Perspective and Scale. Comments on the Contractor Remuneration in Iraq's PFTSC Service Contracts (1st bid round).
Submitted by Juliana Abella and Carlos Bellorin, IHS (London)
"Shall we only threaten and be angry for an hour:
When the storm is ended shall we find
How softly but how swiftly they have sidled back to power
By the favour and contrivance of their kind?"
Excerpt for the poem "Mesopotamia" by Rudyard Kipling (1917)
In 2008, Iraq launched the first of two bid rounds for oil fields after the coalition intervention in the country in early 2003. It is expected that by the end of 2010, Iraq will be awarding three natural gas fields, namely: Akka, Mansuriya and Siba in connection with its third bid round.
For the first and second bid rounds, Iraq offered foreign investors a service contract based on a fixed fee per barrel and other adjustments for production. In connection with the first round, only one contract was awarded and two further contracts were later signed with renegotiated terms. All of the areas awarded in or in relation to the first bid round were producing fields (brownfields) of massive size and huge potential. The model service contract used in this round is known as the Producing Field Technical Service Contract (PFTSC).
Soon after, seven "greenfields" with no initial or significant production were awarded in the second bid round. The fields offered in this round were also substantial in terms of reserves and production potential. The contract offered for these fields was fairly similar to the PFTSC; the main difference being that the second round's model contract, also known as the Development and Production Service Contract (DPSC), does not include the baseline or incremental production elements. Seven fields were awarded as a consequence of the second bid round: West Qurna 2, Majnoon, Halfaya, Garraf, Badra, Qaiyarah and Najmah with remuneration fees ranging from US$1.15 to US$6 per barrel. The award results were announced on December 2009 by the Iraqi Petroleum Contracts and Licensing Directorate.
We will focus our comments on the "contractor remuneration" provisions contained in the PFTSC (1st bid round).
1st Bid Round – Producing Field Technical Service Contract (PFTSC)
Under the PFTSC, the contractor is entitled to the following remuneration concepts: Supplementary Fees and Service Fees.
1. Supplementary Fees = Supplementary Costs
The Supplementary Fees are basically Supplementary Costs as defined in Article 19 of the model contract. These "costs" include:
1) signature bonus1
2) de-mining cost ;
3) costs associated with the construction of additional downstream facilities to the transfer point; and
4) costs and expenditures incurred in the remediation of pre-existing environmental conditions.
The model contract also indicated that Supplementary Fees were to be paid to the extent of 10% of the deemed revenues of the baseline production.2
2. Service Fees = Petroleum Costs + Remuneration Fees
Petroleum Costs are defined in the PFTSC as all recoverable costs and expenditures incurred and/or payments made by the contractor in connection with the conduct of petroleum operations. Annex C (Accounting Procedure) of the PFTSC deals in detail with the treatment of Petroleum Costs.
In addition, Remuneration Fees are defined as the fee due to the contractor for incremental production3. The Remuneration Fee shall be the amount equal to the product of the Remuneration Fee per barrel applicable to a certain quarter, multiplied by the Incremental Production applicable to the same quarter, plus the performance adjustment factor4.
Remuneration Fee = Remuneration Fee per barrel + Incremental Production
The Remuneration Fee per barrel per quarter of a given calendar year must be calculated on the basis of an R-Factor5 determined at the end of the preceding calendar year. According to Article 19.5(d) of the PFTSC, the R-Factor should be calculated as follows:
R-Factor |
Remuneration Fee per Barrel (USD) |
Less than 1.0 |
100% |
1.0. to less than 1.25 |
80% |
1.25 to less than 1.5 |
60% |
1.5 to less than 2.0 |
50% |
2.0 and above |
30% |
For the purposes of calculating the Baseline Production and Incremental Production, the Baseline Production Rate will be determined using the following formulae:
BPRn = IPR * DFn ; and DFn raised to the power ((n-1)/4)
Where:
BPRn = Baseline Production Rate for Quarter n
IPR = Initial Production Rate
DFn = Decline Factor for Quarter n
n = Number of the quarter following the quarter in which the effective date occurs.
R-Factor = Aggregated Cash Receipts/Aggregate Expenditures
The R-Factor for a calendar year is calculated by dividing the aggregate cash receipts for the effective date by the aggregate of expenditures over the same timeframe.
Aggregate Cash Receipts = Services Fees + Contractor Incidental Income
Aggregate Expenditures = Petroleum Costs + Training, Technology and Scholarship Fund6
1st Bid Round Contracts in a nutshell
Contract Area |
Consortium % + 25% State Partner |
Remuneration Fee (US$/barrel) |
Initial Production Rate (b/d) |
Plateau Production Target (b/d) |
Rumaila |
BP 38% CNPC 37% |
2 |
1,066,000 |
2,850,000 |
Zubair |
ENI 32.81% Occidental 23.44% KOGAS 18.75% |
2 |
182,775 |
1,200,000 |
West Qurna 1 |
Exxon Mobil 60% Shell 15% |
1.90 |
244,000 |
2,325,000 |
Source: Table adapted from Iraq's Ministry of Oil "General Information for Service Contract" (http://www.oil.gov.iq).
3. Conclusion
At the time of writing, the Iraqi government has completed two bid rounds resulting in an expected Plateau Production Target (PPT) of 9,647,225 barrels per day, if we take into consideration the ten oil fields that were awarded in 2009. This is an unprecedented number, if we consider that this PPT is expected to be reached seven years from now. If the PPT projections become a reality, Iraq will have five fields producing over a million barrels per day in which two of them, Rumaila and West Qurna 1, will produce over two million three hundred thousand barrels per day. In order to put this potential achievement into perspective, it is worth mentioning that nowadays only two fields in the world produce more than one million barrels per day, Ghawar Field in Saudi Arabia (5 million b/d) and Burgan Field in Kuwait (1.5 million b/d). If we isolate the remuneration provision that we have just briefly explained, we can say that the economic return to the contractor is modest in comparison to any other type of contract used in the oil industry. But if we look at the broader picture, we can notice that the prize may be great. The contract remuneration in Iraq's contracts is a matter of scale.
But, if the country wants to play in the same league as Saudi Arabia and Russia, Iraq has to overcome many obstacles. Among these difficulties, we can name the risk associated to a country which is still politically and socially unstable, lacks infrastructure, security and presents serious flaws when it comes to the viability of its legal and contractual oil regime. Although the current government is doing its part promoting its oil contracts, the truth is that many political sectors allege that the contracts are illegal and still need a further ratification by the Council of Representatives in order to become truly binding contracts. Political differences will be a game-changer in Iraq's oil future. In the oil world, political risk can be offset and even worked out, but what cannot be offset is the intrinsic geological risk associated to this business. Iraq's oil reserves and production potential is far too great to be ignored by the industry's big players.
The views expressed in this paper are the sole responsibility of the author and do not necessarily represent the views of IHS or any of its employees, associated companies or affiliates.
