Production-Sharing Deals and Iraq's Oil Money
SCOTT SIMON, host:
Major oil companies, including ExxonMobil and Chevron, have been providing Iraq's oil ministry with free advice and technical training. A new report says the companies are positioning themselves to win lucrative contracts with the country. The study claims that big oil and some Iraqi officials are promoting a type of contract that could cost Iraq billions of dollars in profits over the long term. NPR's Corey Flintoff reports.
COREY FLINTOFF reporting:
No one disputes that Iraq has huge reserves of oil or that the Iraqi government must find a way to turn that oil into a stable source of revenue. But groups that see themselves as watchdogs over the oil industry say it would be a mistake for Iraqis to accept a certain type of contract called a production-sharing agreement.
Mr. JIM PAUL (Global Policy Forum): This type of contract is very disadvantageous to the Iraqis because basically it brings the companies into a game of producing oil that the Iraqis could do themselves.
FLINTOFF: Jim Paul is the head of Global Policy Forum based in New York.
Mr. PAUL: It means that a very large share of Iraq's potential oil revenue is siphoned off to multinational companies when it could be used for the rebuilding of Iraq.
FLINTOFF: Paul helped edit the report which was produced 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 built a model that would predict the potential profits of oil companies using the agreements in Iraq.
Mr. GREG MUTTIT (PLATFORM): We found that company rates of return could be between 40 percent and 160 percent, depending on the precise terms and on how large the fields are, and by way of comparison, the usual target threshold for companies to judge profitability is 12 percent.
FLINTOFF: Oil analyst Monica Enfield works for the consulting firm PFC Energy. She says production-sharing agreements are advantageous to countries that don't have the money to fund their own oil production because they require the oil companies to pay all the costs up front.
Ms. MONICA ENFIELD (PFC Energy): One of the drawbacks of a production-sharing agreement is that governments will not get those revenues while companies are recovering their costs. And in a high oil price environment like today, many governments would like to see these revenues.
FLINTOFF: Enfield says the agreements are most often used in places where it's costly and technically difficult to find oil, such as the offshore wells of Angola and Nigeria. Jim Paul says that's not the case in Iraq.
Mr. PAUL: What we have to understand here is that the cost of producing oil in Iraq is extremely low, and these fields are already known. There's no exploration risk virtually at all here.
FLINTOFF: Paul says the magnitude of Iraq's oil reserves will attract plenty of investment and that Iraqis can manage their own oil production rather than giving up a big share of the country's profits. Spokespeople for ExxonMobil and Chevron declined to be interviewed for this story, but they confirmed that they have provided technical training to Iraq and that they would be interested in pursuing oil contracts once the political situation has stabilized.
One person who vehemently disagrees with the Crude Designs report is Rod MacAlister, a former ConocoPhillips executive who now runs a company called Business & Conflict in London. In an Internet posting, MacAlister called the report `paranoia on steroids.' MacAlister says the critics don't give enough weight to the security risks oil companies face in Iraq, ranging from insurgent sabotage to the possibility of all-out civil war.
Mr. ROD MacALISTER (Business & Conflict): In Iraq, the below-ground risks are a lot lower than you normally find, because the oil is discovered and its parameters are fairly well-known. But the above-ground risks are much greater than you normally find.
FLINTOFF: Iraqi oil officials have expressed interest in PSAs at oil industry conferences. MacAlister says Iraq needs to move fast to attract investment and that he has no doubt that there might already be some tentative agreements in existence.
Mr. MacALISTER: But I think it's highly unlikely that they are cooked deals behind a bunch of closed doors that are ready to be sprung upon the Iraqi people on December 16th.
FLINTOFF: One thing both sides agree on is that Iraq has to control the insurgency and establish security before new oil development can take place under any kind of contract.
Corey Flintoff, NPR News, Washington.
SIMON: And it's 18 minutes past the hour.