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Q&A: Hussain al-Shahristani

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1Q&A: Hussain al-Shahristani Empty Q&A: Hussain al-Shahristani Thu Dec 22, 2011 11:06 am

TheRock


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Q&A: Hussain al-Shahristani
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Iraqi Deputy Prime Minister for Energy Affairs Hussain al-Shahristani in his office in Baghdad. (BEN VAN HEUVELEN/Iraq Oil Report)

By Ben Van Heuvelen of Iraq Oil Report
Published December 22, 2011

BAGHDAD - Since Hussain al-Shahristani became Oil Minister in 2006, he has primed Iraq for the biggest oil boom in world history, despite political infighting and a still-problematic security environment.

Dozens of the world's largest oil firms have won tough deals to develop oil and gas fields. On paper, at least, those contracts would make Iraq the world's largest-ever oil producer in only seven years.

Forty-six companies have qualified to participate in an upcoming bidding round for 12 exploration blocks.

One of those companies, ExxonMobil, signed six contracts with the semi-autonomous northern Iraqi Kurdistan Region on Oct. 18, posing the biggest challenge yet to the policies of Shahristani and Prime Minister Nouri al-Maliki, who have sought to keep oil sector authority in Baghdad.

In an interview with Iraq Oil Report's Ben Van Heuvelen, Shahristani explained his reasons for central control over an oil sector, what Exxon must do to keep square with Baghdad, and what IOCs want changed in the fourth bidding round contract model.

Ben Van Heuvelen: I'd like to start by asking you about the fourth bid round. You have received a lot of credit for the success of the first three contract licensing round. What lessons should Iraq take from that success, and how are you applying those lessons to the fourth bidding round?

Hussain al-Shahristani: We are very pleased with the results of the bid rounds we have already had, and the work on the ground is progressing well. The fact that the largest IOCs are working on developing these fields and increasing Iraq's production capacity is very encouraging. We are also very satisfied with the fees that are being paid to these companies, based on the service contracts that have been signed.

We hope to receive similar participation in the coming bidding round. Of course this is going to be different because the first three bid rounds were for discovered fields and the companies knew exactly what there is in the fields, while the fourth bid round is about exploration blocks.

Although we all understand that the potential of discovery is very high in these blocks, still it has to be discovered, and the nature of the contract will have to take into account not only the risk associated with these fields but also the development plan that would follow.

That's why the bid round was delayed a couple of months: to carefully prepare the model contract to take all of these factors into account. So far the indications are that a great many number of companies are interested in for these blocks.

BVH: How would you characterize the companies' initial reaction to the data packages and the model contract? Have they suggested changes? Are they enthusiastic?

HS: The data packages – there hasn't been much comment because there isn't much data in there, because these are exploration blocks.

But the model contracts, they have had a lot of, ah, suggestions for changes, and particularly in case large quantities of oil are discovered along with the gas – because these blocks were selected for their gas potential, but there is always a possibility of finding significant amounts of oil. And some of the blocks are perhaps are very likely that some oil will be discovered there.

Iraq is not ready at this stage to develop further capacity for oil production, because we believe with 12 million barrels per day signed contracts already, we have to wait and see how the world oil demand is going to develop, taking into account the economic crisis in the Euro zone and elsewhere, and how this is going to affect their economic growth, which will obviously have significant effect on the oil demand.

So there are a number of general factors beyond our control in the world economy, and we have to take some time to see how the demand is going to grow and how much room there is for increasing Iraqi oil production.

So, no decision will be taken to add any additional capacity to oil production.

However, the story of the gas is different. Iraq needs more gas for its large-scale power generation plans. Also there is a great demand for Iraqi gas from all of our neighbors, except Iran. Beyond our neighborhood, also - Europe has signed a memorandum of cooperation with us where they have very clearly indicated an interest to get some of Iraqi dry gas. All the countries around us, including Turkey, they are looking to get some Iraqi gas.

So, Iraq will develop its gas potential, and that's why these blocks have been chosen in the fourth bid round.

But yet the model contract has to take into account what to do with the oil once it's discovered. That's why it has been a bit different from the previous bid round, a little more complicated, and the companies had more comments on it.

BVH: Has Iraq determined what the policy will be about potential oil discoveries?

HS: Yes, in the model contract we have to deal with that. The current line of thinking is to have some waiting period before that oil discovery is developed.

BVH: Speaking of the fourth bidding round, will ExxonMobil be allowed to participate?

HS: I cannot answer that question at this stage, because Iraq has not taken its decision vis-à-vis ExxonMobil because of the contract that was signed without the approval of the central government. Once that decision is taken, of course it will be implemented, in all other areas of bilateral obligations.

BVH: So is this an all-or-nothing proposition? If something is worked out with Exxon, then the fourth bid round is ok, West Qurna 1 is ok, the water pipeline is ok? And if not, then none of those things can continue?

HS: No decision has been taken yet. All of these options are under consideration.

Iraq's position has been made very clear to ExxonMobil. Before they signed the contract (with the Kurdistan region), and after they signed the contract, they received a letter form the prime minister and from the minister of oil telling them that signing contracts without the approval of the federal government is a breach of their contract for West Qurna Phase 1. And that remains to be the position.

ExxonMobil has been asked to reconsider its situation. And we have not heard from them what they plan to do yet, before we make our final decision.

BVH: I hear that Prime Minister Maliki met with Exxon CEO Rex Tillerson in Washington, DC -- and that Exxon promised to reconsider the KRG contract. Do you have any details about this?

HS: I have no details. The PM has met with ExxonMobil and he has promised to reconsider their contracts in the KRG, but I haven't heard from the prime minister directly what was the commitment made by Tillerson to him.

BVH: You seem to think it's very important for the oil sector in Iraq to be centralized. Why?

HS: Yes, absolutely. Oil can be used to unify Iraq and build a prosperous, progressive country where people can live in peace, with a share of the oil wealth. And there is plenty of it to satisfy all of the Iraqi people and beyond Iraq.

Or it can be a tool for the disintegration for the country, civil war, among different regions, different governorates, and even different tribes.

So, for me, the unity of the country, the peaceful coexistence of its ethnic and religious and sectarian factions, is extremely important. And unless oil is managed centrally and revenues are distributed equally to all Iraqis, oil can be very dangerous, to be used in the civil war among the different factions.

BVH: Are you concerned that a decentralized policy - for example if the KRG were given contracting authority - might set a precedent for other oil producing regions?

HS: Well, it's not whether it's a fear or not: we are hearing from all of the oil-producing areas, particularly from Basra, where 70 percent of Iraqi oil is being produced, as if the KRG is permitted to manage its own oil. "We will not allow anybody else to manage our own oil, and we know what to do with our oil" -- and that attitude prevails throughout the region.

For one thing, the biggest loser will be the KRG, because they are already taking 17 percent of the oil (revenues) from the south. And if the south wants to behave the same way as the KRG are behaving, the first victims will be the KRG with their 17 percent.

That's why we feel, in order to avoid any such friction between all the parts of the country, it's important to manage it centrally.

And of course this is not to say that we don't need to coordinate, consult with the regions, with the oil-producing governorates. In fact, there is a constitutional clause that requires such consultation and coordination. But the management of the sector needs to be central.

BVH: It seems the vehicle to define this architecture of authority is federal oil legislation. What is the next step for the oil law? It seems unlikely that Oil Minister Luaibi and KRG Minister of Natural Resources Dr. Ashti Hawrami will meet by the end of the year. So what is the next step?

HS: Well, even if Mr. Luaibi and Mr. Ashti meet before the end of the year and agreed on some kind of a draft, that has to be presented to the Council of Ministers, to accept an alternative draft to the draft that they already voted on a few months ago, and sent to the Parliament.

And as far as the government, the Council of Ministers is concerned, that's the only draft that is on the table for discussion.

Of course, the Parliament can amend it. But it cannot produce another law. The draft laws have to come from the government, to the Parliament for discussion. And then acceptance or rejection of legislation.

The government, when the last draft was presented to it, which was an amendment of the 2007 draft, made by the Ministry of Oil, presented to the Energy Committee, was approved unanimously by the Energy Committee, sent to the Parliament, it was approved almost unanimously there with two ministers not voting for it - and that's the only draft on the table there, in the Parliament.

There are attempts to produce other drafts, or to go back to the 2007 draft, and there has been talk about this. But as far as I can see, I don't believe that the Council of Ministers will change this draft, and it is really in the court of the Parliament to decide either to legislate the last draft that was sent to them by the government, or to amend it if there is an agreement there.

Otherwise it will be just waiting, as was the case for the last draft that was sent in 2007.

BVH: We heard from Barham Salih that when he came down to Baghdad in late October to meet with Prime Minister Maliki they agreed to go back to the 2007 draft and work off of that. Is this not true? Is this deal now off? Or has the arrangement been changed?

HS: I have heard different versions of that story. I have heard what Mr. Barham Salih said, and I have heard what other participants in that meeting have said. And it's not – I mean, the two stories are not identical.

But regardless, even if there was such an agreement, we have in Iraq a state of law - I am not talking about the political group - but we are in a state of laws and the decisions have to be made by the Council of Ministers. And the only decision that was made by the Council of Ministers was the draft that was presented a few months ago.

BVH: How do Exxon's deals with the KRG affect oil law negotiations? Some people have said that this drives a wedge between Baghdad and Erbil. Others have said that it gives urgency to a process and can in fact serve to bring the two sides together. What do you think?

I think both are partially correct. This draws attention to the importance of having new legislation that clarifies all of the procedures and the authorities. But as it stands now, it has definitely created more problems for both the central government and the KRG.

And a lot of Iraqis think that ExxonMobil has played on very dangerous grounds and has created problems unnecessarily for itself and for Iraq.

BVH: I saw an interview with Prime Minister Maliki recently in which he seemed to be envisioning a process by which you could somehow re-route the Exxon-KRG contracts through the Oil Ministry. I wonder if you have any insight into how this might work.

HS: This hasn't been discussed. Those contracts have not even been presented to the Ministry of Oil, so the Ministry of Oil has not studied them; they have no views on that.

But as I explained earlier, the sure stand of the central government is that anything that is not approved by the Council of Ministers has no legal value in Iraq. And the companies are strongly advised to refrain from working on Iraqi territory without the permission of the Iraqi government. This has consistently been the position of the authorities of the central government.

We have to combine all of these statements, and if you read that statement in the light of what the prime minister said yesterday that his understanding – and that's what he told ExxonMobil, and apparently there has been some positive response from ExxonMobil – that they have to reconsider the contracts with the KRG, as they will never be accepted the way they have been done.

BVH: Can you envision a process where a new contract for these same blocks that Exxon has already signed would run through the Ministry of Oil?

HS: There are a number of options we can consider with ExxonMobil. They have been told that they are welcome to come and discuss it with the Minister of Oil. But first and foremost, they have to acknowledge the authority of the federal government, and to accept the fact that their contracts are not valid without the approval of the central government.

Otherwise, what's the point of coming to talk with the central government, if they consider the (KRG) contracts to be valid?

BVH: To clarify, did the Government of Iraq at any point send a signal to anyone at ExxonMobil that there was a chance these deals would be accepted?

HS: Nobody in the central government from the minister of oil to the deputy prime minister for energy to the prime minister himself or the council of ministers, ever have given any such indication or signal.

BVH: Some of these blocks are in disputed territories. Obviously this is potentially problematic for a number of reasons. Do you have any idea, first of all, why they assigned these blocks to Exxon? Who wanted to do this?

HS: It's not my style to comment on people's intentions – and the conspiracies, and so on. That's just not my style.

BVH: What is the impact of these contracts on the territorial disputes?

HS: I can talk about the facts of this.

The representatives of the governorate council of Ninewa have come to me a couple of days ago and they have told us that they will never accept any foreign company working in their governorate without explicit approval of the central government. And, as these contracts have been signed, two of them within Ninewa province, they want the support of the Iraqi government stop the foreign company from trespassing the boundaries of the governorate.

There is a very strong rejection by the governorate of Ninewa about these contracts. And the same is true in Kirkuk.

BVH: Do you think the presence of Exxon in these blocks makes it more difficult to resolve the issue of disputed territories?

HS: Of course.

BVH: Why?

HS: Because these are disputed territories: Iraqis have been discussing it – it's one of the most difficult unresolved issues in Iraq. And when an oil company comes and puts its nose into such delicate internal affairs, it reminds people of the role of the oil companies in the '50s and '60s in the region, and I don't think that will serve at all to change the image of ExxonMobil, in particular, in the region.

BVH: Do you think this is dangerous for ExxonMobil in terms of security?

HS: Definitely. If they start any activities in that area, I don't think the people of the Ninewa governorate will allow them to do so.

BVH: Do you think it makes things difficult or dangerous for them in the south as well?

HS: If the Iraqi people – and, you know, there are very strong sentiments among Iraqis – if they feel that ExxonMobil is party to the disintegration of the country, or undermining the authority of the Iraqi government, I wouldn't be surprised. I've not heard anything specifically. But I wouldn't be surprised if there would be strong reaction from the population. Not only in the south – everywhere.

BVH: Have there been discussions between the Baghdad government and Erbil since the signing?

HS: The last discussion was what you just referred to, when Barham Salih was there in Baghdad. And since them, I am not aware of any further discussions.

BVH: In terms of US-Iraq relations moving forward, has the US been supportive of your efforts to have this contract reconsidered?

HS: Well, what I would say at this stage – this contract that was signed by ExxonMobil will not undermine Iraq-US relationship. Both countries have taken a very clear position that such contracts will have to be done with the approval of the central government, and we don't expect anything more than that from the US government. They have given the right advice to the companies.

Iraq and the US have signed a cooperation agreement, and we look forward to their involvement of US companies in the reconstruction programs in Iraq and in many other areas. And I don't think the relations between the two countries will be affected by what Iraq decides vis-à-vis ExxonMobil – whether to allow it to remain in Iraq, or not to allow it to do so.

I'd like to ask one more question, to circle back to an earlier topic: you mentioned that Iraq's production is looking very strong. Not needing more oil production, will you make any revision to the production plateau targets for the first and second bid round fields?

We are studying very carefully the oil markets and the expected demands, and we are also studying our own investment – the scale of our investment, and whether it would be more prudent to stretch it a bit longer. All of these are very careful considerations, and Iraq will make its decision, it will announce it, and the first companies to be informed will be the companies that have contracted with us.

The final decision will not detrimentally affect the contracts that have been signed or put any financial burdens on these contracts.

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2Q&A: Hussain al-Shahristani Empty Re: Q&A: Hussain al-Shahristani Thu Dec 22, 2011 11:28 am

TheRock


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Very good article

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