February 26, 2002
This is an excerpt regarding revenues and oil pricing. To read full statement
Revenue generation
It may come as a surprise to some of you that despite all the billions of dollars we have been talking about, the programme implementation is increasingly facing a financial crisis due to the substantial drop in revenues received from Iraqi oil exports under the programme. As at 15 February 2002, there were 699 approved applications for humanitarian supplies with a total value of $1.6 billion, waiting to be funded. The amount of just over $1.9 billion still available in the escrow account is earmarked for oil spare parts and equipment ($1.34 billion) and for the purchase of supplies under the special allocation ($584 million) included in the distribution plan.
While we have been making an all out effort to expedite the release of holds placed on applications, if all the holds, with a total value of $5.32 billion were lifted, we would have a shortfall of $6.9 billion.
The United Nations accounts pertaining to the Iraq programme are divided into seven separate funds pursuant to paragraph 8 (a) to (g) of Security Council resolution 986 (1995). As at 13 February 2002, 1.09 billion euros had been deposited into the account for phase XI, as authorised under Council resolutions 1284 (1999), 1330 (2000), 1360 (2001) and 1382 (2001), bringing the total oil sale revenue since the inception of the programme to $37.33 billion and 15.25 billion euros. The United Nations Iraq Account term investments have been placed with five different credit-worthy banks. The allocation of total oil revenue among the various funds and corresponding expenditures, are reported in annex I to the text of my present statement; the number and value of letters of credit pertaining to oil proceeds and humanitarian supplies are reported in annex II.
As at 29 January 2002, the United Nations Treasury had received the final bids from banks invited to provide proposals for banking services. The proposals have been analyzed and, consequently, letters of intent to enter into further negotiations were issued on 7 February 2002 to four banks for the issuance of humanitarian letters of credit and two banks for the confirmation of oil letters of credit. A plan for the implementation of the diversification of banking services will be drawn upon completion of negotiations.
Oil production and sale of petroleum and petroleum products
Since the beginning of phase XI, and as at 15 February 2002, the oil overseers and the Security Council Committee established by resolution 661 (1990) concerning the situation between Iraq and Kuwait, hereinafter referred to as the Committee, have reviewed and approved a total of 124 contracts (including 30 contracts from previous phases extended into phase XI), involving purchasers from 32 countries*.
The total quantity of oil approved for export under those contracts corresponds to approximately 300 million barrels, with an estimated value of 6 billion euros ($5.2 billion at current rate of exchange). However, in order to export this volume before the phase expires, an average export level of 1.7 million barrels per day would be required. If the average export level remains at a current reduced rate of 1.4 million barrels a day, this would lead to a lower revenue level of approximately 1 billion euros (at current prices and the current rate of exchange).
The export of petroleum from Iraq under the current phase has thus far been some 35 per cent lower than the assumed sustainable rate of export of 2.1 million barrels per day. Although the oil depots in Ceyhan, Turkey, were filled to the capacity, no oil was lifted for about a week until 22 February. As at 15 February 2002, a total of 68 loadings (36 loadings through Mina al-Bakr and 32 loadings through Ceyhan), comprising 110 million barrels (65 million barrels through Mina al-Bakr and 45 million barrels through Ceyhan), with an estimated value of 2.067 billion euros ($1.8 billion, at the current rate of exchange), have been completed.
Based on an estimated revenue, and after the required deductions are applied pursuant to the relevant resolutions, approximately $3.64 billion will be available for programme implementation during the present phase. The distribution plan for phase XI (S/2002/19, annex III), submitted by the Government of Iraq was budgeted at $4.43 and revised recently to $4.6 billion. Hence, should the current situation continue, a revenue shortfall of close to one billion dollars is expected for programme implementation, which is further compounded by the fact that over $1.6 billion worth of already approved applications are waiting to be funded.
The revenue shortfall is attributable to the sharp decline in oil market prices, reduced level of Iraqi oil exports under the programme, as well as the uncertainties regarding the price of oil exports from Iraq due to the yet unresolved serious difficulties encountered with regard to the pricing mechanism whereby the price of Iraqi crude oil continues to be approved retroactively. The reduced level of Iraqi crude oil exports under the programme is most likely a consequence of retroactive pricing imposed by the Committee since October 2001, in combination with the insistence on excessive profits by Iraqi crude oil contract-holders. Retroactive pricing has made it much more difficult for contract-holders to receive an abnormally high premium for Iraqi crude oil and, rather than the latter being satisfied with more reasonable premia, export levels have been negatively affected. Accordingly, a number of contractors have been either reluctant to enter into new contracts for oil and/or to lift the oil contracted by postponing and/or cancelling their contracts to lift the oil.
Everyone is fully aware of the reasons as well as the intentions behind the retroactive pricing for crude oil exports from Iraq. I should like to appeal to all parties, including the Government of Iraq, to make a determined effort to resolve the difficulties encountered and reach a satisfactory arrangement for pricing Iraqi crude oil exports in order to avoid the disruption of oil exports from Iraq, which is the sole source of the revenues available to the programme.
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