Iraq and the IEITI/ITR Reports

Review and Assessment of the Second Report from
Iraq Revenue Transparency
Ahmed Mousa Jiyad
Iraq/ Development Consultancy and Research
Norway
Mou-jiya@online.no
1
st
January 2013
I-Introduction
The Iraqi Extractive Industries Transparency Initiative-IEITI (now it is called
Iraq Revenue Transparency-IRT) issued on 27 December 2012 its second report
entitled “
Oil Export and Field Development Revenues in 2010
”, hereinafter
referred to as the Report. The Report was released two weeks after EITI
announced on 12 December 2012 that Iraq is compliant country.
I have good and regular contacts with many civil society organizations-CSOs
who are involved in the IEITI activities, and some asked for my opinion on the
Report.
After thorough and careful reading, this review and assessment was done in
responding to these requests, and as a contribution to the debate on the Report
inside and outside Iraq.
My intention is to improve the quality and contents of the future IRT reports so
that they would be able to present full, complete and verifiable transparency of
revenues in the country.
After a brief background note, I will identify and highlight the main conclusions
of the Report, then address specific problems and shortcomings of the Report
and concluding with further overall remarks.
II-Background Note
To release the Report the 21 members of the IRT’ Multi Stakeholders Group-
MSG (now it is called Board of Trustees-BoT) convened a meeting on 20
December 2012 and had “reviewed, discussed, and approved” the Report.
Seven members of the BoT were absent, including the three IOCs (CNPC,
ExxonMobil and Shell) and two Kurdish (KRG and CSOs) representatives.
The 93 pages Report is composed of Executive Summary, nine chapters, five
appendixes and a list of terms and abbreviations. It was authored by the
international
PricewaterhouseCoopers
-PwC, commissioned as “R
econciler
according to the EITI rules.
As the second report it surely represents both qualitative and coverage
improvement compared with the previous report. IRT and its BoT have done
good work in following the prescribed procedure normally adopted by EITI, and
to ensure the compilation and release of the Report on the specified deadline.
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The Report could, hopefully, contribute to bring to the forefront of national
attention the issues of transparency and accountability in an attempt to combat
the chronic corruption, which drains national wealth and undermines sustainable
development.
Basically, the Report addresses the “Reconciliation” of oil export revenues in
2010 through cross-checking of information requested from and provided by
many Iraqi and non-Iraqi “Reporting entities”. These include 8 Iraqi government
entities; all IOCs who paid signature bonuses in 2010; all 35 international crude
oil buyers-ICOBs who bought oil through SOMO (the Iraqi Oil Marketing
Company) and the Development Fund for Iraq-DFI accounts at the Federal
Reserve Bank of New York- FRBNY, which all Iraqi export revenues are
deposited in.
III-Assessment of the Report
The following is my brief assessment of the Report starting with the main
findings of the Report then address specific problems and shortcomings of the
Report and finally concluding with further overall remarks.
Vindication of Two Kinds of Revenues
The clearest conclusions of the Report are the vindication of the Iraqi data on
two items: oil export revenues and received signature bonuses in 2010.
Oil Export Revenues
Total oil export revenues in 2010 were $52.2 billion, confirmed by all reporting
entities.
However, there is a discrepancy of $185.1 million between what ICOBs and
SOMO had reported. Out of the 35 ICOBs only 14 reported discrepancy- 8 cases
more than what SOMO had reported and 6 cases less than SOMO’s.
The discrepancy
is almost one-third of one per-cent of what SOMO reported,
and less than the “Materiality Threshold” adopted by BoT of IRT in its meeting
on
18 October 2012.
The Report explain this normal discrepancy by the time difference between
loading shipments and actual payment according to SOMO’s working
procedure, which usually takes place at the end of the year.
This is also confirmed by the reconciliation results of the quantity of oil exports
reported by ICOBs, SOMO, the Ministry of Oil-MoO and the three Iraqi
regional oil companies (SOC, NOC and MOC), and also the data related to
exports through the terminals in the Arabian Gulf, through the Turkish port of
Ceyhan and the export to Jordan through trucks.
It is correct, therefore, to conclude that oil exports revenues in 2010 of $52.2
billion are reconciled and verified. This revenue reconciliation and verification
is confined to SOMO only and does not apply to oil production (and exported)
by KRG (which is discussed below later).
Received Signature Bonuses
2
The second reconciliation is related to the total value of signature bonuses
received by the MoO. All signature bonuses are known publicly as part of the
information pertaining to each bid round and related contracts. 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 Report mentions in the Executive Summary a total $
1.65 billion
in paid
signature bonuses
and the same amount appears in table 3.6.
But table 5.6 provides different and confused data. The totals in the last row of
this table are wrong: $1.55 billion (should be $1.65 billion); and the $12.5
million (should be $112.5 million.)
Also the Report provides no explanation why the
signature bonus of $112.5 by
Lukoil for West Qurna 2 was not reported in the table while the entire
signature
bonus of $150 million was credited, in the same table, as received by PCLD (of
the MoO).
The Report mentions (on p. 4 and in table 3.6) the $500 million signature bonus
for Rumaila is a loan and it “was repaid on 26 August 2012”. This statement
could be misleading and thus needs further clarification, which the Report did
not provide.
Initially, all signature bonuses for the contracts of the first bid round were
considered loans payable with interests and, “shall be amortized and recovered
over twenty (20) equal Quarterly payments beginning with the ninth Quarter
following the Quarter in which the Effective Date occurs”.
But due to protest by many professionals, including myself, and due to a legal
case raised before court of law, the MoO reversed direction. The signature
bonuses were then converted from loans to non-recoverable payments and
reduce the amount to $100 million each. But BP/CNPC had already paid the
signature bonus for Rumaila before the Ministry introduces the above mentioned
conversion.
Therefore, what the MoO had paid on 26 August 2012 should be less than $500
million, after deducting the $100 million signature bonus. The exact repaid
amount depends whether Iraq paid interest or not on the repaid amount. This
issue should be covered and clarified in the forthcoming IRT report for 2012 due
in 2014.
Regardless of this matter of repaying the $500 million the conclusion is that all
paid signature bonuses in 2010 are accounted for.
Other Serious Remarks on the Report
Apart from the above two reconciled items the remaining contents of the Report
have serious problems and prompt specific remarks and constructive
suggestions. These are addressed below.
Revenue reconciliation for the KRG oil production
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The Report has a chapter on KRG which provide no information on the subject
matter (oil revenues) in the Region.
It is worth mentioning that two KRG representatives had attended a meeting in
Paris on 17 July 2012 together with representatives from the World Bank, EITI,
and IEITI. Also two from the Region are members of the IRT- BoT: one
represents KRG and the other represents the Kurdish CSOs.
The Report says, “PwC (The reconciler) and IRT Secretariat had contacted KRG
representatives to obtain the required data for the reconciliation, however up to
the date of this report (27-December-2012), the information and data requested
for the reconciliation was not provided.”
It is not clear why the PwC did not directly write to the concerned parties in the
Region (mainly the IOCs and the Ministry of Natural Resources) using the same
process, templates and procedure that was used with others in the rest of the
country.
Also the Report shows that the MoO provided PwC with monthly data on oil
production in the Region, which was originally supplied by the KRG itself. But
instead of using such data PwC considered, “This data is for reference purposes
only and were not subject to reconciliation.”
Again it is rather surprising to see PwC declines from using such official data as
a starting point in the revenue reconciliation exercise in the Region. Also PwC
could have used the data for analytical purposes.
The above is a serious flaw on part of PwC: it ignores official data of direct
relevance to the subject matter, i.e., revenues in 2010, and focuses on issues that
belong to post 2010 (e.g., fourth bid round of 2012).
According to these data on oil production originally provided by KRG, the
Region had produced a total of 27,085,532 barrels. If we assume that all was
exported (through SOMO) and if we use oil export prices for “Kirkuk crude”
(exported by SOMO) that would generate a total of $2.1 billion in export
revenues. These foregone export revenues represent 4% of actual oil export
revenues Iraq had in 2010. Why did PwC ignore this significant matter?
Finally, the signed report of the IRT /BoT meeting dated 20 December 2012
indicates in item 4 that the BoT had reviewed the report by the MoO on auditing
development cost in the Region and in item 5 requests the National Secretariat
of the IRT to “redraft the section pertaining to the Region”. Unfortunately, the
Report provides nothing pertaining to items 4 and 5 above mentioned.
It is legitimate, therefore, to conclude that chapter seven on KRG is poor and
disappointing, and could have been much better at least analytically even with
the available formal data.
The
new remuneration formula in bid round four
The Report addresses this issue though bid round four was held in May 2012,
and thus falls, time-wise, outside the mandate of the Report. Moreover, the
Report presents distorted view on the model contract of that bid round. The
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Report asserts, “
Under the new remuneration formula, companies (the
contractors) will not be paid for oil, in which they pay subcontractors to
produce. The Iraqi government will deduct the cost of subcontracts from the
total production and then pay the remuneration on the remaining production. In
other words, if the total production is 1 million barrels and the contractor had
spent 300,000 barrels on a subcontractor, the contractor will receive a payment
for the remaining production only or 700,000 barrels. This new formula is aimed
at cutting the cost of subcontracts and effectively ties companies' compensation
to their cost-efficiency.”
The above could be misleading and incorrect interpretation, by intention or
omission, of the “cost production” provision, which was introduced to reduce
unreasonable cost inflating and gold-plating. Surely the new formula was not
intended against the subcontractors since each of the upstream projects involve
tens of subcontractors due to the established facts that contracted IOCs could not
do everything to execute their projects.
The above cited paragraph should be either deleted from the Report or redrafted
properly. The MoO should have its say on this issue.
The Mining Industry in Iraq
Chapter 8 of the Report on “
The Mining Industries in Iraq
” provides
descriptive narratives, which basically summarises reports and data provided by
the Ministry of Industry and Minerals-MIM.
Not only much of the contents of this chapter have no relevance to the subject
matter (Revenues in 2010) of the Report, but the Report reproduced the
information without examining the accuracy and credibility of some of the
reproduced material. In short the Report did not do good due diligence on the
provided data and information from MIM.
I would only cite two examples.
Section
8.1.2 Iraq’s current infrastructure
talks about the “Availability” of
almost everything in /for “The mining infrastructure, which currently exists in
Iraq”. It mentions the “Availability” of roads, electricity, landline telephone
network, railways, solid network of pipelines, water, and local expertise among
others.
It is rather surprising to read such confirmation of
“Availability”
in the Report
when in reality the contents of this section contravene completely what everyone
knows and talks about the state of the ailing infrastructure in the country and the
needed efforts to modernise it.
The second example relates to what the Report says, “Iraq currently uses its
natural gas” giving the impression that Iraq utilises all its natural gas. However,
the Reports says nothing about the flaring of the associated gas, which in 2010
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represent 51.3% of the produced associated gas, increased to 65.9% during the
first ten months of 2012.
This chapter provides absolutely no information or data on the “revenues”
generated from the mining sector.
Surprisingly, this chapter was well written and without any typing errors or
mistakes, as compared with the Executive Summary.
And this
could be
explained by the “copy & paste” method that might be used in reproducing
information and
and investment promotion
material from MIM
without careful
scrutiny, cross-checking and clear analytical framework.
Mandate and Business Ethics
The Report does not provide the mandate and Terms of Reference for the
Reconciler-PwC in preparing this Report. This is important to discuss the
contents of the Report and the efforts made in collecting, compiling and
analysing the information pertaining to the Report’s subject matter, which
unquestionably should be Revenues in 2010.
I found it rather questionable from business ethics premises that PwC askes for
information and uses its clients to provide such information that are not related
to the subject matter. In this respect I am specifically referring to Appendix.3
items:
Research on Iraqi Oil Markets (American, European, and Asian) by
SOMO
and
Research on Mining Extractive Industry in Iraq by Ministry of
Industry and Minerals.
In both communications PwC requests the two entities-SOMO and MIM to
provide available research material and reports they have on strategies, long
term plans, historical and forecasts studies, market positioning, Iraq’s economic
reform etc.
SOMO, for example, has a special template (SOMO Form 2) to provide detailed
information in 20 different columns covering every aspect of the exported
shipments in 2010. This template and the information therein are directly related
to the subject matter (revenues in 2010). But why should SOMO provide other
information, for example, on “Historic and forecasted data pertaining to
production, consumption, imports, exports and reserves regarding Iraqi Oil
Markets (American, European, and Asian) for the period 2007-2015.”?
It is legitimate to ask why PwC request so much detailed information on many
items covering past and future periods, and PwC should provide convincing
answers.
Requesting such information, unless it is clearly mentioned in the mandate and
terms of reference of the assignment contract and reflected in the final Report,
could constitute an abuse of mandate, collecting information for purposes other
than the subject matter, and serious breach of business ethics.
The above should also be taken in the contexts of what is missing in the Report,
discussed below. After all the Report is about transparency!!
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What is missing in the Report?
Important issues of direct relevance to “revenues” are missing and could have
been covered by the Report. However, as mentioned above, this has much to do
with mandate and terms of reference for the assignment of the Report.
I will only highlight two important missing items.
The first missing issue is the “
Domestic Revenues
” from the extractive industry
(petroleum and mining) in Iraq. The Report provides no information on this
issue. I know that both MoO and MIM have detailed relevant statistical data,
and based on such data domestic flowcharts of products & revenues could be
constructed; Involved entities are known; A material balances of
delivered/received quantities could be constructed; And finally fees paid/
received revenues could be accounted.
The inclusion of domestic revenues in future IRT reports is vital and necessary
to provide comprehensive view on the aggregate revenues. It also helps to verify
data on total production and allocation of, for example, oil and gas. This would
prompt MoO to expedite the process of installing modern metering system in all
chains of the petroleum networks: from the fields to domestic entities and export
terminals. Then and only then could one talk about full, accurate and verifiable
revenue transparency.
It is recommended that IRT begin from now to include domestic revenues within
its sphere of responsibility, make the necessary amendment to its legal charter
and develop the needed practical and operational modalities.
The second missing matter is
IOCs expenses in 2010
. The Report could or
should have a special chapter on this subject. PwC could have prepared a special
template and request the IOCs who had paid the signature bonuses to present
detailed information on their actual capital investment in the contracted field
development projects. This 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, approving and payment purposes.
The significance of knowing and accounting for IOCs 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
remuneration fees payment begins. According to the service contracts 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 results from them. Unless 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
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revenues. Moreover, 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.
Needless to say that
transparency value-chain
is a non-dividable issue
composed of three mutually enforcing and interconnected money-flow
components:
Transparent
investments,
transparent
revenues
and transparent
payments.
For a country such as Iraq, especially in its current conditions, it is vital to have
all three flows under watchful eyes of transparency.
In 2011 some IOCs began receiving payments in kind for both investment
recovery and remuneration fees, and Iraq paid some of the carried participation
interest of the “State Partner”. These payments in kind and cash would be
covered in the next IRT report for 2011.
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.
Final Observations on the Report
In addition to what was mentioned above the Report, unfortunately, has many
flaws and suffers from inconsistencies and shortcomings. Some are serious
others are simple, but this is not expected to appear in a report written by known
international consulting firm.
The followings are few examples, with my remarks highlighted in
bold
.
1-
In defining signature bonus the Report uses the term “concession license
agreement”.
This is inappropriate let alone wrong since all deals
singed by MoO are long term service contracts NOT concessions.
“Concession” and “service contracts” are totally very different
regimes in petroleum industry, which PwC should be aware!!
2-
The Report mentions that the $52.2 billion of oil export revenues
“had
resulted from crude oil sales to 34 international crude oil buyers.”
Actually they were 35 buyers
.
3-
The Report says “signature bonuses received by the International Field
Development Oil Companies operating in Iraq.”
Wrong, signature
bonuses paid not received by the IOCs.
4-
The Report says “from the table above”.
Not so, it should be the table
below.
5-
In item “1.5 Content and objective of this report” the Report mentions
eight chapters.
Not so, there are nine chapters in the Report.
Moreover, there is no reference to KRG Chapter 7 in this item 1.5.
6-
The Report asserts “According to the 2010 DFI audited financial
statements, the total export sales of petroleum was USD 52,202,645 as
reported by SOMO..”
Wrong, the DFI statement mentions “Thousand
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USD”. Thus the Reconciler did not read accurately and correctly the
statement and used the number in it without noticing the unit of
measurement. There is a huge difference between $52.2 million and
$52.2 billion!!
7-
The Report mentions “Central Iraq‘s Oil and Gas Sector‘s institutional
structure is dominated by the four IOCs and in which the Government is
the major operator for the time being.”
Wrong, not the four IOCs but
the four ROCs: Regional oil companies or NOCs.
Moreover, the
Government is not “the major operator”, these ROCs/NOCs are State
Owned companies. Obviously, those who authored this PwC Report
do not differentiate between Owner, Regulator and Operator,
especially in petroleum industry!!.
8-
The dates mentioned in section “4.2 Data collection” and in
Appendix 2
are inconsistent.
How is it possible the PwC received IOCBs responses
“As of 13 December 2011”, when BoT on 17 September 2012 “issued
instruction,.., requesting..
crude oil buyers (buyers) to report all
required data..”
Moreover, Appendix 2 says, “
Reporting Templates must be completed and
lodged with the IEITI Reconcilers by no later than 15 September 2011.
Obviously the three dates mentioned above are not consistent, and it
appears PwC did not cross-check the logical sequence of time.
9-
PwC requested the reporting entities to send all information to two
parties: one is the PwC Jordan with full name of contact person, postal
address and email address, but the other is anonym except the email
address (which appears to be in an American University). But why this
anonymity of this particular person(s) in a report about transparency?
Moreover, the Report does not mention the names of PwC team
members who conducted all necessary steps to produce the Report.
10-
Except Chapter 8 the remaining chapters and the Executive
Summary are surprisingly full of too many mistakes and typing errors.
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