Global Policy Forum

Iraq's Oil Service Contracts Are More Than They Seem

By Greg Muttitt*

Next Monday, the Iraqi federal government is set to sign oil development contracts with BP, Shell, ExxonMobil and Total – their first since their 1925 concession was cancelled in the early 1970s. The contracts are the biggest step yet towards long-term foreign control of Iraq's oil. But their terms remain secret, as part of a bizarre game of intrigue on the part of the government and companies.

According to the Iraqi Oil Ministry, there is nothing controversial about these contracts, which cover six of Iraq's largest oilfields. Although the fields account for around half of Iraq's known oil reserves, the contracts are only for two years, and provide for the companies to supply equipment and technical guidance, in exchange for a fixed fee.

Even the most vehement opponents of oil privatization do not object to such "technical service contracts" (TSCs): they are a normal model of business, where a company acts as contractor, providing a service to its client, a government or national oil company, for an agreed price. It's the model used in the nationalized industries of the region, such as in Saudi Arabia and Kuwait. But peel beneath the surface, and the contracts start to look very strange.

For a start, the deals are with the wrong companies. The companies which usually carry out TSCs are specialist service providers, like Schlumberger, Saipem or Baker Hughes. They are often hired in for geological, construction or drilling expertise, or to install a piece of technology. Even the oil majors themselves have outsourced most of their technical functions to these specialist contractors. So in most BP facilities, for example, only around 10% of the workers will generally be BP employees, the rest are outsourced.

But the TSCs to be signed next week are not with these technical specialists; they are with the four member companies of the former Iraq Petroleum Company – BP, Shell, ExxonMobil and Total – plus Chevron, BHP and 3 smaller companies. In no other country are the likes of BP or ExxonMobil carrying out such TSCs. They prefer contracts like production sharing agreements (PSAs), where they invest risked capital, control the operation, and make healthy returns on their capital by receiving a share of the revenues. And in Iraq, they've made it clear that PSAs are what they really want – even though the vast majority of Iraqis oppose them, seeing them as an effective surrender of sovereignty over Iraq's natural resources.

So why would the companies sign up to these fixed-fee TSCs? The answer is that they see them as a stepping stone to PSAs.

BP has identified this as a key issue: "These contracts are valid for a couple of years; how does that link with what comes afterwards?" the company has asked. French company Total added, "This is necessarily a transitory stage, not a proper way to work over the long term." Which brings us to the second, most striking, strange feature of the contracts: it's the companies, rather than the Iraqi government, that have drafted them. In any public procurement process anywhere in the world, whether it's for building a hospital or collecting rubbish bins, the government client decides the terms and then invites companies to bid for the work.

In this case, not only was there was no bidding process – BP was simply granted the Rumaila field, and Shell Kirkuk, and so on – but the companies were allowed to go off and write up their own terms. And in order to get the long-term position they seek, the oil companies' lawyers drafting the contracts wrote in extension clauses – giving them rights to future contracts after these ones expire. If the oil law has passed by then, as the companies hope, these could be production sharing agreements.

According to an article in the International Herald Tribune last week, the way this will work is that the fields will be opened to bidding, but the companies with TSAs will be given right of first refusal to match the best bid. However, preparing a bid for an oilfield involves studying large quantities of data and analyzing the economic and legal terms in detail – taking a whole team of people several weeks. Few companies will be willing to spend this much resource when they know another company will get first preference anyway. In practice, therefore, the companies with TSAs may well actually get long-term deals on their fields without competition.

If this were to happen, it could cost Iraq huge amounts in lost potential revenues. The fields involved are some of Iraq's largest – with Rumaila, Kirkuk and West Qurna each accounting for more than 10 billion barrels. Estimates vary, but the six fields together could account for anything between a third and two thirds of Iraq's known oil reserves.

With so much at stake, it is vital that the proposed contracts are made transparent before they are signed. Iraqi civil society groups, academics, oil experts and parliamentarians need to study and debate their terms before Iraq commits itself to giving foreign companies potential rights to long-term control over its natural resources.

About the Author: Greg Muttitt is an expert on Iraqi oil policy, which he has been studying since the start of the occupation in 2003. Working for the independent British charity PLATFORM, he has argued throughout that decisions about the future of Iraq's oil should be made by the Iraqi people, free from external pressure.