|Places »||Iraq - النفط في العراق|
About production sharing agreements
PSAs in summary:
- A contract between a multinational oil company and a host government, in which the corporation provides capital investment, in exchange for control over an oilfield, and access to a large share of the revenues from it
- Lasting usually 25-40 years - and sometimes even indefinite.
- A change of language, describing the state as "owner" and the foreign company as "contractor", but in practice mostly equivalent to the old-style concession agreements.
- Precise terms depend on negotiation between state and company.
- Often contains "stablisation clause", which restricts future governments' ability to change tax rates or pass any new law which affects the company's profits.
See also Production sharing agreements - Surrendering Iraq's resource sovereignty?, a presentation to the al-Kindi Society for Engineers
PSAs in Iraq:
In the minds of some neo-conservatives, writing on Iraqi oil before the war, "privatisation" meant the transfer of legal ownership of Iraq's oil reserves into private hands. However, in all countries of the world except the USA , reserves (prior to their extraction) are legally the property of the state. This is the case in Iraq, and remains so under the new Constitution. There has never been a realistic prospect of US-style privatisation of Iraq’s oil reserves. But this does not mean that private companies would not develop Iraq’s oil...
In some ways, the debate on “privatisation” has obscured the important practical issues of who gets the revenue from the oil, and who controls the way in which oil is developed. On this matter, Iraq has a relevant history.
The development of Iraq’s oil industry began in the aftermath of the First World War, while the country was occupied by Britain under a League of Nations Mandate. In 1925, Iraq’s British-installed monarch, King Faisal, signed a concession contract with the Iraq Petroleum Company (IPC) , a consortium of British, French and (later) American oil companies. The contract followed a model widely applied in the British colonies. It was for a period of 75 years, during which terms were frozen. Combined with two further concessions granted in the 1930s, the IPC obtained rights to all of the oil in the entire country. Even the Iraqi call for a 20% stake in the concession was denied, despite having been specified in earlier agreements.
As Iraqi frustration at the unfair terms of the deal grew, in the 1950s and 1960s the contract came under pressure. Underpinning this were the issues of the split of revenues between company and state was a fair one, and the degree of control the foreign companies had over the development: they restricted production to boost their other producing areas, and used their monopoly on information in order to fix prices so as to deprive Iraq of income. These same arguments were echoed in all of the major oil-producing countries at the time, most of which had similar deals with multinational companies. The ultimate conclusion to these disputes was the nationalisation of many oil industries – in Iraq’s case in two stages in 1961 and 1972.
While these disputes were raging in the Middle East, a different model was emerging in Indonesia. There, a new form of contract was introduced in the late 1960s: the production sharing agreement (PSA).
An ingenious arrangement, PSAs shift the ownership of oil from companies to state, and invert the flow of payments from state to company. Whereas in a concession system, foreign companies have rights to the oil in the ground, and compensate host states for taking their resources (via royalties and taxes), a PSA leaves the oil legally in the hands of the state, while the foreign companies are compensated for their investment in oil production infrastructure and for the risks they have taken in doing so.
Although many in the oil industry were initially suspicious of Indonesia’s move, they soon realised that by setting the terms the right way, a PSA could deliver the same practical outcomes as a concession, with the advantage of relieving nationalist pressures within the country. In one of the standard textbooks on petroleum fiscal systems, industry consultant Daniel Johnston comments:
“At first [PSAs] and concessionary systems appear to be quite different. They have major symbolic and philosophical differences, but these serve more of a political function than anything else. The terminology is certainly distinct, but these systems are really not that different from a financial point of view.”
So, the financial and economic implications of PSAs may be the same as concessions, but they have clear political advantages – especially when contrasted with the 1970s nationalisations in the Middle East. Professor Thomas Wälde, an expert in oil law and policy at the University of Dundee, describes them as:
“A convenient marriage between the politically useful symbolism of the production-sharing contract (appearance of a service contract to the state company acting as master) and the material equivalence of this contract model with concession/licence regimes in all significant aspects…The government can be seen to be running the show - and the company can run it behind the camouflage of legal title symbolising the assertion of national sovereignty.”
These advantages now appear to make PSAs the Western method of choice for future development of the Iraqi oil industry.
But the cost to Iraq could be severe. PLATFORM's research estimates that the use of PSAs could cost Iraq net revenue of up to $200 billion (seven times current GDP), compared to keeping oil in public hands. Furthermore, they could deprive Iraq of democratic control over its most important natural resource:
- PSAs fix the economic terms for 25-40 years, preventing future elected governments from changing their taxes or other economic policies.
- They deprive governments of control over the development of their oil industry, instead giving key economic decisions such as the depletion rate to the foreign companies.
- They generally over-ride any current or future legislation that compromises company profitability , effectively limiting the government's ability to regulate.
- They commonly specify that any disputes between the government and the foreign companies will be resolved not in national courts but in secretive international arbitration tribunals which will not consider the Iraqi public interest.
It seems that if PSAs are signed in Iraq - as key politicians, under pressure from the UK and USA, are keen to do - the country could be surrendering its democracy as soon as achieving it.
For more information, see our Crude Designs report.
|Places »||Iraq - النفط في العراق|