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Addicted to Oil Cash, and Seeking Help (Part 1)

Two of the Middle East’s most corrupt governments have signed up to a cutting edge anti-corruption initiative.  In part 1 of a 2 part series, Iraq oil expert Ahmed Mousa Jiyad explains Iraq’s commitment to the Extractive Industries Transparency Initiative.

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oil field oil wells

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Of the 32 countries in the Middle East and North Africa, only 2 have signed up to the Extractive Industries Transparency Initiative, the worldwide scheme initiated by civil society organisations with oil company involvement which “aims to strengthen governance by improving transparency and accountability in the extractives sector.”

Incredibly, the MENA region governments who have signed up to this “resource curse” beating plan are Iraq and Yemen, two of the most corrupt and unstable governments in the region. But EITI is an excellent idea, and has already had a major impact in Nigeria where major anti-corruption investigations have been boosted by its reports.

In the first of a two part series, I spoke to Iraq oil expert Ahmed Mousa Jiyad who has reviewed Iraq’s first EITI report after the country won “compliant status”- the seal of approval from EITI that oil and gas revenue flows are transparent. But a deeper analysis of the conditions required for EITI to be truly effective show that the scheme is not the silver bullet that will end the “resource curse” – at least not until there is full disclosure and a healthy civil society with sufficient access to information, two things Iraq and Yemen currently lack.

RT: If the recent US SEC law, proposed EU law and the EITI cover all International Oil Companies (IOCs) operating in Iraq, is there any chance for corruption to remain in Iraq’s oil and gas sector?

AMJ: The enforcement of the above mentioned modalities would surely work as both a deterrent and a punitive measure against corruption. However, the three of them are not sufficient to ensure what I call the “Transparency Value Chain” (TVC) which is peculiar to the “Extractive Industry” in Iraq and I would claim to all other developing countries.

The concept of the TVC basically aims to trace and account for all “resource and cash flows” pertaining to this industry. And these flows fall in three categories, firstly, payments by IOCs. These cover two main items, cash payments to the host country- such as signature bonuses and all other fees like corporate income taxes etc, and secondly  investment (in the related contracted project.)

The first items could be controlled and accounted for with a good degree of transparency and verification, though Iraq’s Report for 2010 did not cover them properly. But there is difficulty and resentment on the part of IOCs regarding their actual investment in the related activity.Without full disclosure of investment there can be no comprehensive and meaningful transparency.

The second category is resource flowcharts and revenues, which covers two items. The first is the export of resources (say oil) and the generated export revenues. The parties involved here, in Iraq’s case, are SOMO (Iraq Oil Marketing Company) and all International Crude Oil Buyers-ICOBs. All export revenues are in US Dollars, and currently should be deposited in the Development Fund for Iraq (DFI) accounts at the Federal Reserve Bank of New York  (FRBNY) which confirmed total export revenues in 2010.

The second item in this category is the domestic use of resources and generated revenues. The parties involved are the Ministry of Oil (MoO) through its Regional Oil Companies (ROCs) which deliver oil and gas to other entities such as refineries, power plants, industry etc. The MoO provides very aggregate data on the produced oil and gas from ROCs and their allocation to export and for domestic use (only Refineries, Power plants and flared gas) but no revenues are provided for.

While the first item is subject to confirmation by all reporting entities and thus easy to reconcile and account for all export revenues, the second item is not. So a comprehensive modern and functional metering system is critically needed to insure the material balance of petroleum between all producing ROCs and receiving entities. Without such a comprehensive modern and functional metering system the transparency in the petroleum sector would be compromised. (Lack of metering was a critical factor in energy sector corruption in Nigeria- RT.)

The third category of resource and cash flows covers payment by Iraq to IOCs, which can be done easily, since each IOC is contractually obliged to prepare and present annual work programmes and corresponding budgets. Moreover, IOCs are obliged to submit “invoices” on actual expenses to MoO for auditing, approval and payment purposes.

The significance of knowing and accounting for IOC investment is to use such information in the verification and reconciliation process of “payment” that Iraq will make to these IOCs once the process of investment recovery and payment of remuneration fees begins.

According to the service contracts (type of oil contract currently in effect in Iraq) the payment of dues to the IOCs might be in kind- crude oil. Such payment in kind would be technically and statistically included in oil export shipments, but no export revenues would result from them.

Unless a special category in oil exports data and terminology is created to cover this payment in kind and cater for its accountability, there will be too many discrepancies in the reported data on oil revenues. Such payment in kind had started already in 2011, and it is expected to increase significantly in volume and value in the years to come.

It is worth recalling that each of these contracts has duration of more than twenty years. Therefore, it is vital to create the capacities and make the necessary preparations as early as possible to cover these items fully, properly and effectively.

For a country such as Iraq, especially in its current conditions, it is vital to have all three flows under the watchful eyes of transparency.

RT: In the last report, Open Oil claimed that signature bonuses amounting to over $1 billion were not documented. While some of these are the form of a loan, another bonus was altered to be simply a payment. Can they do that?

AMJ: Technically and contractually it is incorrect to claim that the Report for 2009 did not account for or document the signature bonuses. The reason is simple: no signature bonuses were due in 2009.

According to the service contracts of the first and second bid rounds, the related signature bonus has to be paid within one month from the “effective date” of the related contract. This implies that all signature bonuses from the 11 contracts resulting from the first two bid rounds were paid in 2010.

The 2010 Report confirms and accounts for all $1.65 billion paid by IOCs and received by MoO. But the Report did not cover what I call “Bid Round Related Payments,” which include four types of payments.

Moreover, the Author and the Reconciler of the 2010 Report, PwC, (PricewaterhouseCoopers) was not successful in producing a good and coherent report. The PwC Report suffers from many flaws, inconsistencies and shortcomings. I was asked to give opinion on the Report, which I did, and communicated my assessment to Baghdad and others within my professional network.

Ahmed Mousa Jiyad’s verdict on the PWC report can be found here.

Looking ahead

As Ahmed Mousa Jiyad can attest, some progress has been made in shining a light on Iraq’s energy sector, but much more needs to be done. As mentioned at the beginning of the article, in order for any transparency initiative to be successful there must be a fairly free society so that people can access information, hold officials to account and affect change. This is a problem in Iraq, where the media have been increasingly under siege: according to Reporters Without Borders, Iraq ranks 152 out of 179 in the press freedom index. As we will see in the next part of this series, finding a role for civil society in the EITI process has been a stumbling block in Yemen.

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Photo Credit: Loco Steve

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