Reconstructing the governance of iraqi oil (2003-2013) – Distribution of Oil Revenues Among Kurdistan and Iraq’s Provinces



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RECONSTRUCTING THE GOVERNANCE OF IRAQI OIL (2003-2013) – Distribution of Oil Revenues Among Kurdistan and Iraq’s Provinces





A thesis submitted to the University of Sheffield for the degree of Doctor of Philosophy in the Faculty of Social Sciences
LORIAN ADMON YACOUB
PhD Thesis

Management School


December 2015
















Abstract

This thesis aims to characterise Iraqi oil governance, particularly the regional distribution of oil revenues between 2003 (the toppling of Saddam Hussein) and 2013. It explains the mechanisms which have been established to distribute oil revenues across the regions of Iraq. These revenues have been especially crucial to Iraq as it has sought to rebuild following the 2003 invasion, but throughout this period, they have also been a source of dispute between the center government, Kurdistan and other Iraqi provinces. The importance of these issues to Iraq’s economic development, and the fact that they have not yet been investigated in any other academic study (indeed, there is little literature about regional oil/gas revenue distribution generally) are what have motivated this research.

In order to understand how oil revenues are distributed it is first necessary to investigate how they are collected. Accordingly, the thesis starts by characterising Iraq’s petroleum fiscal regime. This is done by calculating the discounted cash flows for the West Qurna oilfield, which is operated under a Technical Service Contract (TSC) with the central government, and then comparing these with the performance of fields operating under Production Sharing Contracts (PSCs) signed by Kurdistan’s Regional Government (KRG). The thesis then goes on to characterise the regional distribution system. To do this, it draws on budget law, the draft oil and gas law, the national constitution, contracts signed with international oil companies and socio-economic data relating to Iraq’s provinces. The study also makes use of secondary sources in both Arabic and English. Finally, in order to gain a deeper understanding of the reconstruction of oil governance and the current regional distribution system, a series of semi-structured interviews were conducted with key players in the reconstruction process.

The results show that the governance of Iraqi oil has changed in many ways since 2003, and with it the system for distributing oil revenues among regions. Both the collection and distribution systems are politically driven, with preferential treatment being given to Kurdistan to prevent it from seeking independence. Even so, Kurdistan continues to act as a devolved and independent region and to demand full control over the collection of its oil revenues (petroleum fiscal regime). It is also demanding that its share of the total budget not be reduced like that of other provinces. The result is a distribution system which, because it ignores provincial socio-economic indicators and creates inequality between Kurdistan and other Iraqi provinces, is fostering resentment in oil producing and non-oil producing provinces alike. The danger is that this inequality among provinces may widen in the future if the government does not install some sort of equalisation system. Other oil-rich provinces may even follow Kurdistan’s example and demand greater autonomy or even independence. Such a fragmented Iraq would struggle without the revenues from the oil-rich provinces.



Acknowledgement

I would like to express my sincere and deep gratitude to my supervisors, Professor Philip Wright, Doctor Ian Rutledge and Doctor Paul Segal for their guidance, support and useful critique which have been crucial to the completion of this study. I am also grateful to my internal supervisor Doctor Mike Simpson for his support and encouragement.

I would like also to thank Doctor Mustafa Bazergan for enabling me to attend Iraq Petroleum Conference in London; hence I was able to do my interviews with key Iraqi officials in the oil and gas industry. I would also like to thank all the interviewees who accepted to provide their input which helped this study.

I wish also to express my great appreciation to the research office team, especially Mandy Robinson for her constant support and always being there when needed. I would further like to thank my PhD. Colleagues, Ahmad, Roziani, Ibtisam, Lois and all the colleagues from Victoria Street and Northumberland Road.

This Thesis is dedicated to my mother Nuhad, my sister Afaf, whom I am blessed to have, without their constant support and encouragement I would not be able to complete this project. I would also like to dedicate it to my late father Admon, and my late brother Raad and my other lovely brothers Kais, Amer and Alaa and their adorable families.

Last but not least, my gratitude goes to all my friends specially Tanya, Layla, Saba, Anwesha and Edith and to all my office mates at the Doctorate Center



Table of Contents

Chapter One: Introduction 8

1.1 Introduction 8

1.2 The purpose of this study 10

1.3 Research questions 11

1.4 The structure of this thesis 12

Chapter 2: Research Methodology 15

2.1 Introduction 15

2.2 Research strategies 16

2.2.1 History 18

2.2.2 Archival analysis 18

2.3 Interviews and primary data 21

2.4 Problems with primary and secondary data 23

2.4.1 Secondary data 23

2.4.2 Primary data 24

2.5 Conclusions 25

Chapter Three: The History of the Governance of Iraqi Oil (1916-2003) 26

3.1 Introduction 26

3.2 The Formation of Iraq (1916-1926) 28

3.3 Turkish Petroleum Company (1914-1929) 30

3.4 Terms of the Oil Concessions and Government Share (1925-1952) 31

3.5 Qassim and the Republic of Iraq (1958-1963) 38

3.6 The continuation of the Kurdistan question and the beginning of the Ba’ath regime (1964-1975) 41

3.7 Iraq National Oil Company (1964-1974) 45

3.8 Iraq after Nationalisation (1974-1980) 49

3.9 Iran-Iraq war (1980-1988) 51

3.10A Gulf Conflict (1990-1991) 54

3.10B Impact of the Gulf War (1990-2003) 55

3.11 Kurdistan’s autonomy (1991-2003) 57

3.12 Conclusions 61

Chapter Four: The Governance of Iraqi Oil (2003 – Present) 64

4.1 Introduction 64

4.2 The Iraqi oil industry under the Coalition Provisional Authority (CPA) (March 2003 – June 2004) 65

4.2.1 Law of Administration for the State of Iraq (TAL) 71

4.2.2 Ownership, contracts and revenues from the oil industry 75

4.3 The Iraqi oil industry under the Interim Government, Transitional Government and the First Permanent Government (June 2004 – present) 76

4.3.1 Iraq’s political parties and their objectives when drafting the permanent constitution 78

4.3.2 Iraq’s permanent constitution 80

4.3.3 The hydrocarbon law 95

4.3.4 Kurdistan Oil and Gas Law No. 22 (2007) 100

4.4 Conclusions 103

Chapter Five: The Concepts and Principles of Oil Governance 106

5.1 Introduction 106

5.2 Sovereignty Over and Ownership of Mineral Resources 107

5.2.1. Pre-modern mineral ownership under private governance 107

5.2.2. Modern mineral ownership under private governance 109

5.2.3. Pre-modern mineral governance under State ownership 110

5.2.4. Modern mineral governance under State ownership 111

5.3.1 Private Ownership of oil reserves (the USA) 114

5.3.2 Public Ownership of Oil Reserves 115

5.3.3.1. Non-Proprietorial Governance 116

5.3.3.2 Proprietorial Governance: 117

5.4 The concept of Mineral Rent 118

5.4.1 Ricardian or Differential Rent 118

5.4.2 Customary Ground Rent: 126

5.5 Different methods of charging for mineral rent – Petroleum Fiscal Regimes 127

Chapter Six: Iraq’s Petroleum Fiscal Regime/Analysing Oil Contracts 141

6.1 Introduction 141

6.2 Background to the contract negotiations 142

6.3 Fiscal regime terms in the three bidding contracts 149

6.3.1 Signature bonuses 149

6.3.2 Remuneration fee (RF) 151

6.3.3 Commencement and caps on cost repayments 153

6.4 Government oil revenues and payments to IOC’s in 2011 154

6.5 West Qurna1 field cash flow 159

6.5.1 Definitions and parameters of West Qurna1 160

6.6 Results of the model and discussion 166

6.6.1 Sensitivity to oil prices 168

6.7 Criticisms of the Federal TSC 169

6.7.1 The contract encourages higher costs 169

6.7.2 Changes in the contract after signing 169

6.7.3 Weak inclusion of local content 169

6.7.4 Incompatibility between production plateau target (PPT) and Best International Petroleum Industry Practices (BIPIP) 171

6.7.5 Complex approval process and procedures 171

6.8 Disagreements between the KRG and the Federal Government over contracting practices 171

6.9 KRG production-sharing contracts and the basic parameters of awarded fields in Kurdistan 173

6.9.1 Parameters of PSCs awarded by the KRG 175

6.9.2 Inclusion of local content and training 177

6.10 Which is superior: the PSC or the TSC? 179

6.11 Conclusions 182

Chapter Seven: Oil Revenue Distribution in Theory 185

7.1 Introduction 185

8.2.2 Cash payments from the DFI, 2003-2010 227

8.3 Government revenues (oil and non-oil revenues) 230

References 285






List of tables
Table 2.1: Criteria for choosing research strategies…………………

20


Table 2.2: How the chosen research strategies address the research questions……………………………….

21


Table 3.1: Terms of the Oil Concessions and Government Share (1925- 1952)

37


Table: 3.2 IPC’s oil production and IPC group payments* to the Iraqi government and IPC net profits (1925-1964). ………


40

Table 3.3: Estimates of Accounting Profitability of the IPC Group, 1952-1968


41


Table 3.4: Iraq oil revenues- selected years ………………


54

Table 3.5: Iraq’s proven oil reserves, production, exports and revenues from 1979-1988……………………………………

57


Table 3.6: Iraq’s Oil Production, Exports and Value of Oil Exports from 1990-2003………………………………………………

60


Table 4.1: Iraq’s oil production, exports and value of oil exports, 2003-2005


72

Table 4.2: Development Fund for Iraq (DFI) – statement of cash receipts, May 22, 2003 - June 28, 2004 ($000)………………………

73


Table 4.3: Companies involved in rehabilitating Iraq’s oil fields, 2003 – 2005


75

Table 5.1: Patterns of Sub-surface Mineral Ownership…………………….

110


Table 6.1A: Basic parameters of the awarded oilfields…………………..


149

Table 6.1B: Basic parameters of the awarded oilfields continued………


150

Table 6.2A: Basic parameters of the awarded gas fields…………………


151

Table 6.2B: Basic parameters of the awarded gas fields continued……..


151

Table 6.3A: R-factor for first bid round (PFTSC)…………………………

154


Table 6.3B: R-factor for second bid round (DPSC)…………

155


Table 6.4: State take and IOC take under different scenarios (the amount of RF and cost recovery is disputed ………


158

Table 6.5: Iraqi oil export revenues according to OPEC, Iraqi Extractive Industries Transparency initiative (IEITI) and Development Fund for Iraq (DFI) (2003-2012) ……………


159


Table 6.6: Physical Parameters …………………………


163

Table 6.7: Financial Parameters………………………………


164

Table 6.7: Cash flow results at price $60……………………………………


149

Table: 6.8A: West Qurna1 cash flow……………………….


166

Table 6.8B: West Qurna1 cash flow continued……………


167

Table 6.9: Cash flow results at price $60……………………


168

Table: 6.10: Test of price sensitivity of West Qurna1 field under prices of 40$ and 100$ a barrel………………………

170


Table 6.11: Oil-producing fields in Kurdistan 2011 ……………


176

Table 6.12: R-factor and contractor’s % share of profit crude oil under PSCs awarded by the KRG ………………………..

178



Table 6.13: Main commercial terms of the Shamran PSC for Pulkhama oil field


179

Table 7.1: Scotland fiscal balance 2007-2011, actual, £billion, nominal prices

203

Table 7.2: Oil/mineral resources and secessionist movements……

205

Table 7.3: Colombia – distribution of rents and royalties ($ millions)


211


Table 7.4: Distribution of revenues among Colombian regions/ departments 1994-2009………………

211


Table 7.5: Canada federal support/transfers to provinces 2008-2009 and 2009-2010………………..

215


Table 7.6: Canada revenues 2012-2014 – $ billions………

215


Table 7.7: Preferential treatment for regions to deter separatist movements

217

Table 7.8: Distribution among sub-national governments

224


Table 8.1: Cash receipts in the DFI, December 2003-December 2010……..


230

Table 8.2: Cash payments from the DFI, 2003-2010 …


231

Table 8.3: Iraq’s GDP and GDP per capita, various data source


235

Table 8.4: Total government revenue and expenditures, 2008-2013


236

Table 8.5: Government revenues, 2008-2013 ………
Table 8.6: Calculation of Kurdistan’s share of the budget

236
239


Table 8.7: Share of budget revenue given to Kurdistan and the provinces, 2007-2013 (ID billions)

243


Table 8.8: Direct transfers to Iraqi provinces (revenue sharing), 2012

244


Table 8.9: Petrodollar distribution to provinces and KRG (ID millions), 2012 -2013…………………….

246


Table 8.10: Iraqi governorates ranked by poverty share (most to least poor)


248

Table 8.11: Total per capita share of revenue received by the provinces and the KRG in 2012…………………

253


Table 8.12 Main ministry expenditure in central government (services extending to all provinces) and Kurdistan expenditure, 2010…..

256


Table 8.13: Socio-economic indicators survey in Iraq’s provinces and Kurdistan (December 2011)

257

Table 8.14: KRG’s total revenue, expenditure and deficit, 2010-2013 (ID billions)


258

Table 8.15: Kurdistan production, refineries and exports (2010-2013)…


266




List of Figures





Figure 3.1 Sykes - Picot agreement Map……….


32

Figure 3.2: De Facto Kurdistan, 1991-2003. Adapted from KRG map.............

63


Figure 4.1: Map of Iraq showing areas disputed with Kurdistan


77

Figure 5.1: The Basic Structure of Governance in a modern oil or mineral producing country. ……………………

116


Figure 5.2: Non-proprietorial and Proprietorial State Governance in Oil Industries…………………………………………………

119



Figure 5.3: Differential or Ricardian Rent in Agriculture………


122

Figure 5.4: Differential or Ricardian Rent in an Oil Economy……………..

122


Figure 5.5: The Impact of Imposing a Royalty………………


127

Figure 7.1: Alaska Permanent Fund dividend, current $..........


220

Figure 8.1: Cumulative cash receipts in the DFI, May 2003-December 2010 ($millions)……………

230


Figure 8.2: Cumulative cash payments from the DFI, 2003-2010 ($millions)…………………………………………………

232


Figure 8.3: Total cash receipts to and cash payments from the DFI, 2003-2010 ($000)…………………….

234


Figure 8.4 Federal budget transfers to KRG and other provinces in 2013………………………..

241


Figure 8.5: Per capita budget allocated to provinces by central government via direct transfer (revenue sharing), 2009-2012…………………..


245


Figure 8.6: Per capita budget transfer in 2012 and poverty share among governorates…………………………….

249



Figure 8.7: Total per capita share of revenue received by the provinces and the KRG in 2012 (ID)………………………

254


Figure 8.8 Nominal per capita income in Iraq’s provinces, 2007 ID/000 per month.................................

255


Figure 9.1: Suggested Federal budget transfer to KRG and other province…………………

284


Figure 9.2: Suggested Federal budget transfer to KRG and other provinces………………………………

285





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