Iraq Oil & Gas News


Chevron to Develop Oil Fields in Basra

By John Lee.

The state-run Basra Oil Company (BOC) has signed a memorandum of understanding with US oil company Chevron to develop oil fields

BOC announced the start of the first phase of work and cooperation with Chevron US to develop some oil fields and the establishment of a company.

The Director-General pointed out that this project will provide employment opportunities and social services for citizens in the province.

(Source: Iraqi Oil Ministry)

DNO Presses Foot on Accelerator in Kurdistan

DNO ASA, the Norwegian oil and gas operator, today announced plans for its first dividend distribution to shareholders in 13 years following release of strong half-year 2018 results, including revenues of USD 289 million which were up 83 percent from the same period last year. The Company also reported a net profit of USD 61 million and free cash flow of USD 142 million during the first half of the year.

“With growing production and robust and reliable revenues, the dividend announcement underscores confidence in our strong growth prospects,” said DNO’s Executive Chairman Bijan Mossavar-Rahmani (pictured). “Kurdistan is back and so is DNO,” he added.

The Company continues to ramp up activity in the Kurdistan region of Iraq, where fast track development of the Peshkabir field is expected to boost output by another 15,000 barrels of oil per day (bopd) to 50,000 bopd by yearend.

The Company, the most active driller in Kurdistan, has three rigs operating across its licenses with a fourth to be added next month.

Two rigs will be active at the flagship Tawke field to reverse natural field decline through workovers and the drilling of two wells in the main Cretaceous reservoir and two wells in the shallow Jeribe reservoir.

Operations will commence at the Baeshiqa license with another rig to be mobilized to spud the first well in September as part of a back-to-back, three-well exploration program. DNO acquired a 32 percent interest in and operatorship of the Baeshiqa license last year, joining ExxonMobil (32 percent), the Turkish Energy Company (16 percent) and the Kurdistan Regional Government (20 percent).

At Peshkabir, the fourth rig will spud Peshkabir-8 in 10 days followed by Peshkabir-9 in October. Early production and successful appraisal have raised previous field proven (1P) and proven and probable (2P) reserves. Two newly completed wells, Peshkabir-6 and Peshkabir-7, will commence testing by the end of this month before being placed on production. Peshkabir-6 is key to unlocking further Cretaceous and Triassic reserves.

“Peshkabir is proving prolific in production and has generated over USD 300 million in gross revenue since startup last year or three times the investment,” said Mr. Mossavar-Rahmani.

Elsewhere, DNO recently completed the sale of its Tunisia assets and relinquished Block SL18 in Somaliland as part of the Company’s ongoing rationalization of its portfolio through divestment of non-core assets and focus on expanding operations in Kurdistan and Norway.

Offshore Norway, the Company recently added six new exploration licenses for a total of 21 licenses and plans to participate in one exploration well in the fall, followed by at least five wells next year.

DNO retains indirect interests in North Sea assets through its 28.23 percent strategic stake in Faroe Petroleum plc and, given the size of its shareholding, will request seats on the board and has asked for an extraordinary general meeting to be called for this purpose.

DNO exited the second quarter with a cash balance of USD 584 million in addition to USD 288 million in marketable securities and treasury shares. The Company’s outstanding bond debt stands at USD 600 million.

The planned annual dividend distribution of NOK 434 million (USD 50 million equivalent), payable in two tranches, is subject to shareholder approval. To facilitate the distribution of the planned dividend, the DNO Board of Directors will convene an extraordinary general meeting on 13 September 2018 (i) to seek approval for payment of a dividend of NOK 0.2 per share in H2 2018 to be distributed to shareholders of record on 13 September 2018 (as registered in the VPS on 17 September 2018), and (ii) to seek authorization to approve an additional dividend payment of NOK 0.2 per share in H1 2019.

(Source: DNO)

Deloitte report on Kurdistan Oil and Gas – New Data

Third Deloitte report on Oil and Gas Review in the Iraqi Kurdistan Region, with newly added disclosures on local sales – Q1 of 2018

New verified data on the Kurdistan Region’s oil exports, consumption and revenues have been published, covering the period from 1 January 2018 to 31 March 2018, after a review of the sector by the international “Big 4” audit and consulting firm, Deloitte.

As promised in the last press release with the issuance of the second report in August 2018, apart from enhanced disclosures on the cash flow reconciliation and disaggregate monthly prices realised during the period; a new section on local sales has been included, identifying crude oil sold locally and average price realised.

The Regional Council of Oil and Gas Affairs will continue working to enhance the reporting disclosure based on the feedback received from stakeholders.

The Regional Council for Oil and Gas Affairs acknowledges the positive feedback received from stakeholders, including the international community, and reiterates its commitment to the people of Kurdistan that the two international audit firms, Deloitte and Ernst & Young, will continue to independently review the oil and gas sector, inclusive of all the streams.

The Regional Council of Oil and Gas Affairs expects the release of the fourth report covering oil exports, consumption and revenues for second quarter of 2018 (1 April to 30 June) in the near future.

  1. Deloitte’s report for the first three months of 2018 is accessible through this link (PDF), in Kurdish, Arabic and English.
  2. Frequently asked questions handbook (PDF) in Kurdish, Arabic and English to help readers better understand different sections of the report.

(Source: KRG)

Petrofac awarded Basra Oil Company EPC Contract

Petrofac has been awarded a contract worth around US$370 million by Basra Oil Company (BOC) for expansion of the Central Processing Facility (CPF), located in the Majnoon Field, Southern Iraq.

Under the terms of the 34-month contract, the lump-sum engineering, procurement and construction (EPC) project scope of work includes two oil processing trains, able to process 200 kbopd.

Petrofac was previously awarded a contract in 2011 and delivered engineering, procurement and construction management for the execution and completion of the existing CPF at Majnoon.

Elie Lahoud, Group Managing Director, Engineering & Construction – Iraq, Oman and Saudi Arabia, commented:

“We have developed a significant track record in Iraq with enhanced local delivery, successfully providing services both onshore and offshore since 2010. This important contract win demonstrates Petrofac’s long-lasting client relationships and our ongoing commitment to extending our operations in this key market that complements our broad service capabilities, international experience and expertise.”

(Source: Petrofac)

SOMO Does Not Work This Way

By Ahmed Mousa Jiyad.

Any opinions expressed are those of the authors, and do not necessarily reflect the views of Iraq Business News.

Below is the full Arabic text and source of what was reportedly said by Abdul Alal AL-Yassiry, the Chairman of the Iraqi Centre for Economic and Investment Consultation in Karbala.

What prompts me to write this commentary is only the inaccuracy of data and information he cited regarding SOMO. In other words I am not defending SOMO; its staff can and should defend themselves. Also, I am not discussing here the corruption issue, which undoubtedly and emphatically plaguing Iraq, particularly by the political parties and provincial councils; these can be discussed separately.

I will provide what he says then make my comment.

First; He says “SOMO sales 4 million barrels daily-4mbd”!

Official data does not support this assertion at all; oil exports by SOMO during the last ten years increased from 1.879 mbd during July 2008 to 3.543 mbd in July 2018. Hence, his figure is absolutely incorrect.

Second; He also says “SOMO sales oil to the companies at $10 discount of the bourse price; this is called commission”.

This is also incorrect for the following reasons;

  1. SOMO does not sale all its oil through bourse (stock exchange) or according to bourse prices; however, SOMO sold a few shipments, of 2 million barrels each, through Dubai Mercantile Exchange-DME auctions since April 2017;
  2. SOMO’s marketing procedure and modality is primarily based on annually arranged “Term Contract” and the monthly export price is decided by a ministerial committee using at least three pricing equations for the three major market destinations (North America, Europe and east Asia) with different marker crudes taking into consideration the quality of the crude (API) and, specifically, sulphur contents;
  3. I have been following SOMO for years and never observed such discounts or “commission” of $10 a barrel! Between January 2016 and June 2017 oil export price for a barrel ranged between $22.21 and $42.2; can anyone believe or imagen that SOMO gives 45% and 23.7% of its officially adopted and declared price that easy without causing devastating outcry against it and the Ministry of Oil!!!

Third; in his explanation or justification for this “commission” it “compensates loading loses and what is known vaporisation”

Actual loading of oil into the tanker is rather rigorous operation done in the presence of the “measurement committee” and after issuing at least 13 different certificates; then SOC/now Basra Oil Company-BOC submits all these certificates to SOMO before loading oil to the tanker takes place.

Nothing in these certificates refers to vaporisation that justifies such huge discount or commission. Moreover, neither oil chemistry nor different metering instruments support his claims.

Fourth; Then he asserts, “What is important, these companies came through the political parties”

According to Iraqi and international data the annual number of companies that buy Iraqi oil- international oil buyers-IOBs during the last 15 years ranges between 34 to 45 IOBs. Most of these IOBs are well known and many of them were also SOMO’ clients well prior to 2003.

Therefore, to claim that these IOBs came through the political parties is, apart from been erroneous, it elevates the international networking and impacts of these political parties, which is laughable, but, more seriously, accuse these IOBs with “collusion”, which renders him subject to legal action.

Moreover, all IEITI annual reports (prepared by different international specialised firms) provide, among others, reconciliation of oil export revenues paid by IOBs, received by SOMO and deposited in a New York bank, and provide explanation of any discrepancies over small “materiality threshold”. None of these reports provide any information supportive of his allegations.

Fifth; He alleged that, “the political parties take $2 a barrel from that commission while the companies keep the $8”

But he did not explain or tell:

  1. When, where and how this 2:8 split of the commission was agreed between all political parties and all IOBs;
  2. Was SOMO involved in that agreement?
  3. Oil exports occur through many shipments to each IOB for each year, so what are the modalities each political party uses to secure its share from the commission for each shipment?
  4. What are the modalities for actual payments from each IOB to each political party; to which banks these payments were transferred and deposited and what are the material evidences for such payments etc.?
  5. How come there was no discrepancy in distributing that commission as if all political parties and all IOBs work in perfect harmony!!

From and based on the above comments I conclude:

  1. His knowledge and understanding of oil export system need serious revision and improvement;
  2. Allegations he made are very serious indeed and without strong, emphatic evidence, he could face legal action by SOMO/Ministry of Oil, each political party and each IOB;
  3. As he is the chairman of a consulting centre, what he had said undermines, damage and tarnish the credibility, objectivity and professionalism of his centre.

Ahmed Mousa Jiyad,

Iraq/ Development Consultancy & Research,

Norway.

12 August 2018

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11-08-2018  23:57  0  1102

اقتصادي عراقي :هكذا تستحصل احزاب السلطة بالعراق على الاموال

يرى رئيس المركز العراقي للاستشارات الاقتصادية والاستثمارية في كربلاء ان رواتب مجلس النواب ومجالس المحافظات لا تساوي جميعها  ارباح يوم واحد من الكومشن الذي تتقاضاها  احزاب السلطة  من البنك المركزي ووزارة النفط  مبينا  ان الانتخابات في ظل نفس الشخوص والرموز الحزبية والجهوية معناه بقاء كل شيء على ما هو عليه.

بين عبد العال الياسري لوكالة نون الخبرية بأمثلة والأرقام عن كمية المبالغ المستحصلة بطرق مختلفة بقوله ان  كل الاحزاب لديها مصارف اهلية وقد تقاسمت مبيعات البنك المركزي العراقي من الدولار حيث يباع يوميا من ١٥٠ الى ٢٠٠ مليون دولار بسعر ١١٨ الف دينار في حين وصل سعره بالسوق التجاريه الى معدل ١٢٧ الف وبعمليه حسابيه بسيطه فان معدل ارباحهم من ٥ الى ٨ مليون دولار يوميا!!! اي ١٥٠ مليون دولار شهريا ولا يقل عن ٥٠٠ مليون سنويا وبدون اي تعب فقط فواتير مزوره” , فضلا عن المنافذ الحدوديه وسيطره الصفره.

وأضاف مثلا اخر وهي شركة سومو النفط والتي تبيع يوميا ٤ مليون برميل نقط للشركات حسب سعر البورصه ناقص ١٠ دولار هو مايطلق عليه الكومشين هو مبلغ يعطى للشركات كتعويض للضائعات اثناء التحميل وما يعرف بالتبخر.المهم هذه الشركات جاءت عن طريق احزاب السلطه وهي تستوفي دولارين من الكومشن من تلك الشركات وهي تعطيها بكل سرور لانها رابحه ٨ دولارات وبحسبه بسيطه ٢٤ مليون برميل =٨ مليون دولار أرباح الاحزاب الحاكمه.

واختتم الياسري الذي كان يشغل منصب رئيس مجلس محافظة كربلاء سابقا حديثه ان من يعتقد ان مجالس المحافظات هي الممول للأحزاب الحاكمة فهو غير مدرك للامور فما تصرفه تلك المجالس ليست سوى نقطه في بحر ما تدره العاصمة لتلك الأحزاب“.

اسامة الخفاجي

http://www.non14.net/102748/

Mr Jiyad is an independent development consultant, scholar and Associate with the former Centre for Global Energy Studies (CGES), London. He was formerly a senior economist with the Iraq National Oil Company and Iraq’s Ministry of Oil, Chief Expert for the Council of Ministers, Director at the Ministry of Trade, and International Specialist with UN organizations in Uganda, Sudan and Jordan. He is now based in Norway (Email: mou-jiya(at)online.no, Skype ID: Ahmed Mousa Jiyad). Read more of Mr Jiyad’s biography here.

KRG Oil Export Revenues 2017 Assessed

By Ahmed Mousa Jiyad.

Any opinions expressed are those of the authors, and do not necessarily reflect the views of Iraq Business News.

Introduction

KRG’ gross oil export revenues, for 2017, stood at $7.9billion but it was left with only $3.9billion as net earnings.

When the Region receives less than half of its gross oil exports revenues, this is alarming situation indicating something has been seriously wrong and, thus, should be meticulously addressed in most transparent, truthful and evidenced-based manner. Otherwise, Kurdistan Region’s economy remains stranded in debt-trap through mortgaging future oil sales arrangements.

That is one of my conclusions after analyzing two half-yearly reports. 

Deloitte, a known international firm, was appointed by the Regional Council for Oil and Gas Affairs (RCOGA) of the Kurdistan Regional Government in Iraq (KRG) to review oil production, export, consumption and revenue for 2014 through 2017.

The company, i.e. Deloitte, produced so far two half-yearly reports for 2017 covering KRG, “Oil production, export, consumption and revenue”.  The first report was dated 13 January 2018 and covers the period 1 January to 30 June 2017; hereinafter refer to by H1-2017. The second was dated 31 July 2018 covering the period 1 July to 31 December 2017; hereinafter refer to by H2-2017.

After thoroughly analyzing these two reports I conclude that:

  1. they add very little qualitative or substantive improvements on previously published reports, though it took the company 22 months to produce a report for only one year;
  2. what was produced by Deloitte was far below the requirements of known transparency thresholds, e.g. EITI Standard, since too many important data and vital information were missing and not addressed;
  3. the fact that Deloitte adopts KRG formal views and uses data held and provided by MNR to produce its only one table of data, this surely tarnish Deloitte independency of reporting; and finally,
  4. these reports offer absolutely no analyses of the provided data, particularly their fiscal impacts on the economy of the Region.

This study is composed of four parts: part one provides brief description of the structure and components of Deloitte reports; part two discusses the integrity, credibility, transparency of the process and compliance with EITI Standard; part three unifies and analysis all data of the two half-yearly reports and part four offers concluding remarks.*

I-Structure of the report and its parts

The half-yearly report comprises three different parts that are produced and disseminated separately.

The first part is entitled and contains “Questions and Answers- Kurdistan Region – Iraq Oil & Gas Sector”, hereinafter referred to in this assessment as “Q&A part”.

This part is the longest and provides narratives on 27 selected topics; they mostly represent the official views of KRG and it is therefore, the same text in both half-yearly reports.

The purpose of this Q&A part is “to help readers better understand different sections of the report.”

The second part provides data on “Oil production, export, consumption and revenue” for the related period. This 3 page part comprises introduction, one data schedule/table and explanatory notes on the schedule.

The third part is one page of infographic with a few illustrative charts of the data provided by the second part. However, this part has not yet produced for the second half-yearly report.

Each part was produced in English, Kurdish and Arabic.

This assessment focuses primarily on the data contents of part two (in both half-yearly reports), since such data constitutes the core of the entire purpose of the report, and to the clarification given in “Q&A part”.

Before going further, a few words are due.

The tri-lingual report produced concurrently contributes to disseminate information among wider readership, particularly among the local citizens (mostly Kurdish) and other Iraqis (mostly Arabs).

Also, producing the report after six months’ time-lag (for 2017) is, in comparative sense, by far better than the National Secretariat of Iraq EITI-IEITI, which its last annual report was related to 2015!

Moreover KRG’ RCOGA anticipates that data for 1 January 2018 to 31 March 2018 to be publically available in August 2018.

Timewise, all these reports are commendable achievements that deserve support and encouragement.

 

Having said that, on the downside there are two remarks.

First, the related contract with Deloitte was signed, in a closed ceremony, early October 2016; intended to cover years 2014 to 2017. Hence, taking 22 months to produce one year report is hardly a commendable performance. Moreover, it is not known when the reports for the remaining three years (2014:2016) would be ready.

Second and most important, a thorough reading of the data, the methodology and provided explanation generates many more serious remarks, concerns and identifies missing vital items; as discussed below.

 

II-The Integrity, Credibility, Transparency of the Process and Compliance with EITI Standard

The World Bank proposed and sponsored Deloitte contract in 2016 and the Bank is partially financing Iraqi EITI (Extractive Industry Transparency Initiative) activities; in 2016, Iraq was an EITI compliant country.

Yet, Deloitte’ two half-yearly reports make no reference at all to EITI and they, in my humble views, are not in compliance with or adhere to the requirements, process and procedures outlined by EITI Standard. Needless to say, this Standard provides the most practical, comprehensive and widely adopted guide on transparency in the extractive industry. Moreover, transparency thematic issues and modalities of the Standard are much more than just data review as covered by the two reports under discussion.

In other words, absence of such compliance to EITI Standard would seriously undermine the credibility or claim of transparency of any report.

Therefore, it is legitimate to ask why the World Bank did not compel KRG and Deloitte to fully comply with EITI Standard in preparing the reports.

 

The above concern was premised on the observed immature claim of transparency and biased interpretation of these half-yearly reports. For example, KRG’MNR asserts Deloitte reports, demonstrate KRGs commitment to transparency and they set a precedent to further increase transparency.  And by the way this intentional flawed interpretation of such reporting is not peculiar to KRG; Iraqi authorities expressed similar position when IEITI issued its first annual report and such wrong understanding generates a sense of self-satisfaction, mission accomplished and complacency that eventually led to suspending Iraq status with EITI.

 

When the funding for the contract was approved , “the “big four” international audit firms (Deloitte; PwC; EY; KPMG) were called upon to submit their technical and financial proposals, and which were consequently carefully reviewed and assessed, according to the international standards of the World Bank, in order to shortlist the chosen firm based on clear criteria and key performance indicators.”

Excellent! However, no information was provided on any of these “clear criteria and key performance indicators”, what are they, how the “big four” were assessed and ranked accordingly and timelines for bidding, selection and contracting activities among others. No answers!!

Obviously, that indicates an impacting lack of process transparency prior, during and after the selection. Strangely enough, the report claims, “The selection of Deloitte to carry out the review, meanwhile, was also made based on a diligent procurement and tendering process”

Without providing supporting evidence-based information on how the entire process was conducted, its diligence and transparency becomes questionable.

 

Each contract for such mission usually and preferably has, or should have, a detailed Terms of Reference-ToRs; this contract does not have any since no mention was ever made to the ToRs in any part of the reports.  Why?

 

Absence of the ToRs for the mission probably explains the apparent confusion in the interchangeable use of different terms or concepts e.g. “review” “audit” “validation” as if they are the same. They are not!!

The following example exemplifies the confusion. In its welcoming statement on the first Deloitte report MNR says, “KRG can demonstrate its commitment to transparency in the reporting of oil production and revenue, and the reviews by Deloitte and EY will help to set a precedent to further increase transparency and strengthen independent auditing and verification in the Kurdistan Region.” (Bold added)

From technical, legal and operational perspectives these particular three terms or concepts are very different in their requirement and also implications. No doubt the “big four”, as reputable known international specialized entities, aware of the fundamental differences of the above three concepts; but the current two report do not demonstrate so!

 

The report asserts, “Our review was dependent on documentation provided by all stakeholders (oil producers, refineries, oil traders, the pipeline operator, and the KRG’s Ministry of Natural Resources), and the accuracy and completeness thereof.” (Bold added)

Fine! But again, the report did not produce any data or basic information that was provided by any of the above mentioned stakeholders. Refers to “stakeholders” without identifying them, except MNR, and without providing specific data pertaining to each of them shed big cloud of doubt on the accuracy and credibility of the “aggregated” data!!!

Colleting, verifying and validating process requires producing all data submitted, independently, by all involved stakeholders using specified templates, among other means. For example, all IEITI annual reports used such methodology though the number of involved stakeholders is much more than those in KRG and the magnitudes of production, export, domestic consumption and revenues are many folds that of KRG.

Moreover, the report assumed and relied on “the accuracy and completeness” of the provided documentation! But the report did not mention whether there was any test for such “accuracy and completeness”! Obviously, this “trust me/us” orientation and approach does not serve transparency very well, if at all!

 

The “trust me/us” approach was further evidenced by using another term, i.e. “misstatement”. By intention or omission, the two half-yearly reports affirm repeatedly and emphatically, “We did not identify any misstatements” regarding Oil export and consumption and oil sales during the covered year, 2017.

Such assertion and use of “misstatement” is surprising and causes suspicion. The reports deal with different stakeholders operating at various chains in the petroleum sector in the region; some operating internally while others externally; some are locals while others international etc., and surely each stakeholder has its own accounting, invoicing, contracting, reporting, auditing procedures. Experience, from IEITI (and also other EITI documents and reports) annual reports, tells that reconciliation of data provided by the stakeholders comprises many, significant and otherwise, “discrepancies”; the ToRs for such reports decide the “materiality threshold” for and the obligation to explain, by evidence-based, such “discrepancies”.

The point here, there are many reasons for “discrepancies” to occurs and that is usual and expected, but they have to be identified, quantified and explained.    “Discrepancies” are not necessarily “misstatements”; thus using the later term by Deloitte is ratter unfortunate since it is conceptually and methodologically inaccurate, operationally misleading and politically comforting.

 

Currency issue is not addressed by the report, which says, “Apart from export sales and IOC bonuses, oil revenues are derived from local sales and from the sale of refined products.”

The report presents the values of these oil revenues that are derived from local sales (and the valuation of swap operations ) and from the sale of refined products in USD; but it did not mention anything regarding the used exchange rates between Iraqi Dinars-ID and USD. When locally generated revenues have significance in total revenues, then the issue of exchange rate becomes important variable that needs attention and recognition. Moreover, exchange rate could be a source of “discrepancies”. Deloitte should cover this issue in its forthcoming, or when revising, reports.

 

Oil production is the core of any report, particularly when it comes to transparency in the extractive industry. Though the title of the second part of the report starts with “oil production”, the report does not cover oil production at all!

Moreover, the Regional Council for Oil and Gas Affairs-RCOGA, in its statement on the second Deloitte report, “reiterates its commitment to the people of Kurdistan and stakeholders in the sector that the two international audit firms, Deloitte and Ernst & Young, will continue to independently review the oil and gas sector, inclusive of all the streams.” (Bold added). Clearly enough “all the streams” covers production and the expression “will continue” implies ongoing covering of oil production streams; Deloitte reports did not provide such cover.

But Deloitte report says, “production contributions for the individual fields is subject to additional reconciliation and verification procedures and this exercise is currently in progress”. Production from the fields is the main pillar for the entire data, so how reliable and trustworthy are such provided data when reconciliation and verification of production data are not done?

Strangely enough and despite the above remarks, the report asserts, as discussed above, “We did not identify any misstatements” in “oil export and consumption” and “oil sales”; oil production was not covered!

On this issue the report says, “It should be noted that currently Deloitte did not report on the KRG’s oil production data, pending the completion of a historical oil production reconciliation for 2014, 2015 and 2016.”

The above statement could be interpreted that oil production reconciliation for 2017 has been done and ready. If so, what are the compelling justifications for not disclosing them in the released two reports?

 

In addition to the above rather substantive remarks, there are others that tarnished the quality of Deloitte reports.

 

A matter that worth mentioning is related to “oil sales” item. In the report for the first half of 2017 it is mentioned “oil sales data and the net amount received in the month by the KRG”, while the corresponding item in the report for the second half refers to “oil sales data and the net amount received in the period by the KRG.” (Bold added). If that is an error, it must be corrected, but if it is not then it should be explained.

 

The reports that took 22 months to cover, partially, 2017, provides no clear work plan, its phases, timeliness, consultation process (with whom, when, about what etc) and whether the final text of either of the two half yearly reports were subjected to any sort of consultation process with or discussing the findings; or they were presented on the base of “trust me/us”.

 

The reports refer to the Regional Council for the Oil & Gas Affairs by two acronyms: (RCOGA) and (RCOG); A possible sign of inconsistency or carelessness.

 

Apart from the fact that most contents of “Q&A part” represent KRG official views, except a few relating to Deloitte, this part of the report contains a couple of referencing inaccuracies e.g. in items 11 and 13.

 

Finally, the report warns, “No party, other than the RCOG, is entitled to rely on this report for any purpose whatsoever”. In addition to such statement is clearly anti-transparency, it emphatically contravenes items 18 and 19 in the “Questions and Answers- Kurdistan Region – Iraq Oil & Gas Sector” part of the reports.

 

In conclusion and based on the above remarks I am of the opinion that KRG, RCOGA and Deloitte should consider seriously these remarks and make the necessary modification, correction, explanation, clarification and addition, among others to improve the quality, credibility, integrity and usefulness of the reports.

 

Based on the above remarks there is apparent doubts on the integrity and credibility of the process that need addressing by Deloitte, KRG and RCOG/A.

I will turn now to data analysis of the two reports.

 

III-Data Analysis and Assessment

As mentioned earlier the second part in both half-yearly reports provides data on “Oil production, export, consumption and revenue” for the related period. This three page part comprises introduction (one page of almost the same text in both reports, except the dates of the covered period), one schedule/table comprising data (one page) and explanatory notes on the schedule (one page).

 

The one and only schedule covers data relating to four main items, each has many sub-items. The main items are: Oil Exports and Consumption; Pipeline Export Sales Analysis; Trucking Export Sales Analysis and Financial Flows. The following offers analyses for these four main items.

Before proceeding further, it is useful highlighting the following:

First, H1-2017 report says, “All figures in Schedule 1, … , are based on the records held by the KRG”,  while H2-2017 report says, “All figures in Schedule 1, … , are based on the records provided by stakeholders to the KRG.”

This is clearly a contradiction to what Deloitte asserts, “Deloitte corresponded directly with the various stakeholders to obtain and verify the information contained in Schedule 1”

Second and as mentioned earlier, the reports do not provide data on production though the title of the part of the report mentions “oil production”; this constitutes a major flaw;

Third, the reports do not contain analytical assessment of the covered data, I have done that hereunder;

Fourth, the two parts were not combined in a yearly 2017 report or provide the annual data in one table, so I have to do that;

Fifth, the Q&A part provides no explanation or clarification of the items covered by this part; it only lists them.

 

First: Oil Exports and Consumption  

This item covers eight sub-items and a total with half yearly aggregated data; all data are expressed in number of barrels (bbls)

To begin with there is a methodological and coverage problem relating to item “crud allocated to oil producers”;

First, it is neither included in the export data nor in the consumption data. So where had these volumes gone?

Second, why this item was not mentioned in the second half-yearly report? Where there no crude allocated to the oil producers or it was reporting error? The report for the second half clarifies this,   “Total exports and consumption does not include: (1) crude oil and condensate allocated as compensation to producers; and (2) condensate sales by Dana Gas. These amounts have not been included in total exports and consumption on Schedule 1 as the MNR is not entitled to any of the proceeds from the sale or consumption of this crude oil / condensate.” But again, that report gives no data on these two types of excluded volumes!! Also, Deloitte did not explain why it includes and quantifies this item i.e. “crud allocated to oil producers” in H1-2017 report and avoids that in H2-2017; is there any politics here?

 

Also different categorization, regarding “Local sales, Sales to refineries and swap” was applied in the H2-2017 report making it difficult, or meaningless, to make sub-item comparison.

 

On the aggregate, KRG total oil “exported & consumed” in 2017 was 201.85 million barrels (bbls), 55% of which was in the first half of the year while the rest in the second half. This 10 percentage points could be attributed to post-referendum in the Region of September that year and retaking of Kirkuk by federal authority.

 

2017 oil export occurred through pipelines and trucks totaled over 187 million bbls (94.8% of which was through pipelines). It is worth mentioning that piped export includes “KRG and NOC contribution”, as the reports mention, but they do not quantify both contributions.  On a periodic comparison, piped oil export declined from 95.8 million bbls in first half of 2017 to 81.5 million bbls in the second half.

 

Second; Pipeline Export Sales Analysis

This part of the report provides data on net oil lifted by the buyers through pipeline, gross value of crude oil sold and average barrel price.

Comparing the data in this section with the corresponding data in the first section indicates discrepancies, which the report attributes to “Increase (decrease) in storage at oil terminal”

Volume of net oil lifted by the buyers through pipelines totaled 177.773 million bbls for the entire year. However, it declined from 95.937 million bbls in the first half to 81.836 million in the second half; a decline by 14.7%.

These volumes had “gross value” of $7.61 billion, with only 7.1% decline in second half of the year compared with first half; that is obviously explained by oi price improvement, as discussed next.

Average oil price increased from $41.297/b to $44.584/b in the two parts of the year respectively.

 

Third, Trucking Export Sales Analysis

Unlike piped oil export, trucking exports registered significant improvements for all three sub-items in second half of 2017 comparing with the first half. Volume-wise, trucked exports increased from 4.231million bbls to 5.147 million bbls in the two halves of the year. Gross value of these volumes almost doubled: increased from $108million to $205million. Similarly, average price a barrel increased from $25.452 to $39.883 in the same period.

 

What should be highlighted is that pipeline-truck oil price differentials for the two halves of the year declined, in favor of pipeline exports, from $15.845/b to $4.701/b. In the meantime trucking transportation costs per barrel was $10 during H2-2017.

This calls for specific research to better understanding trucking export economics; why there was such a significant price differentials, what are the main causes, who are the trucking stakeholders and was there influential political connection with or interests for individuals, groups or parties in KRG and or Turkey.

 

Fourth, Financial Flows

Data provided in this section is probably the most vital for understanding fiscal conditions and performance of the petroleum sector in Kurdistan Iraq.

This section contains 11 items without, as mentioned earlier, comparison, analyses and explanation, except 3 notes on data relating to H2-2017 report.  However, notes provided on the other three sections of this report should be kept in mind.

To avoid possible confusion or mixing-up, I will use the same terminology used by the report as titles for the sub-items of the financial flows, but give and use in the analyses what each term could mean. But I must mention, at the outset, the number of items under this section in Schedule 1 are more, by two items, than those listed in the Q&A part; and again, no explanation was provide. Thus, this is added flaw of the report let be inconsistency or inaccuracy.

 

Gross value of crude oil sold (Piped and Trucked exports) USD

The report uses the above term, which implies valuation, but I will take this as gross revenues; the rationale is premised on the fact that what matters is the stream of revenues (gross and net) from exported (or sold) oil. Evidence is provided by item 10 in this section, which asserts “Net cash balance received..”. So, why Deloitte uses such ambiguous terminology??

Also this item deals with “exports”, but what about revenues from oil and refined product sold and swapped locally (as mentioned in “Oil Exports and Consumption” addressed above)!

 

Gross oil export revenues for 2017 totaled little more than $7.9billion. This would give an average price of $42.338/b.

Comparing these to the corresponding average oil prices realized by SOMO of $49.185/b respectively would give significant price-differentials in favor of federally marketed oil of $6.245/b; a 14.8% price differentials represent voluminous financial losses for KRG economy, which suffers from deep fiscal crisis. Why and what for!?

Deloitte justifies these price differentials this way, “In the case of KRG, a considerable portion of its oil is heavy and sour, which partly explains why it is sold at a discounted price. Competitiveness is another reason, whereby the disagreement with Baghdad and the limited exporting routes has meant that KRG had to render its oil exports more competitive in order to sell its output and generate critical funds for the Region.”

Again, Deloitte conceded to KRG /MNR views without discussing the economic and financial implications of such price differentials on the local economy of the region.

 

Net movement in buyer account balances (excluding advance payments) USD

Probably this item deals with payment made by KRG to what it borrowed from the oil buyers outside the advanced payment arrangements. But how, what deals and which oil buyer? No answer was provided!

This payment was mounted to $634 million and cuts 8% of gross revenues; too much for debt repayment!  

Moreover, Deloitte says nothing regarding the remaining balance of these debts (or estimate the balance of buyer account)!!

 

Interest and other charges from the buyers (USD)

This also represents payment by KRG to oil buyers in interest on debt from these buyers and “other charges”! These “other charges” were explained for the second part of the year only.

KRG paid more than $108million (almost 1.4% of its gross revenues) to oil buyers for “interest and other charges”.

The report mentions $13.2million in H2 2017 as interest charges and fees, but says nothing regarding such payment for the first half of the year; or the rate of interests and the balance of debt.

 

Payments made to oil producers by, or on behalf of the KRG (USD)

This is major item that cuts close to $1.2 billion (or 15.1%) of gross oil export revenues of the Region.

However, the report does not specify why and for what these payment were made: for cost oil, for profit oil, for previous entitlements etc.  Also, which producers were paid and how much for each were not mentioned.

 

Payments made to third parties by, or on behalf of the KRG (USD)

Another major cut of $1.3billion (16.8% from KRG gross revenues) was paid to undisclosed “Third parties”; who are they? How many of them? Where are they? Why did they take such a significant chunk from region revenues?

This is no simple matter; it symbolizes utter secrecy and trivializes and makes mockery of transparency claims that are repeated throughout these reports.

 

Payments made against arbitration settlement (USD)

KRG paid, from its export revenues of the second half of the year, more than $518 million in connection with an arbitration settlement agreement. The report did not disclose the name of the parties to that agreement or total payable settlement; it only says “The total settlement was higher than this amount and the balance was provided from other KRG revenue sources.” Another evidence for lacking transparency!

 

Net cash balance received by the KRG for the period sales USD

In addition to the above, other amounts of $247million were deducted from this year gross revenues, leaving only $3.892billion as net cash balance received by KRG; meaning KRG received only 49.1% of gross revenues.

But KRG received $1.436billion in “Additional advance payments made by buyers against future sales”; thus, the Region’s economy remains stranded in debt-trap by mortgaging future oil sales! Ironically, Deloitte reports and the Q & A part say nothing on these “advanced payments” and their specifics!

 

Concluding Remarks

KRG/MNR used to issue monthly reports the last of which was for October 2016. That practice was ended, paving the way for Deloitte to do the job, presumably better!

After 22 months, Deloitte’s report for only one year adds, if any, very little qualitative or substantive improvements on MNR’ previous reports.

 

What was offered by Deloitte’s reports, like those of MNR, are far below the requirements of known transparency thresholds, e.g. EITI Standard. Hence, claims of transparency by these reports were absolutely not supported by the contents of these reports; too many important data and vital information were not addressed.

 

Deloitte adopts KRG/MNR views and uses data held and provide by KRG/MNR to produce its only one table of data; this surely tarnish Deloitte independency of reporting.

 

When the Region receives less than half of its gross oil exports revenues, this is alarming situation indicating something has been seriously wrong and, thus, should be meticulously addressed in most transparent, truthful and evidenced-based manner. Otherwise, Kurdistan Region’s economy remains stranded in debt-trap through mortgaging future oil sales arrangements.

 

* For work necessities, all references and footnotes were removed

 

Norway

7 August 2018

 

Please click here to download Ahmed Tabaqchali’s full report in pdf format.

 

Mr Jiyad is an independent development consultant, scholar and Associate with the former Centre for Global Energy Studies (CGES), London. He was formerly a senior economist with the Iraq National Oil Company and Iraq’s Ministry of Oil, Chief Expert for the Council of Ministers, Director at the Ministry of Trade, and International Specialist with UN organizations in Uganda, Sudan and Jordan. He is now based in Norway (Email: mou-jiya(at)online.no, Skype ID: Ahmed Mousa Jiyad). Read more of Mr Jiyad’s biography here.

How Iraq Should Respond to the Strait of Hormuz Crisis

By Youssef Ali.

Any opinions expressed are those of the authors, and do not necessarily reflect the views of Iraq Business News.

President Donald Trump’s decision to pull out of the nuclear deal and sign the executive order to reimpose sanctions on Iran has had a significant impact on the global oil markets.

This move poses a severe threat to the economies of major oil exporting countries including Iraq, the second largest oil exporter in OPEC after Saudi Arabia and the third in the world after Russia and Saudi Arabia by 4.4 million barrel per day. Many analysts are reflecting on the effects that this conflict has on the economy of Iraq, which heavily relies on oil.

The sanctions mainly target the Iranian energy sector, which supplies Iran with foreign exchange and at the same time represents about 40% of revenues of its budget. The goal of the sanctions is to prevent Iranian oil exports by imposing sanctions on its customers.

Eliminating Iranian oil supplies will cause unrest in the oil markets around the world because it will lead to price surges, hence substantial economic losses on importing countries, which are already fearing a potential recession. That is why the U.S. tried to convince some of OPEC’s members to increase their supplies contrary to the recent deal amongst OPEC and non-OPEC countries to decrease production, and that in order to compensate Iranian supplies and prevent the disruption of the oil market to prevent damage to the global economy.

This move led to massive disputes between the major suppliers and pushed Iran to threat blocking oil exports from the Middle East altogether if it was to be prevented from exporting its own oil to the international market. If Iran follows through with its threat, it would mean massive losses for the Gulf countries, including Iraq whose economy is primarily depended on oil exports.

That said, completely stopping Iranian oil exports would be practically unlikely for the following reasons:

The nature of oil markets which is volatile and is based on trust. If the OPEC members in the Gulf Region, especially Saudi Arabia and UAE decided to replace the sanctioned Iranian oil supplies, the possibility alone that Iran would follow through its threat of closing the Strait of Hormuz would diminish the trust in that market. The supplies which pass through the strait would be considered as unstable, importers would start looking for alternate sources. This would destroy energy markets in the Middle East, meaning massive losses to the economies of all parties involved, including neutral states such as Iraq.

On a global basis, the mentioned encounter will damage the international economy that is fearing a potential recession, because this encounter, if it happens will cause a massive increase in global oil prices, leading to a domino effect that would create a hike in the prices of many goods and services.

This is why it is expected that while the sanctions will be implemented, all parties involved will allow for under-the-table arrangements in order to avoid such mutual destruction by allowing Iran to open an limited channel to export its oil, as it has happened in the past. Prior to signing the nuclear deal, UAE oil brokerage companies and banks played such a role before they were shut down after the recent pull out of the nuclear deal by the U.S. Allowing for such back-channels would mean that the sanctions will have their impact on the Iranian economy by disrupting the traditional oil export routs and limiting its revenue, yet allowing for a backdoor deal that will help the international community avoiding a conflict that could have grave impact on the global economy.

There is a role for Iraq to play in this crisis. The current policy of Iraq in regards to this conflict, in which it is trying to mediate between the parties involved is a wise policy. It is in the interest of nobody to escalate the situation in the Gulf region. On the other hand, Iraq could, given the circumstances,  gain enormous benefits by performing the same role that UAE brokerage companies and banks were playing, which would be a win-win for everyone involved.

In other words, Iraq can empower its private sector to establish companies and banks that facilitate the financial transactions related to the Iranian oil export, which would add important revenues to the economy of Iraq and increase the financial movement in the country; at the same time it would ensure the interests of Iran and decrease the likelihood of an encounter in the Gulf, which would serve the Gulf Arabs well.

Iraq must exploit this opportunity, especially since the Europeans countries along with Russia and China have already expressed their willingness to play this role. This opportunity could also be a significant incentive for Iraq to improve its ailing banking system to be able to implement such operation.

However, this is not possible without  negotiating with the U.S. on this issue in order to avoid being subject of the sanctions. The U.S. has in the past exempted Iraq from the sanctions for dealing with Iran, given its special circumstances. The U.S. also has expressed its readiness this time to allow some exceptions. This could be Iraq’s chance to negotiate an arrangement that serves everyone well, at least for the short-term.

On the long term however, Iraq has to find alternate routes to export its oil in order to avoid the increasingly unstable oil routes of the Arabian Gulf. Viable solutions could be the Iraq-Jordan pipeline that would start in Basra and end in Aqaba. Iraq needs to accelerate building this pipeline. Another option is the rehabilitation of the Iraq-Syria pipeline that begins from Kirkuk and ends in Banias, which, of course, would only be an option if the security in Syria improves.

Iraq is either the core, or constantly caught in the middle of many crisis that are shaking the Gulf region. These reoccurring crisis pose huge obstacles in front of rebuilding and investment. If Iraq wants to survive them, it needs to play a constructive role and aim for stability and profit for all parties involved.

Genel Energy Shares Rise on Increased Profits

Shares in Genel Energy jumped 12 percent on Tuesday morning after the firm announced increased profits in its unaudited results for the six months ended 30 June 2018.

Murat Özgül, Chief Executive of Genel, said:

Genel continues to deliver on its focus. We are generating significant free cash flow, averaging over $10 million a month in the first half of 2018 and moving us rapidly towards a net cash position.

“The impressive performance we have seen at Peshkabir will further increase cash generation, and the ongoing appraisal success provides the potential for both production to exceed guidance and for proven and probable reserves to increase.

“Growing cash generation provides a solid bedrock from which we are able to pursue multiple growth opportunities, with Bina Bawi oil offering exciting potential within the Genel portfolio.

“With 11 wells currently drilling or to be drilled on our producing assets in the Kurdistan Region of Iraq in H2 2018, of which eight are expected to be completed and adding to production by the end of the year, we are well positioned to both add value through the drill bit and further bolster our financial strength.”

Results summary ($ million unless stated)

H1

2018

H1

2017

FY

2017

Production (bopd, working interest) 32,100 37,100 35,200
Revenue 161.1 87.1 228.9
Net gain arising from the RSA 293.8
EBITDAX1 137.4 64.7 475.5
  Depreciation and amortisation (63.6) (45.7) (117.4)
  Exploration expense (0.5) (4.8) (1.9)
  Impairment of property, plant and equipment (58.2)
Operating profit 73.3 14.2 298.0
Cash flow from operating activities 125.1 114.2 221.0
Capital expenditure 34.1 41.0 94.1
Free cash flow2 70.1 54.6 99.1
Cash3 233.2 245.7 162.0
Total debt 300.0 422.8 300.0
Net debt4 63.8 158.3 134.8
Basic EPS (¢ per share) 21.3 8.4 97.1

 

  1. EBITDAX is earnings before interest, tax, depreciation, amortisation, exploration expense and impairment which is operating profit adjusted for the add back of depreciation and amortisation ($63.6 million), exploration expense ($0.5 million) and impairment of property, plant and equipment (nil)
  2. Free cash flow is net cash generated from operating activities less cash outflow due to purchase of intangible assets ($10.5 million) and purchase of property, plant and equipment ($29.5 million) and interest paid ($15.0 million)
  3. Cash reported at 30 June 2018 excludes $17.5 million of restricted cash
  4. Reported IFRS debt less cash

Highlights

  • Net working interest production averaged 32,100 bopd in H1 2018, in line with guidance
  • Peshkabir continues to exceed expectations, with the successful Peshkabir-4 and 5 wells boosting gross current field production to 35,000 bopd
    • Peshkabir-5 has successfully proved the westward extension of the field, with an increase in proven and probable reserves expectedto follow
  • Net working interest production currently c.35,500 bopd
  • $151 million of cash proceeds received in H1 2018 (H1 2017: $139 million), boosted by the impact of the Receivable Settlement Agreement and a higher oil price, with strong free cash flow generation of $70 million
  • Cash of $233 million at 30 June 2018 ($162 million at 31 December 2017)
  • Net debt of $64 million at 30 June 2018 ($135 million at 31 December 2017)

Outlook

  • 11 wells set to be under drilling operations across assets in the Kurdistan Region of Iraq in H2 2018, with eight expected to be completed and contributing to production by the end of the year
  • Cash generation expected to remain strong in H2 2018, with monthly free cash flow of over $10 million
  • Genel expects to be in a net cash position around the end of 2018
  • Field development plan for Bina Bawi oil complete and set to be submitted to the Ministry of Natural Resources, with Bina Bawi and Miran gas plans to also be submitted in H2 2018
  • 2018 guidance refined:
    • Production guidance of c.32,800 bopd reiterated, with the potential for this to be exceeded through an ongoing positive performance at Peshkabir and the resumption of drilling at Tawke and Taq Taq
    • Capital expenditure net to Genel is forecast to be $95-125 million (previously $95-140 million):

–          Tawke PSC and Taq Taq net to Genel of $70-80 million (previously $60-85 million), as work ramps up across both licences

–          Miran and Bina Bawi capex of $15-30 million (previously $25-40 million), as the work programme focuses on progression of the high-value oil opportunity at Bina Bawi

–          African exploration cost unchanged at$10-15 million, with the majority relating to seismic shooting offshore Morocco, which will be covered by restricted cash

–          Opex of c.$30 million and G&A of c.$15 million cash cost unchanged

More here.

(Source: Genel Energy)

Sicuro Group to partner Benaa Al Basra for Oil Ops Centre

Benaa Al Basra has been endorsed by the Iraqi Prime Minister’s office to make Basra’s Oil Operations Centre (OOC) operational.

The OOC has appointed Sicuro Group, a CMC-licenced, Iraq-experienced tracking, communications and information provider as the exclusive operating partner.

According to a press release from Sicuro, “this new partnership will ensure the required expertise and resources are applied to the centre in order to deliver timely information, civil and military authority liaison and coordination, incident management and emergency response to all international oil companies operating in Southern Iraq“.

The OOC will be operational from mid-August, delivering enhancements to the Basra Operations Command.

(Source: Sicuro)

Baker Hughes wins Iraq Flare Gas Contract

Baker Hughes, a GE company has been awarded a contract by the South Gas Company of Iraq (SGC) for fast-track solutions to help the recovery of flare gas for Nassiriya and Al Gharraf  [Garraf] oilfields. The importance of the project was highlighted by the attendance of several high-level officials, including HE Jabbar Al-Luaib, the Minister of Oil of Iraq, at the agreement-signing ceremony.

As per the agreement, BHGE will develop solutions for flare gas recovery at Nassiriya and Al Gharraf oilfields using advanced modular gas processing (NGL) technology developed in the United States and Italy. The project will utilize the modular skid-mounted Gas Processing technology to build 200 million standard cubic feet per day (MMSCFD) NGL plant and is expected to be completed by 2021.

The project will support the development of a fully integrated natural gas liquid (NGL) plant at Nasiriya that will recover 200 MMSCFD of dry gas, liquefied petroleum gas (LPG) and condensate.

The modular solution will support power plants with dry gas for efficient power generation, thus helping meet the growing demand for electricity using clean fuel. It will also contribute to curtailing the amount of gas flared in the fields of Nassiriya and Gharraf that otherwise goes to waste.

The advanced technology used to develop the plant will help produce more than 1,000 tons of LPG per day and recover more than 900 cubic meters per day of condensates, which will help to meet the domestic demand for cooking gas.

The surplus LPG and condensate will be exported, generating high revenue to the Iraqi government.  Contributing to the social and economic development of Nassiriya, the project is aligned with the vision of the Ministry of Oil and the government.

H.E. Jabbar Ali Al-Allaibi, Iraq’s Minister of Oil said, that this project is important achievement for the Ministry and marks the entry of a new phase for the sector, highlighted by time optimal utilization of flare gas, which is a major milestone in the government’s extensive efforts to drive a better future for Iraq.

H.E. also highlighted the prominence of this project for the province of Dhi Qar specifically and for Iraq in general adding that BHGE will provide it latest and advanced technologies and solutions to optimize the use of flare gas at the Nassiriya and Al Gharaf oilfields recovering 200 MMSCFD of dry gas daily.

Rami Qasem, President, MENAT & India, BHGE, said:

“As a local trusted partner to Iraq, BHGE is bringing advanced technologies and solutions that can help meet the Ministry’s goals for the industry. This contract is a testament to our continued commitment to supporting the Ministry of Oil’s strategic goals by deploying advanced flare gas solutions to build the country’s oil and gas infrastructure. The project will create more than 500 direct and indirect jobs for Iraqis, build local capabilities and strengthen the local supply chain.”

BHGE is the first and only company in the world to provide a fullstream offering covering products, services and digital solutions for the oil and gas sector, from upstream, to midstream to downstream.

BHGE has been a committed partner to Iraq for more than 50 years, with three offices in Iraq – Baghdad, Erbil and the Basra –  and more than 350 employees in country, BHGE continues to deliver its latest technology and expertise to its local customers.

(Source: Baker Hughes)