Under CSTs and SSDSs, the contractor is remunerated on the basis of cost recovery and a compensation fee per barrel. This represents a substantial difference between contracts used in federal Iraq and production-sharing contracts in other parts of the world, where the contractor is remunerated on a cost-recovery basis plus a share of “oil profit” (usually the portion of oil production that remains after the contractor has received its cost-recovery oil allocation). The amount of compensation fees varies from block to block, with production blocks generally receiving lower fees and exploration blocks generally receiving higher fees. Compensation fees also vary based on an “R factor,” where a ratio between the contractor`s cash income and expenses is regularly calculated and as the ratio increases, compensation costs decrease. It is important to note that the compensation fee does not take into account oil prices, which means that the entrepreneur does not receive an upward trend in oil prices and is not exposed to downside risks due to lower prices. Its performance is based solely on its ability to meet the production targets set out in the contract. FLINTOFF: Enfield says agreements are most often used in places where it is expensive and technically difficult to find oil, such as the offshore wells of Angola and Nigeria. Jim Paul says this is not the case in Iraq. FLINTOFF: Paul says that the size of Iraq`s oil reserves will attract a lot of investment and that Iraqis will be able to manage their own oil production instead of giving up much of the country`s profits. ExxonMobil and Chevron spokespeople declined to be interviewed for the story, but confirmed that they had provided technical training to Iraq and would be interested in pursuing oil contracts once the political situation stabilized. FLINTOFF: Oil analyst Monica Enfield works for the consulting firm PFC Energy. She says production-sharing agreements are beneficial for countries that don`t have the money to finance their own oil production because they require oil companies to cover all costs in advance.
Oil companies are in a high-stakes competition to close lucrative deals in Iraq. Monitoring groups warn Iraqis against accepting production-sharing agreements with multinationals. Iraq`s service contracts were signed at a time when oil prices were much higher. The drop in global oil prices means that Baghdad is now paying companies much more than it would under production-sharing contracts. Zebari said the revised agreements would be known in Iraq as revenue-sharing treaties. Ms MONICA ENFIELD (PFC Energy): One of the disadvantages of a production sharing agreement is that governments do not receive these revenues while companies cover their costs. And in an environment of high oil prices like today, many governments would like to see those revenues. FLINTOFF: Iraqi oil officials have expressed interest in the MESSAGES at oil industry conferences.
MacAlister says Iraq needs to act quickly to attract investment, and that he has no doubt that there could already be agreements in principle. Iraq is a member of OPEC and has indicated that it will begin to comply with OPEC production quotas at some point in the near future, although the date on which it will begin to comply and the production quota to which it would be subject have not yet been determined. Iraq`s quota was 3.8 million barrels at the time of the first Gulf War (when it was officially excluded from the OPEC quota system). The impact of a future agreement by the Iraqi government to comply with OPEC production quotas on CST and CSPD is unclear. FLINTOFF: Paul helped edit the report, which was prepared by a London-based group called PLATFORM. The report`s author, Greg Muttit, says the researchers looked at various production-sharing agreements around the world and then created a model that would predict the potential profits of oil companies using the deals in Iraq. No one denies that Iraq has huge oil reserves or that the Iraqi government needs to find a way to turn that oil into a stable source of revenue. But groups that see themselves as watchdogs of the oil industry say so would be a mistake for iraqis to accept a certain type of treaty called a production-sharing agreement. All TSCs generally provide that a capped production target must be achieved within a certain period of time. In recent years, it has become clear that many of the plateau production targets originally envisaged in the CSTs are not achievable given the current state of Iraq`s oil export facilities and other technical and logistical obstacles.
As a result, the ministry is in the process of renegotiating the CSTs in order to set more realistic plateau production targets. Baghdad also plans to change the way it handles exploration and production contracts with oil companies such as Royal Dutch Shell, BP and Exxon, Zebari said. Iraq`s shift, for the first time, to production-sharing contracts, where revenues are divided into percentages, service contracts where oil companies receive fixed fees. “Now it`s better for us to have production sharing contracts.