3%, but I will now test rates of 2% and 5%:
Developing Iraq’s Oil Industry to Maximize Government Net Revenues
39
Table 5: Risk-Free Real Interest Rate Sensitivity Analysis
Risk-Free Real Interest Rate
PV Net Rev. Nationalization, $ Billion
PV Net Rev. PSA, $ Billion
Threshold Efficiency Level
Indecision Interval
2%
3%
85.6
98.5
69.4
79.7
0.820
0.815
77%-87% 76.5%-86.5%
5%
132.4
106.8
0.810
76%-86%
The threshold efficiency was 81.5% at the 3% risk-free rate. Increasing the risk-free rate to 5%
only reduces the threshold efficiency to 81%, while decreasing it to 2% only increases the
threshold to 82%. Consequently, the Indecision Interval change only slightly. The changes are
not large, suggesting that fixed growth price forecasts, while important to revenue figures, may
not have a considerable effect on the difference in net revenues between the two development
options.
I also test the results’ sensitivity to the assumption made regarding Majnoon’s peak
production. Based on Muttitt’s analysis, I assume that Majnoon’s production peaks at 600,000
bbl/day (2005). I track how the threshold efficiency level changes at a peak production of
400,000 bbl/day and 800,000 bbl/day:
Table 6: Peak Production Sensitivity Analysis
Peak Production Level, 1,000 bbl/day
PV Net Rev. Nationalization, $ Billion
PV Net Rev. PSA, $ Billion
Threshold Efficiency Level
Indecision Interval
400
600
64.7
98.5
52.6
79.7
0.820
0.815
77%-87% 76.5%-86.5%
800
132.4
106.9
0.810
76%-86%
As I increase peak production, the threshold efficiency level decreases, but only slightly: at
400,000 bbl/day, the INOC must achieve an efficiency score of 82%; at 800,000 bbl/day, this
score must be 81%. This is a 1% change that represents only 1.23% of the original threshold
Developing Iraq’s Oil Industry to Maximize Government Net Revenues
40
efficiency score. Consequently, the Indecision Interval does not undergo a sizable change. The
peak production assumption on its own does not have a significant impact on the threshold
efficiency results.
It is, however, possible that simultaneously manipulating multiple assumptions can have
a significant effect on the results. Thus, I create three charts displaying all of the possible
efficiency threshold outcomes obtained with different assumptions. Each chart displays the
efficiency outcomes of manipulating prices and discount rates, while holding peak production
constant:
Discount Rate
Table 7: Efficiency Thresholds at Peak Production = 400,000 bbl/day
3%
6%
9%
11%
12%
Risk-Free Real Interest Rate
2%
3%
0.805
0.805
0.81
0.805
0.815
0.81
0.815
0.815
0.82
0.815
5%
0.8
0.805
0.81
0.81
0.815
Discount Rate
Table 8: Efficiency Thresholds at Peak Production = 600,000 bbl/day
3%
6%
9%
11%
12%
Risk-Free Real Interest Rate
2%
3%
0.805
0.805
0.81
0.805
0.81
0.81
0.815
0.81
0.815
0.815
5%
0.805
0.805
0.805
0.81
0.81
Developing Iraq’s Oil Industry to Maximize Government Net Revenues
41
Discount Rate
Table 9: Efficiency Thresholds at Peak Production = 800,000 bbl/day
3%
6%
9%
11%
12%
Risk-Free Real Interest Rate
2%
3%
0.805
0.805
0.81
0.81
0.815
0.815
0.82
0.82
0.825
0.825
5%
0.8
0.805
0.81
0.815
0.82
With the above figures, the Iraqi decision-makers can essentially determine the threshold
efficiency that the INOC must meet at different assumptions regarding price, discount rates, and
peak production. If, for example, the decision-makers believe that the price of oil over the next
forty years will grow at a rate of 3%, that peak production will be 800,000 bbl/day, and they
choose to discount future net revenues at 6%, then Table 9 tells them that the threshold
efficiency the INOC must achieve is 81%. Because of the estimations made in the analysis, I
create an Indecision Interval of ± five percent around each threshold efficiency score. Thus, in
the above example, if the INOC can achieve any score greater than 86%, nationalization is more
profitable; if it can only achieve a score less than 76%, then a PSA is more profitable. Any score
in between would require further study before the Iraqis make a decision.
The general trend that emerges from these figures is that the INOC needs to achieve a
higher efficiency score when changes in assumptions reduce the present value of net revenues. In
each of the three figures, the efficiency threshold increases as one moves down or to the left of
the figure. Such movements lower the assumed price and raise the discount rate, thus lowering
net revenues. The bottom-left cell always contains the highest threshold level. Thus, while the
figures present efficiency scores that the INOC must meet to be more profitable than a PSA, it
Developing Iraq’s Oil Industry to Maximize Government Net Revenues
42
also suggests to the Iraqis that as net revenues decline, the INOC will have to achieve a higher
efficiency score to remain more profitable than a PSA.
What is most important to note, however, is that the threshold scores vary only slightly as
we manipulate the multiple assumptions. The lowest threshold calculated in the sensitivity
analysis is 80%, while the highest is 82.5%. This difference of 2.5% is represents only 3.1% of
the original threshold efficiency of 81%. This implies that my assumptions have a very slight
impact on the results, thus bolstering the conclusions of the analysis.
While my analysis concluded that the Indecision Interval lies between 76.5% and 86.5%,
the sensitivity analysis allows me to create a broader and “safer” Indecision Interval of 75% 87.5%. I do so by adding five percent to the highest efficiency threshold calculated under the
sensitivity analysis and subtracting five percent from the lowest efficiency threshold. Essentially,
if the Iraqi government does not believe the INOC can achieve 75% efficiency, then it should
without a doubt engage in a PSA. If, on the other hand, the INOC can achieve greater than 87.5%
efficiency, then the Iraqis should definitely nationalize Majnoon.
4.3 Other Issues to Consider
My analysis has concluded that the Iraqi government’s Indecision Interval lies between
75% and 87.5%, which suggests to the Iraqis that nationalization should at least be considered at
any efficiency level 75% or greater. Yet the analysis has its limitations.
The first limitation of the analysis is that it only looked at Majnoon’s development. While
Majnoon is one of the world’s largest fields whose development is a priority for the MoO, Iraq
possesses nearly 70 other fields (Al-Mehaidi). Does a case study of Majnoon capture all of the
issues associated with developing Iraq’s entire industry?
One factor to consider is project financing. In answering whether it should nationalize its
oil, Iraq must account for how it will secure the funds necessary for field development. A PSA
Developing Iraq’s Oil Industry to Maximize Government Net Revenues
43
stipulates that the IOC provides the initial capital necessary to develop a field; under
nationalization, it is the government’s duty to secure financing. While Iraq may be able to
finance Majnoon’s development, it will be severely hard-pressed to finance the reconstruction of
the entire industry.
One financing option involves borrowing from financial institutions abroad. It is
conceivable that the government can secure loans using future production as collateral, but the
terms of any loan would have to be accounted for as a cost. I would therefore have to account for
debt servicing costs in the analysis.
A second financing option would be for Iraq to channel its own revenues – most of which
is generated from oil sales – away from projects being undertaken by other ministries and toward
field development. Of course, this would entail an opportunity cost that would also need to be
accounted for in the analysis. This would involve calculating the net revenues that these non-oil
projects would have garnered for the government.
Another issue with the analysis is my decision to maximize government net revenues.
The ultimate purpose of the paper is to determine how to develop Iraq’s oil industry to maximize
the welfare of the Iraqi people. In economics, welfare is subjective, and an economic unit may
seek to maximize welfare through combinations including, but not limited to, net revenue, GDP,
growth, employment, and equity. While government net revenues is one such indicator, it may
not be the most appropriate, especially if a government is not stable or does not possess proper
distribution mechanisms. Nevertheless, Iraq does seek to maximize government net revenues,
which, ceteris paribus, is likely to increase welfare.
I also assumed that the Iraqi government itself desires to maximize net revenues over the
next forty years. Recently, however, Iraq announced that it “is seeking to boost its oil production
as much as possible in the shortest possible time” (Platts 2009), and it has asked IOCs to provide
$2.6 billion in what it calls “soft loans”. Deputy Prime Minister Barham Salih noted that
Developing Iraq’s Oil Industry to Maximize Government Net Revenues
44
declining oil prices had dictated the desire to boost short-term production., while Oil Minister
Hussein Al-Shahristani assured that Iraq would reimburse these loans from production-generated
revenue. Essentially, the government’s main concern is to raise funds in the short-term, because
lower oil prices have slashed government revenues. Thus, production in the short-term is more
valued than long-term production. To account for this in my analysis, I would have to place
greater weight on production in the early years of development. If PSAs are more effective in
boosting production quickly, then they may become more favorable among Iraqi decisionmakers.
Iraqi production is also subject to external influences. In Majnoon’s case, I claimed that
Iraq would maximize production, an assumption bolstered by the government’s desire to boost
short-term production. But as a member of the Organization of Petroleum-Exporting Countries
(OPEC), Iraq is subject to OPEC production quotas. While OPEC does not currently require Iraq
to abide by its quotas (due to its rebuilding hydrocarbons industry) (Iraq Oil Report 2008), this
exemption may not last over the next forty years. An IOC may also curb production levels under
a PSA for strategic purposes. IOC and OPEC limitations would affect the revenue figures I
estimated in the analysis.
Hydrocarbon development will also have significant spillover effects that I did not
account for. One specific issue to consider is foreign investment: PSAs may pave the way for
foreign investment not only in the oil sector but in other industries as well. Nationalizing
industries may guarantee greater sovereignty, but it may also dissuade foreign companies from
investing in the country as a whole. This is especially pertinent to Iraq, where political and
security concerns heighten the risks associated with investment in the country. Thus, foreign
companies require high risk premiums to invest their capital in the country. Nationalizing the oil
industry may portend the nationalization of other industries, a threat to the capital that foreign
firms have or will be investing in the country. My analysis would have to include the effect on
Developing Iraq’s Oil Industry to Maximize Government Net Revenues
45
government net revenues of declines in foreign investment in other industries, as nationalizing
Iraqi oil has implications beyond the hydrocarbons industry.
The analysis also focused exclusively on the upstream processes of an oil industry, which
include the exploration and production of crude oil. However, the downstream processes of
refining oil and selling and distributing products derived from oil are equally important.
Nationalizing Iraq’s oil industry entails the nationalization of both upstream and downstream
components. Major IOCs generally engage in both components, as they are involved in the
recovery, refining, and selling of oil and its derivatives. Thus, it is important to also observe
effects on the downstream processes under nationalization and under a PSA. It is likely that IOCs
are also more efficient at refining and selling petroleum products as they are at producing oil.
This is an important factor for the Iraqi decision-makers to consider.
Finally, my analysis relied on economic foundations, but Iraqi politics will dictate the
nature of the new hydrocarbon law as much as economics will. In this regard, the major issue
relates to jurisdiction: who actually possesses decision-making authority over the country’s
fields? The Kurdistan Regional Government (KRG), for example, has already signed agreements
with IOCs to develop some of the northern oil fields, and this was done without the consent of
the national government. While the MoO continues to claim control over all oil fields, it recently
gave the KRG permission to export some of the oil produced in the Kurdish region. Specifically,
the KRG will be able to export 60,000 bbl of oil per day from the Tawqe field, and another
40,000 bbl/day from the Taq-Taq field. But “the oil will be marketed by the central government
and all revenue will go to Baghdad” (Robertson 2009, p. 1). Thus, while the central government
has softened its position, it continues to insist on ownership of the revenues.
More generally, there is friction between central and regional authorities throughout the
entire country: discussions on whether Iraq should employ a federalist structure – where regional
Developing Iraq’s Oil Industry to Maximize Government Net Revenues
46
authorities have greater autonomy – have yet to be resolved. Once they are, field jurisdiction will
be more clearly defined.
4.4 Final Conclusions
The issues mentioned above are important for the Iraqi government to consider, and they
will certainly affect the INOC’s threshold efficiency level. Regardless, my analysis provides a
starting point in answering whether Iraq should nationalize its oil. It highlights some of the issues
related to nationalization as well as PSAs, and it explores the implications of a case study
comparing alternative ways of developing an oil field.
I initially found that the INOC faced an Indecision Interval of 76.5%-86.5%. The
sensitivity analysis demonstrated that modifying my assumptions only slightly altered the results,
but it dictated an adjustment of the Indecision Interval to 70%-87.5%. Thus, I conclude that the
INOC must achieve an efficiency score of at least 70% – relative to an IOC – to consider the
option of nationalization. Otherwise, Iraq should engage in PSAs to maximize government net
revenue. Any efficiency score above 87.5% suggests that Iraq should nationalize its oil, and any
score within the Indecision Interval would require further study before the Iraqis make a
decision.
This decision will have a significant impact on the shape of the country’s reconstruction
as a whole. Relying as heavily on oil revenues as Iraq does guarantees that the oil industry will
pave the way for the country’s development. It is therefore vital that the Iraqis make a sound
economic decision with respect to rebuilding its hydrocarbons industry. I provide the Iraqi
decision-makers with the foundational analysis necessary to begin exploring development
options. It is up to them to utilize it.
Developing Iraq’s Oil Industry to Maximize Government Net Revenues
Appendix 1: Iraqi Crude Oil Production, 1960-2007
Year Avg. Production (million bbl/day) Total Annual Production (million bbl) % Change
1960
0.97
354.1
1961
1.01
368.7
4.1
1962
1.01
368.7
0.0
1963
1.16
423.4
14.9
1964
1.26
459.9
8.6
1965
1.32
481.8
4.8
1966
1.39
507.4
5.3
1967
1.23
449.0
-11.5
1968
1.50
547.5
22.0
1969
1.52
554.8
1.3
1970
1.55
565.8
2.0
1971
1.69
616.9
9.0
1972
1.47
536.6
-13.0
1973
2.02
737.3
37.4
1974
1.97
719.1
-2.5
1975
2.26
824.9
14.7
1976
2.42
883.3
7.1
1977
2.35
857.8
-2.9
1978
2.56
934.4
8.9
1979
3.48
1270.2
35.9
1980
2.51
916.2
-27.9
1981
1.00
365.0
-60.2
1982
1.01
368.7
1.0
1983
1.01
368.7
0.0
1984
1.21
441.7
19.8
1985
1.43
522.0
18.2
1986
1.69
616.9
18.2
1987
2.08
759.2
23.1
1988
2.69
981.9
29.3
1989
2.90
1058.5
7.8
1990
2.04
744.6
-29.7
1991
0.31
113.2
-84.8
1992
0.43
157.0
38.7
1993
0.51
186.2
18.6
1994
0.55
200.8
7.8
1995
0.56
204.4
1.8
1996
0.58
211.7
3.6
1997
1.16
423.4
100.0
1998
2.15
784.8
85.3
1999
2.51
916.2
16.7
2000
2.57
938.1
2.4
2001
2.39
872.4
-7.0
2002
2.02
737.3
-15.5
2003
1.31
478.2
-35.1
2004
2.01
733.7
53.4
2005
1.88
686.2
-6.5
2006
2.00
730.0
6.4
2007
2.09
762.9
4.5
2008
2.36
861.4
12.9
Energy Information Administration. 2007. “World Crude Oil Production, 1960-2007.”
http://www.eia.doe.gov/aer/txt/ptb1105.html, accessed June 1, 2009.
47
Developing Iraq’s Oil Industry to Maximize Government Net Revenues
Appendix 2: Draft Iraq Oil and Gas Law
COUNCIL OF MINISTERS
OIL AND ENERGY COMMITTEE
REPUBLIC OF IRAQ
DRAFT IRAQ OIL AND GAS LAW
NO. _______ OF 2007
15 FEBRUARY 2007
TABLE OF CONTENTS
CHAPTER/ARTICLE TITLE
PREAMBLE
CHAPTER I: FUNDAMENTAL PROVISIONS
Article 1: Ownership of Petroleum Resources
Article 2: Scope of Application
Article 3: Purpose
Article 4: Definitions
CHAPTER II: MANAGEMENT OF PETROLEUM RESOURCES
Article 5: Competence of Authorities
Article 6: Creation of the Iraq National Oil Company
Article 7: Reorganising the Ministry of Oil
Article 8: Oil Fields’ Development and Production
Article 9: Grant of Rights
Article 10: Mechanisms of Negotiations and Contracting
48
Developing Iraq’s Oil Industry to Maximize Government Net Revenues
Article 11: Petroleum Revenues
Article 12: State Participation
CHAPTER III: EXPLORATION AND FIELD DEVELOPMENT OPERATIONS
Article 13: Exploration and Production Contracts
Article 14: Obligations of the Holders of Exploration and Production Rights
Article 15: Building Local Content and Expertise
Article 16: Unitisation
Article 17: Conservation
Article 18: Access to Main Pipelines and Field Pipelines
Article 19: Ownership of Data
Article 20: Restrictions on Production Levels
CHAPTER IV: TRANSPORTATION
Article 21: Main Pipelines
Article 22: Rights and Obligations Regarding Pipelines
CHAPTER V: GAS
Article 23: Exploitation of Gas
Article 24: Associated Gas
Article 25: Flaring of Gas
Article 26: Non-Associated Gas
CHAPTER VI: REGULATORY MATTERS
Article 27: Regulations for Petroleum Operations
Article 28: Use and Benefit of Land and Rights of Way
Article 29: Access to Zones Subject to Maritime Jurisdiction
49
Developing Iraq’s Oil Industry to Maximize Government Net Revenues
Article 30: Inspection
Article 31: Environmental Protection and Safety
Article 32: Transfer of Ownership and Decommissioning
CHAPTER VII: FISCAL REGIME
Article 33: Taxation
Article 34: Royalty
Article 35: Maintaining Records
CHAPTER VIII: MISCELLANEOUS PROVISIONS
Article 36: Transparency
Article 37: Implementing Anti-corruption Laws
Article 38: Competitive Public Bidding
Article 39: Resolution of Disputes
Article 40: Existing Contracts
Article 41: Changes in Administrative Borders
Article 42: Relationship to Existing Legislation
Article 43: Entry into Force
ANNEX NO. 1: PRESENT PRODUCING FIELDS ALLOCATED TO THE IRAQ
NATIONAL OIL COMPANY
ANNEX NO. 2: DISCOVERED (UNDEVELOPED) FIELDS ALLOCATED TO
THE IRAQ NATIONAL OIL COMPANY
ANNEX NO. 3: DISCOVERED (UNDEVELOPED) FIELDS OUTSIDE THE
OPERATIONS OF THE IRAQ NATIONAL OIL COMPANY
ANNEX NO. 4: EXPLORATION AREAS
50
Developing Iraq’s Oil Industry to Maximize Government Net Revenues
PREAMBLE
WHEREAS the Republic of Iraq has entered a new era after the adoption of the Constitution
In 2005;
WHEREAS, Article 111 of the said Constitution declares that Oil and Gas are owned by all
the people of Iraq in all the Regions and Governorates;
WHEREAS, Articles 110, 112, 114 and 115, seen in the light of Article 111, broadly define
the authorities and responsibilities of the Federal, Regional and Governorate Authorities
including those in the Petroleum sector;
WHEREAS, the Iraq Republic is endowed with rich Oil and Gas resources, a great portion of
which is already discovered and ready for Development whilst more Petroleum resources are
yet to be discovered;
WHEREAS, Iraq's Production capacity during the last decades has been low and at great
disparity with its exceptionally rich Oil and Gas resources;
WHEREAS, the Iraqi people find themselves at the crossroad to a new and more prosperous
future which will require quick and substantial funding of reconstruction and modernization
projects;
WHEREAS revenues from Oil and Gas represent the most important basis for redeveloping
the country in general and the Iraqi economy, in particular on sustainable and robust basis in
a planned and coordinated manner that takes into consideration the objectives of the
Constitution, including the unity of the Iraq Republic, the exhaustible nature of Petroleum
resources, the need for preserving the environment;
To help the Iraqi Ministry Of Oil focus on its main duties of creating policies, planning, and
51
Developing Iraq’s Oil Industry to Maximize Government Net Revenues
supervision, while achieving the necessary upgrading to enhance operational quality, the oil
activates operated solely by the Ministry of Oil have to be transferred to technical and
commercial entities and institutions including an independent Iraq National Oil Company, to
provide authorities to the Regions and Producing Governorates;
WHEREAS, the rehabilitation and further development of the Petroleum industry will be
enhanced by the participation of international and national investors of recognized technical,
managerial and operational skills as well as robust capital resources to help upgrade and
develop national expertise and efficiency in the Petroleum sector;
WHEREAS, the national private industry directly and indirectly related to the Petroleum
sector are in need of proactive encouragement and support to play a prominent role in the
development of the sector;
WHEREAS, the positive interplay between the Federal and Regional authorities requires
appropriate legislative and institutional framework conditions to ensure efficient coordination;
WHEREAS, the introduction of a variety of national and international players in the
development of the Petroleum sector calls for clear legislative, institutional and operational
framework conditions to ensure co-ordination and efficiency between the relevant Iraqi
authorities and the commercial players as well as among these players;
WHEREAS, the development of the petroleum sector must be closely coordinated and
harmonized with the development of the society and the national economy in a manner that
maintains sustainable development for the economy and the environment and in the long term
decreases dependence on Oil and Gas revenues;
WHEREAS, the conditions for regulating the Petroleum sector are of great importance to the
whole nation as well as to all Investors in the sector, there is a need for a clear, fair,
52
Developing Iraq’s Oil Industry to Maximize Government Net Revenues
transparent and efficient system of governance that inspires confidence, efficiency and
cooperation
among all participants in the petroleum sector, including governmental authorities
at Federal, Regional and Governorate level, and among national and international actors;
THEREFORE THIS LAW IS ENACTED:
CHAPTER I: FUNDAMENTAL PROVISIONS
Article 1: Ownership of Petroleum Resources
Oil and gas are owned by all the people of Iraq in all the Regions and Governorates.
Article 2: Scope of Application
(a) This law applies to Petroleum Operations in all the territory of the Republic of Iraq,
including the soil and subsoil on land, as well as inland waters and territorial waters.
(b) The scope of this Law excludes the refining of Petroleum, its industrial utilization as
well as the storage, transport, and distribution of Petroleum Products.
Article 3: Purpose
(a) This law establishes the regime for the management of Petroleum Operations in the
Republic of Iraq, taking into account the existing international treaties between the Republic
of Iraq and other countries on Crude Oil transportation.
(b) The law aims to build upon existing co-operation between the relevant Ministries in the
Federal Government administration, in addition to building a base for coordination and
discussions among the Federal, Regional, and Producing Governorates’ authorities.
53
Developing Iraq’s Oil Industry to Maximize Government Net Revenues
Article 4: Definitions
For the purposes of this law, the following terms and expressions shall have the meaning
indicated as follows, unless the context in which used requires a different meaning:
1- "Discovery": the first Petroleum encountered in a Reservoir by drilling that is recoverable
at the surface by conventional petroleum industry methods;
2- "Commercial Discovery": a Discovery which has been deemed to be commercial for
Development purposes by the holder of Exploration and Production;
3- “Region”: the Kurdistan Region or any other Region created in Iraq after issuing this law
according to the Constitution of Iraq;
4- "Good Oilfield Practices": all those practices related to Petroleum Operations that are
generally accepted by the international petroleum industry as good, safe, environmentally
friendly, economic and efficient in exploring for and producing Petroleum;
5- "Good Pipeline Practices": all those practices related to transportation by pipelines
including the design, construction, commissioning, maintenance, operation and
decommissioning of pipelines that are generally accepted in the international petroleum
industry as good, safe, environmentally friendly, economic and efficient in transporting
Petroleum;
6- "Production": the extraction and disposal of Petroleum;
7- "Petroleum": all Crude Oil or Natural Gas, or other hydrocarbons produced or capable of
being produced from Crude Oil, Natural Gas, oil rocks or tar sands;
8- "Development": the activities carried out by the holder of Exploration and Production
based on either the Field Development Plan or the Main Pipeline Development Plan, which
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aim at Production and transportation of Petroleum;
9- "Exploration": the search for Petroleum by geological, geophysical and other means
including drilling of exploration and appraisal wells;
10 -"Field": an area consisting of a single Reservoir or multiple Reservoirs connected to the
same individual geological structural feature or stratigraphic condition. The field name refers
to the surface area, although it may refer to both the surface and the underground productive
formations.
11- "Field Pipeline": a pipeline, including valve stations, pump stations, compressor stations
and associated installations, collecting Crude Oil or Natural Gas from a Field or a group of
Fields and delivering it to a transfer point for further transportation;
12- “Pipeline”: an entity that consists of a linear pipeline accompanied with other
components on the ground level including stations of pumping, valves, compression, and
other accompanied accessories for gauging, supervision, telecommunications, remote control,
for the purposes of transporting Crude Oil and Natural Gas from the Transfer Point to the
Delivery Point.
13- "Main Pipeline": the principal pipeline, including valve stations, pump stations,
compressor stations and associated installations built by the Transporter, for the
transportation of Crude Oil or Natural Gas from one or several Fields or sources inside or
outside Iraq;
14- "Field Development Plan": a scheduled programme and cost estimate specifying the
appraisal and Development activities required to develop and produce Petroleum from a
specific Field or group of Fields by the holder of an Exploration and Production contract,
prepared in accordance with this law and the relevant provisions in the Regulations for
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Petroleum Operations and the Exploration and Production Contract covering that contract
Area;
15- "Main Pipeline Development Plan": a scheme and cost estimate specifying all activities
to be carried out by the transporter for the transportation of Petroleum by pipeline inside Iraq
and across the territory of neighbouring States, prepared in accordance with this Law, the
relevant provisions in the regulations for Petroleum Operations and the Exploration and
Production Contract covering that Contract Area and any relevant bilateral agreements;
16- "Decommissioning Plan": a scheme for the closure of Petroleum Operations and
restoration of the operating environment including the removal and disposal of all
installations;
17- "Iraqi Person": any citizen with Iraqi nationality or any company or institution with legal
personality established and registered pursuant to Iraqi legislation, with its headquarters in
Iraq and having at least fifty percent (50%) of its share capital held by national citizens or by
Iraqi public or private companies or institutions;
18- "Foreign Person": any non-Iraqi citizen or any company or institution with legal
personality established and registered pursuant to Iraqi legislation, and having less than fifty
percent (50%) of its share capital held by national citizens or by Iraqi public or private
companies or institutions;
19- "Petroleum Operations": all or any of the activities related to Exploration, Development,
Production, separation and treatment, storage, transportation and sale or delivery of
Petroleum at the Delivery Point, Export Point or to the agreed Supply Point inside or outside
Iraq, and includes Natural Gas treatment operations and the closure of all concluded
activities;
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20- "Natural Gas": all hydrocarbons which are in a gaseous state at atmospheric conditions of
temperature and pressure, that might be associated or not with liquid hydrocarbons, as well as
the residue gas remaining after the extraction of liquid hydrocarbons from the Reservoir;
21-"Associated Natural Gas": Natural Gas which under Reservoir conditions is either in
solution with liquid hydrocarbons or as gas-cap gas which overlies and is in contact with
Crude Oil;
22- "Non-associated Natural Gas": the free Natural Gas other than Associated Natural Gas;
23- "Operator": the entity designated by the Designated Authority, in consultation with the
holder of Exploration and Production right, to conduct Petroleum Operations on behalf of the
latter;
24- “Producing Governorate”: any Iraqi Governorate that produces Crude Oil and natural gas
continually on rates more than one hundred and fifty thousand (150,000) barrels a day;
25- "Reservoir": a separate accumulation of Petroleum in a geological unit limited by rock
characteristics, structural or stratigraphic boundaries, contact surfaces between Petroleum and
water in the formation; or a combination of these, so that Petroleum Production from any
portion of the accumulation will affect the pressure in the accumulation as a whole;
26- "Contract Area": the area within which the holder of an Exploration and Production right
is authorized to explore for, develop and produce Petroleum;
27- "Development and Production Area": a part of the Contract Area which following a
Commercial Discovery has been delineated according to the terms and conditions of the
Exploration and Production Contract;
28- "Crude Oil": all hydrocarbons, regardless of specific gravity, which are produced and
saved from the Field in liquid state at atmospheric pressure and temperature, including
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asphalt, tar and the liquid hydrocarbons known as distillates or condensates obtained from
Natural Gas within the Contract Area;
29- 'Transporter": the entity designated by the Council of Ministers to receive Crude Oil or
Natural Gas from the holder of Exploration and Production right at the Transfer Point and
deliver Crude Oil for export or Natural Gas to the holder of Exploration and Production right
at the Delivery Point;
30- "Production Measurement Point": the place(s) at which volumes and qualities of Crude
Oil or Natural Gas to be transferred at the Transfer Point are measured;
31- "Transfer Point": the inlet flange(s) of the outgoing Pipelines from the Production
Measurement Point, where the Transporter shall receive Crude Oil or Natural Gas from the
holder of Exploration and Production right;
32- "Delivery Point": the point(s) of the loading facility at which Crude Oil reaches the inlet
flange of the receiving tank-ship or such other point inside or outside Iraq, as agreed to under
the Exploration and Production Contract. In the case of Gas it is the flange of the inlet to the
receiving installation for Natural Gas;
33- "Supply Point": the place at which Crude Oil or Natural Gas is transferred from a Main
Pipeline or a Field Pipeline to a different type of transport, processing or use;
34- "The Ministry": is the Ministry of Oil in the Republic of Iraq and other companies and
organizations specifically authorized by it;
35- “Designated Authority”: the Ministry of Oil, the Iraq National Oil Company, or the
Regional Authority;
36- “Regional Authority”: the authorized ministry in the Regional Government;
37. “Federal Oil and Gas Council”: the Council which is formed by the Council of Ministers
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according to Article 5D of this law to exercise the authorities designated to it according to the
provisions of this law; and
38. “Panel of Independent Advisors”: the panel of experts that is appointed by the Federal
Oil and Gas Council, according to the provisions of this law.
CHAPTER II: MANAGEMENT OF PETROLEUM RESOURCES
Article 5: Competence of Authorities
(a) The Council of Representatives
First: The Council of Representatives shall enact all Federal legislation on Crude Oil and
Natural Gas.
Second: The Council of Representatives shall approve all international petroleum treaties
related to Petroleum Operations that Iraq signs with other countries.
B. The Council of Ministers
First: The Council of Ministers shall be responsible for recommending proposed legislation
to the Council of Representatives on the development of the country's Petroleum resources.
Second: The Council of Ministers is the competent authority to formulate Federal Petroleum
policy and supervise its implementation. It also administers the overall Petroleum Operations
including the formulation of Federal policy on all matters within the scope of this law,
including Exploration, Production, Transportation, Marketing, the proposal of Petroleum
legislation, and the approval of such regulations as may be necessary from time to time on the
said matters.
Third: In carrying out the above functions, the Council of Ministers shall ensure that the
Federal Oil and Gas Council and the Ministry adopt appropriate and effective mechanisms
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for consultation and co-ordination with the Regional and Producing Governorate authorities
in accordance with the provisions of this law.
C. The Federal Oil and Gas Council
First: To assist the Council of Ministers in creating Petroleum policies and related plans,
arranged by the Ministry in coordination with the Regions and Producing Governorates, and
to put important legislation for Exploration and Production based on Article 9 of this law the
Council of Ministers shall create an entity to be named “the Federal Oil and Gas Council”.
The Prime Minister or his nominee shall be the president of this Council, and the Council
shall include:
1- the Federal Government’s Ministers of Oil, Finance, and Planning;
2- the Director of the Iraq Central Bank;
3- a Regional government minister representing each Region;
4- a representative from each Producing Governorate not included in a Region;
5- the Chief Executives of important related petroleum companies including the Iraq National
Oil Company and the Oil Marketing Company; and
6- Experts in petroleum, finance, and economy, with their number not exceeding three (3), to
be appointed for a period not exceeding five (5) years based on a resolution from the Council
of ministers.
The formation of the Federal Oil and Gas Council shall take into consideration a fair
representation of the basic components of the Iraqi society.
Second: The Federal Oil and Gas Council holds the responsibility of putting Federal
Petroleum policies, Exploration plans, Development of Fields and main pipeline plans inside
Iraq, and this has the right to approve any major changes in such plans and policies.
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Third: The Federal Oil and Gas Council reviews and changes the Exploration and Production
contracts that give the rights of Petroleum Operations according to Article 10 of this Law,
and what might be relevant to the Republic of Iraq.
Fourth: The Federal Oil and Gas Council approves the types of, and changes to, model
Exploration and Production contracts, according to the criteria defined in this Law, and
selects appropriate model contract types according to the nature of the Field or Exploration
area to provide maximum returns to the people of Iraq.
Fifth: The Federal Oil and Gas Council sets the special instructions for negotiations
pertaining to granting rights or signing Development and Production contracts, and setting
qualification criteria for companies.
Sixth: To assist the Federal Oil and Gas Council in reviewing Exploration and Production
contracts and Petroleum Fields’ Development plans, the Council relies on the assistance of a
panel called the “Panel of Independent Advisors” that includes oil and gas experts, Iraqis or
foreigners. The Council shall decide their number. They should be qualified and have a good
reputation and long practical experience in Exploration and Production operations and in
Petroleum contracts, and they should be chosen by a unanimous decision of the Council and
contracted for a year, which can be extended. The Panel of Independent Advisors gives its
recommendations and advice to the Federal Oil and Gas Council on issues related to
contracts, Field Development plans, and any other related issues requested by the Federal Oil
and Gas Council.
Seventh: The Federal Oil and Gas Council is the competent authority to approve the transfer
of rights among holders of Exploration and Production rights and associated amendment of
contracts provided this does not adversely affect the national content including the percentage
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of national participation.
Eighth: The Federal Oil and Gas Council and the Ministry are responsible for ensuring that
Petroleum discovered resources are developed, and produced in an optimal manner and in the
best interest of the people in accordance with legislation, regulations and contractual
conditions as well as recognised international standards.
Ninth: Members of the Federal Oil and Gas Council can suggest policies and law drafts to the
Federal Oil and Gas Council.
Tenth: The Federal Oil and Gas Council may create entities necessary for the implementation
of its duties.
Eleventh: The Federal Oil and Gas Council shall adopt an internal procedure to regulate its
internal processes to take its decisions by a two-thirds (2/3) majority on setting Petroleum
policies, planning, model contracts and guidelines for negotiations of contracts.
D. The Ministry of Oil
First: The Ministry is the competent authority for proposing Federal policy, laws and plans.
Second: The Ministry creates legislation as well as issuing regulations and guidelines to
implement the Federal plans.
Third: The Ministry undertakes the necessary monitoring and supervisory actions in
coordination
with the Regional Authorities and Producing Governorates, to ensure their proper,
coordinated, and uniform implementation throughout Iraq.
Fourth: On the basis of policies, regulations, guidelines and requirements under Article 5D
First, and 5D Second, and in accordance with the overall economic and social policies of the
Federal Government, the Ministry shall in consultation with the Regional Authorities and
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Producing Governorates draw up Federal policies and plans on Exploration, Development
and Production on an annual or as needed basis. Such policies and plans shall address both
the short term as well as the long term requirements. The geographical distribution and
timing of actions and projects shall comprise proposals from the Regions and Governorates in
accordance to Annex Nos. 1, 2, 3 and 4. The suggestions for petroleum policies and related
plans are to be submitted to the Federal Oil and Gas Council to be reviewed and decided
upon.
Fifth: The Ministry is the competent authority to represent the Iraqi Republic in regional and
international forums.
Sixth: The Ministry is empowered to negotiate with other countries and organizations
multilateral and bilateral treaties related to Oil and Gas, subject to approval in accordance
with the Constitution.
Seventh: The Ministry is responsible for monitoring Petroleum Operations to ensure
adherence with the laws, regulations, and contracting terms. In addition to its administrative
and technical monitoring duties, the Ministry shall carry out verification of costs and
expenditures incurred by the holders of rights to ensure correct and justified cost recoveries
for the purpose of determining revenues accruing to the Government. The Ministry shall
through inspection, technical audits and other appropriate actions verify conformance with
legislation, regulations, contractual terms and internationally recognised practices. The
Ministry must coordinate with Regional Governments and Producing Governorates to create
specialized entities that carry out the above responsibilities instead of the Ministry.
Eighth: The Ministry has the right to execute contracts related to Oil and Gas supply services
other than those covered by Exploration and Development Contracts and according to other
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applicable legislation.
E. The Iraq National Oil Company
First: The Iraq National Oil Company (INOC), in accordance with Article 6 of this Law, can
participate in Exploration and Production operations inside Iraq on behalf of the Government.
INOC is obligated to sell its share of Crude Oil to the Oil Marketing Company based on the
delivery price that covers the cost in addition to a reasonable profit that would facilitate the
company’s development in Exploration and Production.
Second: The tasks and scope of operation of INOC shall include carrying out Oil and Gas
Exploration, Development, Production, Transportation, Storage, Marketing and sales down to
the Delivery Point in accordance with the rights and obligations under this law including the
necessary contracts, permits and approvals applicable to all other holders of rights.
Third: INOC shall have the right to participate as a commercial partner in international
projects related to the transportation, marketing and sale of Oil and Gas. It may also
participate in Exploration and Production contracts outside the Republic of Iraq subject to
approval by the Council of Ministers.
Fourth: INOC shall form fully owned Subsidiary companies in selected areas in Iraq based on
the location of Fields, size of Petroleum reserves, Production capacity and cost benefit
analysis, or based on rearrangements and task management of existing companies based on
its work capacity leading to better efficiency based on appropriate bylaws and procedures to
be issued for the purpose.
Fifth: INOC shall have the right to establish in association with others affiliated companies or
acquire shares in existing companies inside the Republic of Iraq. INOC may also undertake
the same outside the Republic of Iraq subject to the approval of the Council of Ministers.
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Sixth: INOC shall have the right to acquire tangible and intangible assets belonging to natural
or legal entities for the purpose of achieving its objectives and in accordance with the law.
F. Regional Authority
The Regional Authorities shall have the following competencies:
First: The Regional Authorities shall undertake the necessary preparations in order to propose
to the Federal authorities activities and plans on behalf of the Region to be included in the
Federal plans for Petroleum Operations. It shall further assist the Federal Authorities in
discussions leading to the finalisation of the Federal plan as required.
Second: Carry out the licensing process regarding activities within its respective Region
related to Exploration and Production of discovered but undeveloped Fields mentioned in
Annex No. 3 according to mechanisms mentioned in Article 9 and based on contracting types
prepared by the Federal Oil and Gas Council and in accordance to regulations issued by
Federal Oil and Gas Council with qualified international oil companies on the bases put
forward by the Federal Oil and Gas Council.
Third: Be represented in discussions carried out by the Federal Oil and Gas Council in
accordance with Article 5 of this Law.
Fourth: Collaborate with the Ministry to undertake the monitoring and supervision of
Petroleum Operations to ensure adherence to legislation, regulations, guidelines and the
specific terms of the relevant Exploration and Production Contracts. Such functions shall be
carried out in close coordination and harmonisation with the Ministry to ensure uniform and
consistent implementation throughout the Republic of Iraq.
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Article 6: Creating the Iraq National Oil Company
A- The Iraq National Oil Company (INOC) is a holding company fully owned by the Iraqi
Government and based in Baghdad. INOC is financially and administratively independent
and runs on commercial bases.
B- Its scope of operations shall include:
First: Managing and operating existing producing Fields mentioned in Annex No. 1, and both
the North Oil Company and the South Oil Company are linked to it.
Second: Participation in the Development and Production of discovered and yet not
developed Fields mentioned in Annex No. 2.
Third: Carrying out for Exploration and Production operations in new areas outside its
respective areas in adherent to this law through applying for Exploration and Production
rights in the new areas on a competitive basis.
Fourth: INOC shall also own, manage and operate the Main Oil and Gas Pipeline Network
and the export ports in the Republic of Iraq and enter into contracts with existing and future
shippers of Oil and Gas in accordance with this Law. The company continues its
responsibilities in operating the Main Oil and Gas Pipeline Network and the export ports in
Iraq during a transitional period not exceeding two years until the reorganization of the
companies in the Ministry is completed. Then, the Federal Oil and Gas Council shall decide
the entity responsible of operating the Main Oil and Gas Pipeline Network and the export
ports in Iraq based on a proposal submitted by the Ministry after coordinating with the INOC
in adherence to this Law and after the approval of the Council of Ministers.
Fifth: To ensure and develop the coordination and collaboration with Regions and Producing
Governorates, INOC establishes subsidiary companies which it owns in total and which will
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Developing Iraq’s Oil Industry to Maximize Government Net Revenues
undertake the Petroleum Operations in the Regions and Producing Governorates. These
subsidiary companies will be represented on the INOC board and will be paid for the cost
they incur in addition to a specific reasonable profit in order that they can develop and
enhance their operations
Sixth: The board of the INOC oversees the INOC and its subsidiary companies; in
accordance to the INOC law, the board includes members from the Federal Government, the
Regions, and the Producing Governorates.
Article 7: Reorganising the Ministry of Oil
A- The Ministry, pursuant to a law, must create the important institutional and methodology
changes to reflect its new responsibilities and duties. In particular, the Ministry shall create a
new department as soon as possible specialized in planning, developing, and following up the
process of obtaining rights. This new department must consist of members of the Ministry
trained and specialized in the bidding process and conduct professional negotiations with oil
companies to sign contracts of Exploration and Production rights in accordance with the
Ministry’s authorities and in accordance with Article 9 of this Law. In addition, this
department must include in each and every negotiations representatives from the related
Producing Governorates. It is permissible that the negotiation and rights teams include expert
advisers with a distinguished international reputation and experience.
B- The law of reorganization of the Ministry of Oil must include the suggested mechanisms
that will be the basis of re-structuring the relationship between the Ministry and other related
companies and regulating entities in a way that guarantees a full separation between, on the
one hand, the Production and oil services companies, and, on the other hand, the regulatory,
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Developing Iraq’s Oil Industry to Maximize Government Net Revenues
monitoring, and supervisory departments in the Ministry. In addition, there must be
separation yet integration between the producing units and the services departments in a way
that guarantees increasing productivity and maximizing profits.
Article 8: Field Development and Oil and Gas Exploration
A- Regarding the priorities aimed at restoring and increasing Production related to existing
Fields, INOC is the Operator and is authorized to directly sign services contracts or
administrative contracts with appropriate oil or services companies, in case this was needed
to accelerate reaching to the goals stated in this Article.
B- The Ministry, and after coordinating with Regions and Producing Governorates, and in
adherence to Article 9 of this Law, is to propose to the Federal Oil and Gas Council the best
methods to develop the discovered but yet not developed Fields.
C- The Ministry prepares model Exploration and Production contracts to be approved by the
Federal Oil and Gas Council and to be appended to this law. These model contracts must
guarantee the best levels of coordination between the Oil Ministry, INOC, and the Regions
each according to their specific responsibility in relation to both this Law and the
international oil companies.
D- Utmost effort must be put into ensuring speedy and efficient Development of the Fields
discovered but partially or entirely not yet developed when this law is enacted, and it is
permissible to develop these Fields in collaboration with reputable oil companies that have
the efficient financial, administrative, technical, operational capabilities according to the
contracting terms and the regulations issued by the Federal Oil and Gas Council.
E- The Federal Oil and Gas Council, the Oil Ministry, INOC, and the Regional Authorities
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have to carry out an exploratory program in Iraq to assess the Oil and Gas resources and to
compensate Production, and to add new reserves.
F- The Ministry must provide the Federal Oil and Gas Council with a comprehensive
proposal for Oil and Gas Exploration throughout the Republic of Iraq in coordination with
the Regions and the Producing Governorates, sorting out the areas according to their Oil and
Gas potential, implemented within a short time table in order to guarantee increasing reserves
and continuing Production and Development.
Article 9: Grant of Rights
A- The rights for conducting Petroleum Operations shall be granted on the basis of an
Exploration and Production contract. The contract shall be entered between the Ministry (or
the Regional Authority) and an Iraqi or Foreign Person, natural or legal, which has
demonstrated to the Ministry or the Regional Authority the technical competence and
financial capability that are adequate for the efficient conduct of Petroleum Operations
according to the guidelines of the Federal Oil and Gas Council and as mentioned in Article
5C Fifth, and in accordance with the mechanisms of negotiations and contracting stated in
Article 10 of this Law.
B- The licensing process shall be based on transparent and accountable tendering and shall
take into account recognised practices by the international petroleum industry. It shall adhere
to the following principles and procedures:
First: Competitive licensing rounds based on clearly defined terms and terms of application
as well as the criteria to be used in the selection of successful candidates.
Second: The contractual terms offered to applicants shall be specified in model contracts
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accompanying the letter of invitation.
Third: The form and terms of the model contract shall take account of the specific
characteristics and requirements of the individual area, Field or prospect being offered,
including whether the resources are discovered or not, the risks and potential rewards
associated with the investments under consideration, and the technological and operational
challenges presented.
Fourth: All model contracts shall be formulated to honour the following objectives and
criteria:
1- National control;
2- Ownership of the resources;
3- Optimum economic return to the country;
4- An appropriate return on investment to the investor; and
5- Reasonable incentives to the investor for ensuring solutions which are optimal to the
country in the long-term related to
a- improved and enhanced recovery,
b- technology transfer,
c- training and development of Iraqi personnel,
d- optimal utilisation of the infrastructure, and
e- environmentally friendly solutions and plans.
Fifth: The Model Contracts may be based upon Service Contract, Field Development and
Production Contract, or Risk Exploration Contract provided they are adapted to best meet the
objectives and criteria under Article 9B above which serve the best interest of the Republic of
Iraq.
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Sixth: Only pre-qualified companies by the Ministry or the Regional Authority shall be
considered in any licensing round. The criteria for prequalification shall be specified in the
invitation to bidding according to the regulation and instructions issued by the Federal Oil
and Gas Council.
Seventh: Evaluation of pre-qualified applicants shall aim at establishing a short list of
successful candidates for negotiations.
Eighth: The selection and ranking of successful applicants shall be on the basis of the quality
and relevance of the proposed work plan and the anticipated economic return to Iraq.
Ninth: The overall allocation of Exploration and Production rights throughout the Republic of
Iraq shall aim at achieving variety among oil companies and Operators with different
background, expertise, experience and approach so as to enhance efficiency through positive
competition, benchmarking of performance and transparency. The possibility of using
consortia of selected companies, particularly in large Fields, should be considered.
Tenth: Not later than two (2) months after the endorsement of approval of Exploration and
Production contracts, the contract must be published.
C- The granting of rights for the activities referred to in Article 9A shall always respect
national interests, for example those related to defense, navigation, research and
development, conservation, health and safety and a high level of environmental protection.
D- The Designated Authority is to regulate the form and manner in which rights are granted
under this Article in a manner consistent with this law and the regulations of the Federal Oil
and Gas Council.
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Article 10: Mechanisms of Negotiations and Contracting
A- The Ministry, the INOC, or the Regional Authority, based on their respective specialties
and responsibilities, and after completing initial procedures for granting rights as indicated in
Article 9 there will be an initial signing of Exploration and Production contracts with the
selected contractor.
B- The Exploration and Production contracts mentioned in Article 10A must include the
following: “the contract is valid with no objection from the Federal Oil and Gas Council
according to the provisions of the Oil and Gas Law No. ____ of 2007 including the
contractual guidelines on negotiations and model contracts and any amendments to these that
might be issued by the Federal Oil and Gas Council”.
C- The initial contract mentioned in Article 10B must be submitted to the Federal Oil and
Gas Council within thirty (30) days from the day of the initial signing or it is considered
cancelled.
D- The Federal Oil and Gas Council must adhere to the following steps when deciding on the
contracts submitted to it by Ministry, INOC, or the Regional Authority:
First: Submit the initial contract stated in Article 10C, if the Federal Oil and Gas Council
finds it advisable, to the Panel of Independent Advisors for analysis on the extent of its
compliance with the model contracts approved by the Federal Oil and Gas Council and its
regulations pertaining to Exploration and Production rights in accordance with Article 9.
Second: In case the initial contract has serious discrepancies as compared to the model
contracts and guidelines issued by the Federal Oil and Gas Council, the Federal Oil and Gas
Council will make a decision on the contract relying on the opinion of the Panel of
Independent Advisors, which decision shall require a two-thirds (2/3) majority of the
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Developing Iraq’s Oil Industry to Maximize Government Net Revenues
members in attendance.
Third: The Ministry, INOC, or the Regional Authority must be informed of the objection of
the initial contract in accordance to the legal reasons within sixty (60) days of receipt of the
initial contract by the Federal Oil and Gas Council, and the contract remains valid in case no
objection is made by the Federal Oil and Gas Council within the stated period. In case the
Federal Oil and Gas Council cannot hold a meeting within sixty (60) days of receiving the
initial contract due to extraordinary reasons, the Council must take a decision regarding the
contract within forty five (45) days using all the possible means. The contract remains valid
in case no decision is made by the Federal Oil and Gas Council within the stated period.
C- The Ministry, INOC, or the Regional Authority shall address the reasons for objection
issued by the Federal Oil and Gas Council by amending the initial contract and submitting it
again according to the steps mentioned in this Article.
Article 11: Petroleum Revenues
A- According to the Constitution of Iraq (Articles 106, 111, 112 and 121(3)) regarding the
ownership of Oil and Gas resources, the distribution of its revenues, and the monitoring of
federal revenue allocation, the Council of Ministers must submit a draft federal revenue law
to the Council of Representatives regulating these matters in adherence to the sections of this
Article.
B- The oil revenues include all the government revenues from Oil and Gas, royalties, signing
bonuses and production bonuses of Petroleum contracts with foreign or local companies.
C- The revenues mentioned in Article 11B must be deposited in an account called “the Oil
Revenue Fund” established for this purpose, and the federal revenue law shall regulate the
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Developing Iraq’s Oil Industry to Maximize Government Net Revenues
Oil Revenue Fund and ensure its fair distribution according to the Constitution.
D- Another fund must be created under the name “The Future Fund”, and a certain portion of
the Oil Revenue Fund must be deposited in the Future Fund and be regulated by the law.
Article 12: State Participation
A- The Republic of Iraq shall aim at achieving real national participation in the management
and Development of its Petroleum resources in adherence to Article 111 of the Constitution.
B- The Exploration and Production rights with regard to existing producing Fields are hereby
given to INOC, and also the granting of additional Exploration and Production regarding not
yet developed Fields to be implemented by the Federal Oil and Gas Council in accordance
with Article 6 and Annex No. 2 of this Law.
C-The Main Pipeline network inside Iraqi territories is hereby assigned to INOC or any
specialized company created for this purpose. The formal procedure for this assignment and
necessary approvals shall be established by the Federal Oil and Gas Council in accordance
with Article 21 this Law.
D- The Republic of Iraq reserves the right to participate in Petroleum Operations in any phase
of Petroleum Operations on terms and conditions that are established by contract.
E- The Federal Oil and Gas Council is authorised to designate INOC to exercise the Republic
of Iraq's participation share in accordance with Article 15E of this law.
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CHAPTER III: FIELD EXPLORATION AND FIELD DEVELOPMENT
OPERATIONS
Article 13: Exploration and Production Contracts
A- An Exploration and Production Contract shall give the holder an exclusive right to
conduct Petroleum Exploration and Production in the Contract Area. In addition, the contract
shall give the holder the right of transportation in accordance with Article 21A of this Law.
B- Except if additional time is needed to complete the operations to assess a Discovery, the
exclusive Exploration and Production right shall be granted as follows:
1- A First Period shall be a maximum of four (4) years.
2- Subject to having fulfilled all commitments by the holder, the Designated Authority may
grant a Second Period of two (2) years provided however that a substantial work program is
committed to under this period.
C- A Third Period of Exploration can for special considerations of continuity be granted by
the Designated Authority provided however that such extension is justified by the quality and
substance of the work program and does not exceed two (2) years.
D- All extensions shall be subject to the provisions concerning the relinquishment of Contract
Areas in adherent to the Petroleum regulations.
E- In the event of a Discovery, the exclusive Exploration and Production right may be
retained by the holder for the purposes of completing the operations initiated within a
specified area to assess or determine the commercial value of a Discovery for an additional
period of two (2) years or, in the case of a non-associated Natural Gas Discovery, for an
additional period not to exceed four (4) years.
F- On the basis of a Field Development Plan prepared and approved in accordance with this
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Developing Iraq’s Oil Industry to Maximize Government Net Revenues
Law and the relevant contract, INOC and other holders of an Exploration and Production
right may retain the exclusive right to develop and produce Petroleum within the limits of a
Development and Production Area for a period to be determined by the Federal Oil and Gas
Council varying from fifteen (15) to twenty (20) years, not exceeding twenty (20) years
dating from the date of approval of the Field Development Plan, depending on considerations
related to optimal oil recovery and utilisation of existing infrastructure. In cases which for
technical and economic considerations warrant longer Production period, the Federal Oil and
Gas Council, on newly negotiated terms, has the authority to grant an extension not
exceeding five (5) years. The remaining acreage outside the Development and Production
Area shall be relinquished at the end of the Exploration and Production right.
G- The appointment of an Operator shall be approved by the Designated Authority, and the
procedures for such appointment are stated in the initial Contract, and according to the
guidelines issued by the Federal Oil and Gas Council, and the Operator should be named in
the initial Contract.
Article 14: Obligations of the Holders of Exploration and Production Rights
A holder of Exploration and Production right is obliged, mutatis mutandis, to:
A- Conduct Petroleum Operations in accordance with the terms of this law, the Regulations
for Petroleum Operations as well as other applicable legislation and Good Oil Field Practices;
B- Promptly report any Discovery within the Contract Area to the Designated Authority;
C- Conduct the necessary delineation and evaluation of the Discovery with a view to
determining its commercial potential and keep the Designated Authority fully informed of
progress and results;
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Developing Iraq’s Oil Industry to Maximize Government Net Revenues
D- In the event of a Commercial Discovery, prepare and submit to the Designated Authority,
in accordance with the Regulations for Petroleum Operations, a Field Development Plan for
the Discovery:
E- Prepare and submit a revised Field Development Plan for any material amendment to the
original Plan for approval by the Designated Authority;
F- Implement the Field Development Plan or the revisions thereto once these have been
approved by the Designated Authority;
G- Submit a Decommissioning Plan to the Designated Authority, not later than two (2) years
before the planned termination of Production;
H- Compensate the Injured parties for any losses or damages resulting from the conduct of
the Petroleum Operations as provided by law;
I- When the national interest so requires, give preference to the Designated Authority in the
acquisition of Petroleum produced in the Contract Area, and access to pipeline transportation,
in accordance with terms and conditions to be agreed upon with the Designated Authority;
J- Provide the greatest possible support for required research and development activities in
connection with Petroleum Operations and endeavour to carry out as much of these activities
by Iraqi institutions;
K- Collect, organise and maintain in good condition usable data from all phases and on all
aspects of Petroleum Operations in accordance with this Law and with Petroleum regulations,
and
L- At no cost, supply the Ministry and affiliated companies, with, all data collected and
assembled from Petroleum Operations, in accordance with Article 19 of this Law.
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Developing Iraq’s Oil Industry to Maximize Government Net Revenues
Article 15: Competence Building and Local Content
A- The Republic of Iraq aims at the development of a competent and effective Iraqi private
sector capable of substantial participation in Petroleum Operations including the acquisition,
alone or together with international companies, of Exploration and Production rights. Such
development shall however adhere to the objectives of professional competence in
accordance with this Law. Towards this end holders of Exploration rights are encouraged to
pursue cooperation and association with serious and qualified Iraqi private initiatives.
B- INOC and other holders of Exploration and Production rights shall give preference to the
purchase of Iraqi products and services whenever they are competitive in terms of price,
comparable in terms of quality and available on a timely basis in the quantity required.
C- INOC and other holders of Exploration and Production rights shall to the maximum
reasonable extent undertake to employ Iraqi citizens having appropriate qualifications and
shall undertake to train and prepare potential candidates towards this objective.
D- INOC and other holders of Exploration and Production rights shall maximise to the
greatest reasonable extent, training and technology transfer opportunities for Iraqi nationals,
at all levels of Petroleum Operations including management.
E- INOC and other holders of Exploration and Production rights are required to diligently
seek and develop associations, affiliations, joint ventures and other forms of partnership and
or co-operation in order to promote the rapid growth of an Iraqi private sector capable of
assisting and enhancing Petroleum Operations to the mutual benefit of the said holders and
the nation.
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Developing Iraq’s Oil Industry to Maximize Government Net Revenues
Article 16: Unitisation
A- A Petroleum Discovery which is located partly in one Contract Area and partly in another
Contract Area shall be developed and operated jointly pursuant to a unitization agreement
which shall be submitted for approval by the Federal Oil and Gas Council to be approved.
Should the right-holders fail to reach agreement on the modalities of unitisation, the Federal
Oil and Gas Council has the right to decide on the terms six (6) months after serving notice to
the parties to this effect.
B- A Petroleum Discovery which extends from areas authorized for Production into areas not
authorized for Production shall be developed only after consultation with the Federal Oil and
Gas Council about the measures necessary to protect the interests of the Republic of Iraq.
C- The Council of Ministers shall adopt the necessary measures to protect the interests of the
Republic of Iraq in Petroleum Discoveries extending beyond the borders of the Republic. In
such cases efforts shall be made to seek joint solutions with the said neighbouring countries.
Article 17: Conservation
A- The extraction of Petroleum resources shall aim at the avoidance of waste, including
preventing leakages from Pipelines, and the optimal maintenance of energy in the Reservoir
in accordance with Good Oilfield Practices and Good Pipeline Practices.
B- INOC and other holders of an Exploration and Production right shall diligently apply the
latest technologies and oilfield practices that lead to optimum recovery from the individual
Reservoir or a group of Reservoirs that are targeted under the Field Development Plan(s).
C- The Field Development Plan shall be based on thorough investigations of alternative
extraction strategies in order to select a solution that combines the highest level of Petroleum
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Developing Iraq’s Oil Industry to Maximize Government Net Revenues
recovery with acceptably high levels of Production and as low cost as possible.
D- Subsequent to the approval of a Field Development Plan, INOC and other holders of
Exploration and Production right shall continue to improve Reservoir understanding through
optimal data collection and Reservoir monitoring and shall accordingly seek to identify and
implement actions that would improve Petroleum recovery.
Article 18: Access to Main Pipelines and Field Pipelines
A- The Main Pipelines are the property of the Federal Government.
B- INOC as the Transporter with respect to Main Pipelines and the holder of Exploration and
Production right under Article 18A with respect to Field Pipelines have the obligation to
transport, without any discrimination and on reasonable commercial terms, the Petroleum of
third parties, provided in general that:
1- capacity is available in the Field Pipeline;
2- there are no insurmountable technical problems that prevent such utilisation of the Field
Pipeline.
C- Details shall be provided for the modalities of the system of access by third parties to
Field Pipelines in regulations to be made by the Ministry in coordination with the Regions
and Producing Governorates.
D- Whenever there is a dispute concerning the commercially reasonable terms for the
transport of Petroleum in a Main Pipeline or a Field Pipeline for Crude Oil or for Natural
Gas, the availability of uncommitted capacity in the pipeline in question or a proposed
increase of its capacity, the dispute shall be first referred to the Ministry for resolution, the
Ministry must work in coordination with Regions and Producing Governorates. Thereafter,
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Developing Iraq’s Oil Industry to Maximize Government Net Revenues
resolution shall be sought according to the procedures set out in Article 30 of this Law.
Article 19: Ownership of Data
A- All data obtained pursuant to any Contract provided for under this Law is the property of
the Iraqi Government, and shall not be published, reproduced or exported without the prior
approval of the Ministry.
B- The terms and conditions for the exercise of rights in respect of primary, differentiated,
processes, interpreted and analysed data related to Oil and Gas in Iraq including but not
limited to geological and geophysical reports, engineering data, samples, logs and well
surveys, shall be established in data supply obligations in the relevant contract and by
regulations.
C- The Ministry submits copies of the current available Petroleum data to the INOC and to
the Regions, and the INOC and Regions must take the responsibility of supplying the
Ministry with new data and updates resulted from the Petroleum Operations implemented by
them in a continues and periodic fashion.
D- Anyone who has the information in his possession or sells, buys, transfers, receives, deals
with any of the information or data mentioned in this article shall be considered in violation,
unless the contract terms states otherwise, and shall be prosecuted under the Iraqi criminal
and civil law. No one has the right to own such data and information.
E- Without prejudice to section D of this Article, it is allowed for someone to have a
permission from the Designated Authorities to own, buy, sell, transfer, or receive data and
information indicated in section F of this Article under the condition of supplying the
Designated Authorities with copies of the data, and his permission should not be revoked
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Developing Iraq’s Oil Industry to Maximize Government Net Revenues
without logical reasons.
F- Old Data, for the purposes of this law, mean all primary, differentiated, processes,
interpreted and analysed data and information related to Oil and Gas in the Republic of Iraq
indicated in section B of this Article.
Article 20: Restrictions on Production Levels
In the event that, for national policy considerations, there is a need to introduce limitations on
the national level of Petroleum Production, such limitations shall be applied in a fair and
equitable manner and on a pro-rata basis for each Contract Area on the basis of approved
Field Development Plans.
CHAPTER IV: TRANSPORTATION
Article 21: Main Pipelines
A- INOC, or the specialized company created by the Ministry, shall own all Main Pipelines.
Such Pipelines shall be constructed and operated by the INOC subsidiary representing
Transporter for the purpose of transporting Crude Oil or Natural Gas to specified Delivery
Points for Crude Oil and Natural Gas respectively. The Ministry in co-ordination with INOC
and in consultation with Operators shall ensure that the Main Pipeline network is optimally
designed, operated and maintained so as to serve the overall requirement for Petroleum
transportation in the Republic of Iraq.
B- The construction and operation of Main Pipeline or any major modification thereof shall
be subject to approval by the Ministry on the basis of a Main Pipeline Development Plan
outlining the proposed work. If the proposed work is undertaken by the INOC subsidiary
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Developing Iraq’s Oil Industry to Maximize Government Net Revenues
company specialized company representing Transporter in association with Iraqi or Foreign
Persons, the agreement between' the parties shall accompany the Main Pipeline Development
Plan. Such agreement shall outline the terms of financing, implementation, and the modalities
of utilisation and operation of the new or modified Main Pipeline.
C- INOC and other holders of Exploration and Production right shall deliver Crude Oil and
Natural Gas to the Main Pipeline at appropriate Transfer Point(s) In accordance with Article
13A. The transportation of Crude Oil or Natural Gas beyond the Transfer Point shall be
carried out by the Designated Authority representing Transporter on the basis of a contract.
D- All the above activities shall be carried out in accordance with Good Pipeline Practices.
E- The co-ordination of tasks related to the transport of Crude Oil through new Pipelines
outside the Iraqi territories is the responsibility of the Ministry. The follow up of operations
subsequent to the approval of the necessary bilateral agreements shall be the responsibility of
INOC in accordance with the said bilateral agreements and any specific instructions from the
Ministry.
Article 22: Rights and Obligations Regarding Pipelines
A- The Exploration and Production Contract shall provide a non-exclusive right to access
Main Pipelines on reasonable commercial terms. It shall also confer the right to construct and
operate Field Pipelines to deliver Crude Oil or Natural Gas from the Contract Area to the
Transfer Point, for further transportation through the Main Pipeline to the Delivery Point.
B- INOC and of her holders of Exploration and Production right shall implement the Field
Development Plan and construct Field Pipelines connected to the Main Pipeline or the
modifications thereto following approval of such plans have been approved by the Ministry.
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Developing Iraq’s Oil Industry to Maximize Government Net Revenues
C- INOC and other holders of Exploration and Production right shall prepare and submit a
revised Field Pipeline Development Plan for any material amendment to the original Plan for
approval by the Ministry.
D- INOC and other holders of Exploration and Production right shall negotiate with INOC or
the specialized company as the Transporter for the right to use the Main Pipeline. The
Ministry Is to be kept informed on the progress of these negotiations.
E- INOC and other holders of Exploration and Production right shall submit a
Decommissioning Plan to the Ministry, not later than two (2) years before the planned
termination of Production.
CHAPTER V: GAS
Article 23: Exploitation of Gas
A- Natural Gas is a valuable Petroleum resource of increasing importance in the economic
development of the Republic of Iraq and the Middle East. It shall be utilised to generate
additional revenues through optimal utilisation partly through improving oil recoveries by gas
injection into suitable Reservoirs; through utilisation for power generation, utilisation in
petrochemical and chemical industries, utilisation for domestic purposes, utilisation in
Industrial processes, utilisation for export and/or through the replacement of fluid fuels. The
latter will have the additional benefit of reducing the impact on the environment while at the
same time maximising revenue by freeing more crude and fuel oil for export.
B- INOC and other holders of Exploration and Production rights shall diligently pursue all
alternatives for optimal utilisation of surplus volumes of produced gases in accordance with
the objectives of Article 23A above. Should they fail to identify commercial utilisation, the
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Developing Iraq’s Oil Industry to Maximize Government Net Revenues
volumes of surplus Natural Gas shall be offered after treatment to Government at no cost at
the Field's outlet. The cost incurred by the holder of Exploration and Production rights shall
be recoverable under the respective contract.
Article 24: Associated Gas
A- INOC and other holders of Exploration and Production right are entitled to use, free of
charge, the quantity of Associated Natural Gas necessary for Petroleum Operations.
B- INOC and other holders of Exploration and Production rights shall in the Field
Development Plan propose optimal plans for the utilization or disposal of Associated Natural
Gas.
C- All Associated Natural Gas produced from a Reservoir which is neither used in Petroleum
Operations, utilised or re-injected in the Field, shall be offered for delivery free of charge to
the Ministry in accordance with Article 23B above.
Article 25: Flaring of Gas
A- Flaring of Natural Gas is only permitted for the purposes of commissioning, testing of
installations, safety precautions or while awaiting the completion of transportation facilities
provided the flared volumes are strictly kept to a minimum and the Ministry is promptly
notified.
B- The flaring of Associated Natural Gas shall be kept to a minimum. It shall not be
permitted beyond a maximum period of one (1) year during which measures shall be
completed to utilise the gas or deliver it to a nominated government entity in accordance with
Article 23B above.
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Developing Iraq’s Oil Industry to Maximize Government Net Revenues
Article 26: Non-associated Gas
A- The Development and Production of Natural Gas or liquid components thereof from a
Non-associated Natural Gas Discovery shall be subject to the approval of the Ministry of a
Field Development Plan supported by signed agreement(s) for the sale of Natural Gas from
the Discovery and approved by the Council of Ministers. In the event that only liquid
Petroleum is to be produced, a scheme for the re-injection of Natural Gas or other acceptable
schemes for its disposal shall be presented in the Field Development Plan.
B- The flaring of Non-associated Natural Gas may only be permitted in accordance with
Article 25B.
CHAPTER VI: REGULATORY MATTERS
Article 27: Regulations for Petroleum Operations
The Ministry, in coordination and collaboration with the INOC, Regions, and Producing
Governorates, shall approve regulations for Petroleum Operations and submit them to the
Federal Oil and Gas Council to be approved.
Article 28: Use and Benefit of Land and Rights of Way
A- Land use and benefit for the purpose of conducting Petroleum Operations is regulated by
the legislation on land use and benefit, without prejudice to the following provisions.
B- For the purpose of conducting Petroleum Operations, the duration of the right of use and
benefit of the land shall be the same as the duration of the Contract.
C- The land where installations are located, and a strip of land, to be defined by regulation,
surrounding those Installations, are considered to be a zone of partial protection in
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Developing Iraq’s Oil Industry to Maximize Government Net Revenues
accordance with the legislation on land use and benefit.
D- INOC and other holders of a right to conduct Petroleum Operations who, by virtue of the
exercise of Petroleum Operation rights in the Contract Area, causes damage to crops, soils,
building and improvements or requires the relocation of the legal users or occupants of the
land within the respective Contract Area, has the obligation to compensate the holders of title
to the assets and the persons relocated.
E- Subject to the payment of the compensation that are due, the holder of the right to conduct
Petroleum Operations may require the right of way in accordance with the legislation in
force, in order to have access to the locations where Petroleum Operations are conducted.
F- In cases where lands and rights of way are owned by an Iraqi Person, the land shall be
either rented or bought by the relevant state owned company, according to the applicable
laws and regulations.
Article 29: Access to Zones Subject to Maritime Jurisdiction
The access to Petroleum Operations sites located in interior waters, the territorial waters, and
other zones subject to maritime jurisdiction is regulated by law, and any relevant
international agreements.
Article 30: Inspection
A- The Designated Authority, or its authorized representatives, has the right to inspect sites,
including buildings and installations, where Petroleum Operations are being conducted, as
well as all assets, records and data kept by INOC and other holders of Exploration and
Production right relating to Petroleum Operations.
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Developing Iraq’s Oil Industry to Maximize Government Net Revenues
B- The Designated Authority may designate an independent entity or a commission created
for this purpose, to any out the inspection.
C- The terms and conditions pursuant to which the Inspection is carried out shall be
established by regulations.
D- In carrying out its inspections, the Designated Authority shall not unreasonably interfere
with the Petroleum Operations.
Article 31: Environmental Protection and Safety
In addition to carrying out their Operations in accordance with Good Oil Field Practices,
INOC and other holders of Exploration and Production rights shall conduct Petroleum
Operations in accordance with environmental and other applicable legislation of the Republic
of Iraq to prevent pollution of air, lands and waters. They shall also conduct Petroleum
Operations so as to comply with the environmental management standards of the ISO 14000
series, as amended. In general, they shall carry out Petroleum Operations in order to:
1- Ensure that there is no ecological damage or destruction caused by Petroleum Operations,
but where unavoidable, ensure that measures for protection of the environment are in
accordance with internationally acceptable standards. For this purpose, INOC and other
holders of a right shall prepare and submit to the relevant authorities for approval an
environmental impact assessment, including environmental impact mitigation measures, for
each major operation in the Contract Area;
2- Notify the Ministry and other specified authorities immediately in the event of an
emergency or accident affecting the environment;
3- Control the flow and prevent the escape or loss of Petroleum discovered or produced
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Developing Iraq’s Oil Industry to Maximize Government Net Revenues
within the Contract Area;
4- Avoid damage to Petroleum Reservoirs;
5- Avoid destruction to land, the water table, trees, crops, buildings or other Infrastructure
and goods;
6- Clean up the sites after the closure of Petroleum Operations and comply with the
environmental resolution requirements;
7- Ensure the health and safety of personnel in the planning and conduct of Petroleum
Operations, and take preventive measures if their physical safety would be at risk;
8- Report to the competent entity within the government on the amounts of operational and
accidental discharge, leakage and waste resulting from Petroleum Operations, and
9- Provide compensation for damages to State and private property in accordance with the
applicable laws and regulations.
B- INOC and other holders of a right under this Law shall act in a secure and effective
manner when conducting Petroleum Operations. In order to guarantee the disposal of polluted
water and waste oil in accordance with approved methods, as well as the safe plugging of all
boreholes and wells before these are abandoned.
Article 32: Transfer of Ownership and Decommissioning
A- On completion of the Exploration and Production Contract or Main Pipeline Contract the
ownership of all works and facilities shall be transferred to the Designated Entity. The
properties shall be transferred to the relevant federal state enterprise or to the Ministry in
actual operating condition and in a satisfactory state of work at the time of the transfer.
B- All site relinquishment and related costs that become due at the time of transfer with
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Developing Iraq’s Oil Industry to Maximize Government Net Revenues
regards to any works and facilities shall be payable by INOC and other holders of
Exploration and Production right according to a Decommissioning Plan, submitted in
accordance with Article 9F [sic] of this Law.
C- An outline Decommissioning Plan shall be included in the Field Development Plan
submitted by the Contractor to the Council of Ministers.
CHAPTER VII: FISCAL REGIME
Article 33: Taxation
A- INOC and its subsidiary companies as well as other Individual and collective persons who
are holders of a right to conduct Petroleum Operations are, subject to the payment of the
following fiscal impositions:
1- Royalty;
2- Property Contribution and the Property Transfer Tax (SISA) as established in accordance
with the law;
3- municipal and local taxes due; and
4- the taxes provided for in the Income Tax Code.
B- The appropriate monitoring authority is authorised to establish a law regulating methods
of taxation, the rates, tax exemptions applicable to Petroleum Exploration, Development and
Production activities.
C- The Commission of Financial Audit has the authority to audit the income derived from
Petroleum Operations.
D- A Foreign Person may repatriate its exports proceeds in accordance with the foreign
exchange regulations in force at the time. It may freely transfer shares in accordance with
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Developing Iraq’s Oil Industry to Maximize Government Net Revenues
Article 5C Seven.
Article 34 - Royalty
A- INOC and other holders of an Exploration and Production right shall pay a royalty on
Petroleum produced from the Development and Production Area, at the rate of twelve point
five percent (12.5%) of Gross Production measured at the entry flange to the Main Pipeline.
B- The collection of Royalty shall be in kind or in cash at the option of the Ministry.
C- Where the royalty is paid in cash, it shall be calculated according to the prevailing Market
Price in accordance with Petroleum Regulations.
Article 35: Maintaining Records
A- Holders of Exploration and Production right can transfer any net profits from Petroleum
Operations to outside Iraq after paying taxes and fees owed.
B- INOC and other holders of Exploration and Production right shall maintain proper records
and books in both Arabic and English of accounts in accordance with the provisions of the
Contract enabling the relevant calculations to be performed, and in compliance with the
requirements of the laws relevant to the taxes referred to in Article 33. INOC and other
holders shall prepare and submit to the specialised entity annually, or quarterly, a statement
of accounts.
CHAPTER VIII: MISCELLANEOUS PROVISIONS
Article 36: Transparency
A- All activities related to Oil and Gas, while occurring, have to be transparent and
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Developing Iraq’s Oil Industry to Maximize Government Net Revenues
responsible. To ensure this transparency and give the Iraqi people the chance to hold
governmental entities responsible for their activities and actions, different sorts of
information must be published. This information includes but is not limited to the following:
1- All the revenues, payments and receipts that are delivered to any governmental unit, or
entity run by the government, from activities related to Oil or Gas. This includes but is not
limited to the income of selling Oil, Gas and their products, signing and production rewards,
royalties, revenue of selling assets, taxes, fees, customs and taxes, public services fees, share
of profits from oil and gas cartels, commercial activates related to Oil and Gas (and their
products) contracts, oil and gas revenue investment yield, and any other payments resulted
from or related to commercial Production of hydrocarbons;
2- The revenues of oil and gas usage and distribution, including distribution among
governmental entities;
3- All of the financially significant contracts related to Exploration, Development, processing
and marketing of oil and gas resources in Iraq;
4- All of the financially significant contracts related to importing or exporting services and
goods for the Oil and Gas industry or by any governmental unit or entity controlled by the
government;
5- The annual report of the Federal Oil and Gas Council;
6-The annual and quarterly reports of the INOC, the subsidiary companies, and the entities
controlled by the government including the budgets audited according to international
accounting standards;
7- All other information necessary for understanding the operations and activities carried out
by any governmental unit or entities controlled by the government related to oil and gas;
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Developing Iraq’s Oil Industry to Maximize Government Net Revenues
8- Any information that must be declared in accordance to laws and regulations;
9- Any condition or secret agreement aimed at blocking or trying to block access to
documents and information that must be made public in accordance to this Article in
considered in violation of the law and is considered void.
B- Publicizing the information stated in Section A of this Article does not extend to and has
no effect on the Oil and Gas industry royalties that must be kept secret in accordance to the
national or international laws except for financial information.
C- Any person or governmental entity obligated to publish information mentioned in Section
A of this Article shall publish it in publicly accessible media.
D- The Ministry shall issue the regulations needed for implementing the laws of this Section
including the legal basis covering what should be included and an exempted as mentioned in
Section B of this Article.
Article 37: Implementing Anti-corruption Laws
A- Any contractual right shall be considered void if it is in violation of any of the laws of the
Republic of Iraq, particularly the Iraqi anti-corruption laws.
B- The authorized person’s violation of the Iraqi anti-corruption may lead to the cancellation
of his rights contract, in whole or in part. Each rights contract shall include terms indicating
these conditions.
C- Any person who violates the Iraqi anti-corruption laws may be prosecuted under the
criminal law active in Iraq.
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Developing Iraq’s Oil Industry to Maximize Government Net Revenues
Article 38: Competitive Public Bidding
A- All oil companies working in the Republic of Iraq shall submit public bids on a
competitive basis in order to offer any goods or services, and this should occur in accordance
to the general bidding laws and the Federal Oil and Gas Council shall determine the
maximum amount that can be excluded from the bidding process.
B- Bidding by the holders of Petroleum Operations rights stated in this Law shall be
competitive and in accordance with the Petroleum laws and with the special terms of the
related contracts.
C- All public bidding must be allowed to the public within a reasonable timeframe, must
declare thereafter the reasons for selecting the chosen bid, the complete results of the bidding
call must also be published, and competitors must be given the opportunity to raise
objections.
D- Any contract that is signed in violation of the regulations set by this Article shall be
considered void and inactive.
Article 39: Resolution of Disputes
A- Any disputes arising from the interpretation and application of this Law, the Regulations
for Petroleum Operations and the terms and conditions of contracts shall in the first instance
be attempted to be resolved in good faith by means of negotiation among the parties.
B- If the dispute cannot be resolved by agreement, the matter shall be referred to the Minister
to resolve through discussions with senior officers of the holders of rights concerned. Failing
resolution through these discussions the matter of dispute may be submitted to arbitration or
to the competent judicial authority.
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Developing Iraq’s Oil Industry to Maximize Government Net Revenues
C- If the dispute relates to a technical, engineering, operational or accounting matter relative
to Petroleum Operations and is of a kind that is readily subject to resolution by an expert in
the relevant field, the parties may refer the dispute to an independent technical expert for a
recommendation as to the resolution of the dispute. If a party does not accept the
recommendation of the expert, it may initiate arbitration proceedings according to Article
39D below.
D- Arbitration between the State of Iraq and foreign investors shall be conducted as follows:
1. In accordance with the Rules of Procedure for Arbitration Proceedings of Paris, Geneva or
Cairo for the Settlement of Disputes between States and Nationals of other States and based
on the Iraqi law.
2. The rules of such other international instances of recognised standing as agreed by the
parties to the contracts referred to in this law, provided that the parties have expressly defined
in the contract the conditions for Implementation including the method for the designation of
the arbitrators and the time limit within which the decision must be made.
Article 40: Existing Contracts
A. The Designated Authority in the Kurdistan Region will take responsibility to review all
existing Exploration and Production contracts with any entity before this law enters into force
to ensure harmony with the objectives and general provisions of this law to obtain maximum
economic returns to the people of Iraq, taking into consideration the prevailing circumstances
at the time at which those contracts were agreed, and in a period not exceeding three (3)
months from the date of entry into force of this law. The Panel of Independent Advisors will
take responsibility to assess the contracts referred to in this Article, and their opinion shall be
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Developing Iraq’s Oil Industry to Maximize Government Net Revenues
binding in relation to these contracts.
B. Except for the provision of paragraph A above, the Ministry shall review all the existing
Exploration and Production contracts with any entity before this law enters into force to
ensure harmony with the objectives and general provisions of this Law. These contracts must
then be submitted to the Federal Oil and Gas Council, to ensure and to validate the maximum
economic return for the people of Iraq, in a period not exceeding three (3) months from the
time the Federal Oil and Gas Council issues model contracts and related regulations. The
Federal Oil and Gas Council shall take a decision on the accuracy of the review and validity
of the contracts.
Article 41: Changes in Administrative Borders
In the case of changes in borders of Regions or Producing Governorates, or in the case of
establishing new Regions, the new affected places shall be dealt with in accordance to the
provisions of this Law regarding to granting rights and Petroleum Operations.
Article 42: Relationship to Existing Legislation
Any Article in prejudice to this Law shall cease to be effective on adoption of this Law.
Article 43: Entry into Force
This Law enters into force thirty (30) days after publication in the Official Gazette.
Council of Ministers: Oil and Energy Committee. 2007. Draft Iraq Oil and Gas Law. Baghdad, Iraq.
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Appendix 3: Eller, Hartley, Medlock DEA and SFA Revenue Efficiency Measures
Eller, Stacy L., Peter Hartley, and Kenneth B. Medlock III. 2007. “Empirical Evidence on the Operational
Efficiency of National Oil Companies,” James A. Baker III Institute for Public Policy, Rice University.
97
Totals
7,451,466,319
812,820,713,825
-30,000,000
-4,000,000,000
-200,000,000
-8,680,599,479
799,910,114,346
98,537,241,483
Year Time t= Production (bbl/yr) Revenue ($)
Feasibility Costs ($) Development Costs ($) Fixed Op. Costs ($) Variable Op. Costs ($) Net Revenue ($) PV Net Revenue ($)
2009
1
0
0
-10,000,000
-2,000,000,000
-200,000,000
0
-2,210,000,000
-1,990,990,991
2010
2
0
0
-10,000,000
-1,000,000,000
0
0
-1,010,000,000
-819,738,658
2011
3
0
0
-10,000,000
-37,037,037
0
0
-47,037,037
-34,393,076
2012
4
65,700,000
4,020,361,178
0
-37,037,037
0
-65,700,000
3,917,624,141
2,580,660,367
2013
5
131,400,000
8,281,944,028
0
-37,037,037
0
-131,400,000
8,113,506,990
4,814,971,499
2014
6
197,100,000
12,795,603,522
0
-37,037,037
0
-197,100,000
12,561,466,485
6,715,872,944
2015
7
219,000,000
14,643,857,365
0
-37,037,037
0
-219,000,000
14,387,820,328
6,930,014,675
2016
8
219,000,000
15,083,173,086
0
-37,037,037
0
-219,000,000
14,827,136,049
6,433,887,196
2017
9
219,000,000
15,535,668,278
0
-37,037,037
0
-219,000,000
15,279,631,241
5,973,186,351
2018
10
219,000,000
16,001,738,326
0
-37,037,037
0
-219,000,000
15,745,701,289
5,545,391,602
2019
11
219,000,000
16,481,790,476
0
-37,037,037
0
-219,000,000
16,225,753,439
5,148,160,827
2020
12
219,000,000
16,976,244,191
0
-37,037,037
0
-219,000,000
16,720,207,154
4,779,317,784
2021
13
219,000,000
17,485,531,516
0
-37,037,037
0
-219,000,000
17,229,494,479
4,436,840,444
2022
14
219,000,000
18,010,097,462
0
-37,037,037
0
-219,000,000
17,754,060,425
4,118,850,137
2023
15
219,000,000
18,550,400,386
0
-37,037,037
0
-219,000,000
18,294,363,349
3,823,601,459
2024
16
219,000,000
19,106,912,397
0
-37,037,037
0
-219,000,000
18,850,875,360
3,549,472,872
2025
17
219,000,000
19,680,119,769
0
-37,037,037
0
-219,000,000
19,424,082,732
3,294,957,975
2026
18
219,000,000
20,270,523,362
0
-37,037,037
0
-219,000,000
20,014,486,325
3,058,657,370
2027
19
219,000,000
20,878,639,063
0
-37,037,037
0
-219,000,000
20,622,602,026
2,839,271,113
2028
20
219,000,000
21,504,998,235
0
-37,037,037
0
-219,000,000
21,248,961,198
2,635,591,679
2029
21
219,000,000
22,150,148,182
0
-37,037,037
0
-219,000,000
21,894,111,145
2,446,497,430
2030
22
219,000,000
22,814,652,627
0
-37,037,037
0
-219,000,000
22,558,615,590
2,270,946,539
2031
23
219,000,000
23,499,092,206
0
-37,037,037
0
-219,000,000
23,243,055,169
2,107,971,335
2032
24
219,000,000
24,204,064,972
0
-37,037,037
0
-219,000,000
23,948,027,935
1,956,673,058
2033
25
219,000,000
24,930,186,922
0
-37,037,037
0
-219,000,000
24,674,149,885
1,816,216,969
2034
26
219,000,000
25,678,092,529
0
-37,037,037
0
-219,000,000
25,422,055,492
1,685,827,810
2035
27
219,000,000
26,448,435,305
0
-37,037,037
0
-219,000,000
26,192,398,268
1,564,785,592
2036
28
212,430,000
26,424,631,713
0
-37,037,037
0
-318,645,000
26,068,949,676
1,403,072,549
2037
29
206,057,100
26,400,849,545
0
-37,037,037
0
-309,085,650
26,054,726,858
1,263,339,688
2038
30
199,875,387
26,377,088,780
0
0
0
-299,813,081
26,077,275,700
1,139,128,860
2039
31
193,879,125
26,353,349,400
0
0
0
-290,818,688
26,062,530,712
1,025,661,944
2040
32
188,062,752
26,329,631,386
0
0
0
-282,094,127
26,047,537,258
923,488,192
2041
33
182,420,869
26,305,934,718
0
0
0
-273,631,304
26,032,303,414
831,484,767
2042
34
176,948,243
26,282,259,376
0
0
0
-265,422,365
26,016,837,012
748,640,327
2043
35
171,639,796
26,258,605,343
0
0
0
-257,459,694
26,001,145,649
674,043,968
2044
36
166,490,602
26,234,972,598
0
0
0
-249,735,903
25,985,236,695
606,875,270
2045
37
161,495,884
26,211,361,123
0
0
0
-242,243,826
25,969,117,297
546,395,323
2046
38
156,651,007
26,187,770,898
0
0
0
-234,976,511 25,952,794,387
491,938,635
2047
39
151,951,477
26,164,201,904
0
0
0
-227,927,216
25,936,274,688
442,905,858
2048
40
147,392,933
26,140,654,122
0
0
0
-221,089,399
25,919,564,723
398,757,214
2049
41
142,971,145
26,117,127,534
0
0
0
-214,456,717
25,902,670,816
359,006,586
Developing Iraq’s Oil Industry to Maximize Government Net Revenues
98
Appendix 4: Government Net Revenues From Nationalized Majnoon
Totals
7,451,466,319
812,845,713,825
801,051,264,474
640,846,011,579
-6,000,000
640,840,011,579
79,713,109,944
Year Time t= Production (bbl/year) Revenue ($)
Cost Oil ($)
Net Revenue Before 80:20 Split ($) Net Revenue After 80:20 Split ($) Production Bonus ($) Net Revenue ($) PV Net Revenue ($)
2009
1
0
25,000,000
0
25,000,000
25,000,000
0
25,000,000
25,000,000
2010
2
0
0
0
0
0
0
0
0
2011
3
0
0
0
0
0
0
0
0
2012
4
65,700,000
4,020,361,178 -1,608,144,471
2,412,216,707
1,929,773,366
-2,000,000
1,927,773,366
1,269,884,027
2013
5
131,400,000
8,281,944,028 -1,761,592,566
6,520,351,462
5,216,281,169
-3,000,000
5,213,281,169
3,093,828,633
2014
6
197,100,000
12,795,603,522 -204,572,037
12,591,031,485
10,072,825,188
-1,000,000
10,071,825,188
5,384,809,040
2015
7
219,000,000
14,643,857,365 -223,187,037
14,420,670,328
11,536,536,262
0
11,536,536,262
5,556,669,723
2016
8
219,000,000
15,083,173,086 -223,187,037
14,859,986,049
11,887,988,839
0
11,887,988,839
5,158,513,345
2017
9
219,000,000
15,535,668,278 -223,187,037
15,312,481,241
12,249,984,993
0
12,249,984,993
4,788,822,583
2018
10
219,000,000
16,001,738,326 -223,187,037
15,778,551,289
12,622,841,032
0
12,622,841,032
4,445,568,689
2019
11
219,000,000
16,481,790,476 -223,187,037
16,258,603,439
13,006,882,751
0
13,006,882,751
4,126,866,867
2020
12
219,000,000
16,976,244,191 -223,187,037
16,753,057,154
13,402,445,723
0
13,402,445,723
3,830,966,124
2021
13
219,000,000
17,485,531,516 -223,187,037
17,262,344,479
13,809,875,583
0
13,809,875,583
3,556,239,830
2022
14
219,000,000
18,010,097,462 -223,187,037
17,786,910,425
14,229,528,340
0
14,229,528,340
3,301,176,934
2023
15
219,000,000
18,550,400,386 -223,187,037
18,327,213,349
14,661,770,679
0
14,661,770,679
3,064,373,801
2024
16
219,000,000
19,106,912,397 -223,187,037
18,883,725,360
15,106,980,288
0
15,106,980,288
2,844,526,617
2025
17
219,000,000
19,680,119,769 -223,187,037
19,456,932,732
15,565,546,186
0
15,565,546,186
2,640,424,325
2026
18
219,000,000
20,270,523,362 -223,187,037
20,047,336,325
16,037,869,060
0
16,037,869,060
2,450,942,063
2027
19
219,000,000
20,878,639,063 -223,187,037
20,655,452,026
16,524,361,621
0
16,524,361,621
2,275,035,059
2028
20
219,000,000
21,504,998,235 -223,187,037
21,281,811,198
17,025,448,958
0
17,025,448,958
2,111,732,954
2029
21
219,000,000
22,150,148,182 -223,187,037
21,926,961,145
17,541,568,916
0
17,541,568,916
1,960,134,531
2030
22
219,000,000
22,814,652,627 -223,187,037
22,591,465,590
18,073,172,472
0
18,073,172,472
1,819,402,804
2031
23
219,000,000
23,499,092,206 -223,187,037
23,275,905,169
18,620,724,135
0
18,620,724,135
1,688,760,468
2032
24
219,000,000
24,204,064,972 -223,187,037
23,980,877,935
19,184,702,348
0
19,184,702,348
1,567,485,653
2033
25
219,000,000
24,930,186,922 -223,187,037
24,706,999,885
19,765,599,908
0
19,765,599,908
1,454,907,995
2034
26
219,000,000
25,678,092,529 -223,187,037
25,454,905,492
20,363,924,394
0
20,363,924,394
1,350,404,969
2035
27
219,000,000
26,448,435,305 -223,187,037
26,225,248,268
20,980,198,614
0
20,980,198,614
1,253,398,492
2036
28
212,430,000
26,424,631,713 -307,885,287
26,116,746,426
20,893,397,141
0
20,893,397,141
1,124,516,037
2037
29
206,057,100
26,400,849,545 -260,351,419
26,140,498,126
20,912,398,501
0
20,912,398,501
1,013,998,847
2038
30
199,875,387
26,377,088,780 -270,848,250
26,106,240,530
20,884,992,424
0
20,884,992,424
912,315,300
2039
31
193,879,125
26,353,349,400 -223,314,382
26,130,035,018
20,904,028,015
0
20,904,028,015
822,654,801
2040
32
188,062,752
26,329,631,386 -270,848,250
26,058,783,136
20,847,026,509
0
20,847,026,509
739,109,522
2041
33
182,420,869
26,305,934,718 -223,314,382
26,082,620,336
20,866,096,268
0
20,866,096,268
666,473,532
2042
34
176,948,243
26,282,259,376 -270,848,250
26,011,411,126
20,809,128,901
0
20,809,128,901
598,787,357
2043
35
171,639,796
26,258,605,343 -223,314,382
26,035,290,961
20,828,232,769
0
20,828,232,769
539,943,311
2044
36
166,490,602
26,234,972,598 -270,848,250
25,964,124,348
20,771,299,479
0
20,771,299,479
485,105,760
2045
37
161,495,884
26,211,361,123 -223,314,382
25,988,046,741
20,790,437,393
0
20,790,437,393
437,434,881
2046
38
156,651,007
26,187,770,898 -270,848,250
25,916,922,648
20,733,538,118
0
20,733,538,118
393,006,946
2047
39
151,951,477
26,164,201,904 -223,314,382
25,940,887,522
20,752,710,017
0
20,752,710,017
354,387,704
2048
40
147,392,933
26,140,654,122 -270,848,250
25,869,805,872
20,695,844,698
0
20,695,844,698
318,393,362
2049
41
142,971,145
26,117,127,534 -223,314,382
25,893,813,151
20,715,050,521
0
20,715,050,521
287,107,056
Developing Iraq’s Oil Industry to Maximize Government Net Revenues
99
Appendix 5: Government Net Revenues Under PSA
Totals
6,072,945,050
662,448,881,767
-30,000,000
-4,000,000,000
-200,000,000
-7,074,688,575
651,144,193,192
79,738,978,805
Year Time t= 81.5% Production (bbl/yr)
Revenue ($)
Feasibility Costs ($) Development Costs ($) Fixed Op. Costs ($) Variable Op. Costs ($) Net Revenue ($) PV Net Revenue ($)
2009
1
0
0
-10,000,000
-2,000,000,000
-200,000,000
0
-2,210,000,000
-1,990,990,991
2010
2
0
0
-10,000,000
-1,000,000,000
0
0
-1,010,000,000
-819,738,658
2011
3
0
0
-10,000,000
-37,037,037
0
0
-47,037,037
-34,393,076
2012
4
53,545,500
3,276,594,360
0
-37,037,037
0
-53,545,500
3,186,011,823
2,098,724,672
2013
5
107,091,000
6,749,784,382
0
-37,037,037
0
-107,091,000
6,605,656,345
3,920,135,531
2014
6
160,636,500
10,428,416,871
0
-37,037,037
0
-160,636,500
10,230,743,334
5,469,773,170
2015
7
178,485,000
11,934,743,752
0
-37,037,037
0
-178,485,000
11,719,221,715
5,644,661,708
2016
8
178,485,000
12,292,786,065
0
-37,037,037
0
-178,485,000
12,077,264,028
5,240,644,864
2017
9
178,485,000
12,661,569,647
0
-37,037,037
0
-178,485,000
12,446,047,610
4,865,468,317
2018
10
178,485,000
13,041,416,736
0
-37,037,037
0
-178,485,000
12,825,894,699
4,517,081,039
2019
11
178,485,000
13,432,659,238
0
-37,037,037
0
-178,485,000
13,217,137,201
4,193,577,096
2020
12
178,485,000
13,835,639,015
0
-37,037,037
0
-178,485,000
13,620,116,978
3,893,185,455
2021
13
178,485,000
14,250,708,186
0
-37,037,037
0
-178,485,000
14,035,186,149
3,614,260,512
2022
14
178,485,000
14,678,229,431
0
-37,037,037
0
-178,485,000
14,462,707,394
3,355,273,268
2023
15
178,485,000
15,118,576,314
0
-37,037,037
0
-178,485,000
14,903,054,277
3,114,803,122
2024
16
178,485,000
15,572,133,604
0
-37,037,037
0
-178,485,000
15,356,611,567
2,891,530,241
2025
17
178,485,000
16,039,297,612
0
-37,037,037
0
-178,485,000
15,823,775,575
2,684,228,452
2026
18
178,485,000
16,520,476,540
0
-37,037,037
0
-178,485,000
16,304,954,503
2,491,758,642
2027
19
178,485,000
17,016,090,836
0
-37,037,037
0
-178,485,000
16,800,568,799
2,313,062,610
2028
20
178,485,000
17,526,573,561
0
-37,037,037
0
-178,485,000
17,311,051,524
2,147,157,356
2029
21
178,485,000
18,052,370,768
0
-37,037,037
0
-178,485,000
17,836,848,731
1,993,129,764
2030
22
178,485,000
18,593,941,891
0
-37,037,037
0
-178,485,000
18,378,419,854
1,850,131,662
2031
23
178,485,000
19,151,760,148
0
-37,037,037
0
-178,485,000
18,936,238,111
1,717,375,227
2032
24
178,485,000
19,726,312,953
0
-37,037,037
0
-178,485,000
19,510,790,916
1,594,128,712
2033
25
178,485,000
20,318,102,341
0
-37,037,037
0
-178,485,000
20,102,580,304
1,479,712,478
2034
26
178,485,000
20,927,645,411
0
-37,037,037
0
-178,485,000
20,712,123,374
1,373,495,295
2035
27
178,485,000
21,555,474,774
0
-37,037,037
0
-178,485,000
21,339,952,737
1,274,890,914
2036
28
173,130,450
21,536,074,846
0
-37,037,037
0
-259,695,675
21,239,342,134
1,143,135,350
2037
29
167,936,537
21,516,692,379
0
-37,037,037
0
-251,904,805
21,227,750,537
1,029,289,614
2038
30
162,898,440
21,497,327,356
0
0
0
-244,347,661
21,252,979,695
928,390,021
2039
31
158,011,487
21,477,979,761
0
0
0
-237,017,231
21,240,962,530
835,914,484
2040
32
153,271,143
21,458,649,579
0
0
0
-229,906,714
21,228,742,866
752,642,876
2041
33
148,673,008
21,439,336,795
0
0
0
-223,009,512
21,216,327,282
677,660,085
2042
34
144,212,818
21,420,041,392
0
0
0
-216,319,227
21,203,722,165
610,141,866
2043
35
139,886,434
21,400,763,355
0
0
0
-209,829,650
21,190,933,704
549,345,834
2044
36
135,689,841
21,381,502,667
0
0
0
-203,534,761
21,177,967,907
494,603,345
2045
37
131,619,145
21,362,259,315
0
0
0
-197,428,718
21,164,830,597
445,312,188
2046
38
127,670,571
21,343,033,282
0
0
0
-191,505,856
21,151,527,425
400,929,988
2047
39
123,840,454
21,323,824,552
0
0
0
-185,760,681
21,138,063,871
360,968,274
2048
40
120,125,240
21,304,633,110
0
0
0
-180,187,860
21,124,445,249
324,987,129
2049
41
116,521,483
21,285,458,940
0
0
0
-174,782,224
21,110,676,715
292,590,368
Developing Iraq’s Oil Industry to Maximize Government Net Revenues
100
Appendix 6: Nationalized Majnoon at 81.5% Efficiency
Developing Iraq’s Oil Industry to Maximize Government Net Revenues
101
Reference List
AFP. 2009. “Iraq's 2008 Oil Revenues Up Sharply at 61 Billion Dollars.” Last updated January
13, 2009. http://www.google.com/hostednews/afp/article/ALeqM5ibwEAa2bAKckFuTawSwK9DR8BaQ, accessed June 3, 2009.
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