developing iraq’s oil industry to maximize … iraq’s oil industry to maximize government net...

Developing Iraq’s Oil Industry to Maximize Government Net Revenues

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DEVELOPING IRAQ’S OIL INDUSTRY TO MAZIMIZE GOVERNMENT NET REVENUES

June 2009

Mohammad Mazin Hamid Ali Al-Moumen

Department of Economics Stanford University Stanford, CA 94305

[email protected]

under the direction of Professor Geoffrey Rothwell

ABSTRACT

This paper seeks to determine whether (1) nationalizing Iraq’s oil industry or (2) developing it through production-sharing agreements with international oil companies (IOCs) will generate the highest amount of net revenues for the Iraqi government. I propose to use the development of the Majnoon oil field in southern Iraq as a case study to answer this question. I consider a timeframe of forty years and construct the estimated revenues and costs associated with developing Majnoon under nationalization, comparing them to those associated with developing Majnoon under a PSA similar to that employed in Oman. I conclude that if the Iraqis believe that the Iraq National Oil Company (INOC) can be at least 87.5% as efficient as an IOC, then Majnoon would be more profitable under nationalization. If the INOC cannot be at least 75% as efficient, then Majnoon would be more profitable under a PSA. If the INOC’s relative efficiency is between 75%-87.5% (deemed the “Indecision Interval”), then Iraqi decision-makers must engage in further analysis to determine the profit-maximizing option. The case of Majnoon provides insights important for the decision-makers to consider when deciding on whether to nationalize Iraq’s oil industry or not. Keywords: Iraq, oil, Majnoon, international oil company, Iraq National Oil Company *Acknowledgments: I would like to thank Professor Geoffrey Rothwell for his guidance, kindness, support, patience, and mentorship; Junko Pierry and Koren Bakkegard for their administrative support; Tzvetan Tchoukalov, Andrew Nigrinis, and Bilal Badawi for their time and insight on analytical methods; Mohammad Ali, Ulugbek Baymuradov, Myles Bradley, Kevin Danna, Ali Habib, Samy Hamdouche, and Ahlia Kattan for their constant support;; the Alis and Hilfis for being family; and Mazin Al-Moumen, Nidal Douba Al-Moumen, Manaf Al-Moumen, and Mishaal Al-Moumen for being my spirit.


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1. Introduction

1.1 Developing Iraqi Oil

After three wars, 12 years of sanctions, and nearly 30 years of dictatorship, Iraq is

desperately in need of reconstruction. With the world’s third largest proven reserves of oil, the

importance of Iraq’s hydrocarbons industry to the country’s redevelopment is unquestioned. The

debate, rather, pertains to the means by which to develop this industry.

While some believe that nationalizing Iraq’s petroleum industry best serves the country’s

interests, others argue that privatizing the industry – through production-sharing agreements

(PSAs) – would be more beneficial for Iraq. To contribute to the debate, this paper examines the

possible development strategies of the Majnoon oil field in southern Iraq. I compare the

government’s net revenues from nationalizing Majnoon to its net revenues when employing an

Omani-style PSA, and I determine the breakeven efficiency level that the government must

achieve before privatization becomes the more lucrative option. The analysis concludes that Iraqi

decision-makers face an Indecision Interval of 70%-87.5%: if the Iraq National Oil Company

(INOC) can achieve an efficiency level – relative to an international oil company (IOC) – of

87.5% or greater, then the Majnoon study suggests that nationalization maximizes government

net revenues. If the INOC cannot achieve at least a 70% relative efficiency score, then a PSA

would maximize government net revenues. At any efficiency score between 70% and 87.5%, it is

unclear which development strategy is more profitable to the government, so further studies must

be conducted.

Concessions, PSAs, and nationalization are the three major methods employed to develop

a country’s hydrocarbon industry (Muttitt 2005). Under the concessionary model, a government

will grant an IOC, or a consortium of IOCs, the right to extract oil. Once extracted, this oil

becomes property of the IOC. In exchange, the IOC pays taxes and royalties to the country.


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Concessionary agreements were more common in the early 20th century, as they are currently

viewed as a threat to a country’s sovereignty. Today, concessions also cover smaller areas and

last for a shorter period of time. In 1901, William Knox D’Arcy signed a concessionary

agreement with the Persian Shah Qajar, securing exclusive rights to potential oil discoveries in

most of Iran for 60 years – this was the first Middle Eastern concessionary agreement (Kinzer

2003).

Under a PSA, a country will grant an IOC the right to extract oil (Muttitt 2005). The IOC

provides the capital investment necessary for exploration, infrastructure, and drilling, but the oil

legally remains property of the country. Once production begins, the IOC retains cost oil, which

is a percentage of production that makes up for the company’s costs and capital investment.

After the company recuperates its costs, the country and the IOC divide the remaining

production – known as profit oil – according to contractual agreements, with the state taxing the

IOC’s share. The Energy Information Administration (EIA) states that PSAs administer only

12% of the world’s oil reserves. Smaller nations with minor oil fields are most likely to employ

PSAs: lacking the financial means and technical know-how, and facing high extraction costs,

these countries engage in PSAs so that IOCs provide capital as well as de facto insurance in case

oil is not discovered.

The third form of development is nationalization. Currently employed in Iraq, the

nationalization model stipulates that a country owns 100% of the oil and has complete decision-

making power. The state may employ IOCs only through a technical service contract, in which

the IOC provides technical and consulting services in exchange for a fixed fee (Muttitt 2005).

The Iraqi government will not entertain any discussions on concessionary agreements

(Draft Iraq Oil and Gas Law 2007), as they are politically infeasible in a country still under

foreign military occupation. Thus, Iraq has two basic options: it can either develop its


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hydrocarbons industry nationally, with technical assistance provided by IOCs, or it can engage in

PSAs with IOCs.

According to the Iraq Study Group, a panel appointed by the US Congress and led by

James A. Baker, Iraq’s stabilization depends heavily on its economy (EIA 2007a). Hydrocarbons

are the staple of this economy: oil exports account for nearly 90% of the government’s revenue

and 60% of the country’s GDP (EIA 2007a). The U.S. Government Accountability Office

(GAO) states that Iraq generated a total of $90.2 billion in crude oil export sales between 2005

and 2007 (2008), while Iraqi Ministry of Oil (MoO) spokesman Asim Jihad announced that oil

revenues in 2008 alone amounted to $61 billion (AFP 2009).

Iraq, however, has failed to meet hydrocarbon production and export targets since 2004

(EIA 2007a). The Special Inspector General for Iraq Reconstruction (SIGIR) reported in January

of 2007 that the industry was plagued by procurement, transportation, and storage issues and

struggled with managing pricing controls and budget execution. The report also highlighted

corruption and smuggling as major factors hampering production.

Significant investment is thus required to modernize the hydrocarbons industry.

International organizations have estimated that total reconstruction costs for the oil, gas, and

electricity sectors will amount to over $30 billion (Sakmar 2008), and the World Bank estimates

that maintaining current oil production levels would require an additional $1 billion (EIA 2007a).

1.2 Oil in Iraq

Iraqi oil was discovered in the early 20th century, and it has been subject to periods of

nationalization as well as privatization (Muttitt 2006). In 1925, King Faisal granted a concession

to a consortium of IOCs known as the Iraqi Petroleum Company. Granting the IPC full control of

Iraqi oil for 75 years, the agreement drew widespread dissatisfaction among Iraqis, who also

objected to the revenue-sharing terms and the degree to which the IPC controlled the industry’s


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development. Thus, Iraq began nationalizing its oil in 1961, and by 1972 the state reclaimed all

Iraqi oil (Behn 2007). Today, the INOC controls virtually all oil production.

Iraq possesses 115 billion barrels (bbl) of proven oil reserves, according to the Oil and

Gas Journal (EIA 2007a). Nearly 65% of proven reserves are located in the south – particularly

in Basra – but there are also significant deposits near the northern cities Kirkuk, Khanaqin, and

Mosul, which account for 20% of Iraq’s proven reserves. According to the Iraqi government, the

country possesses nine “supergiant” fields and 22 “giant” fields. The southern fields historically

accounted for nearly two-thirds of production. But only three fields account for most of the

current production: North Rumaila, South Rumaila, and Kirkuk.

Estimates of the amount of unproven reserves vary: while oil industry consultant IHS

estimates that Iraq possesses up to 100 billion bbl of unproven oil, the US Geological Survey

believes this figure to be closer to 45 billion bbl (Blanchard 2007). Iraq’s former Oil Minister,

Thamer al-Ghadban, however, believes that Iraq possesses up to 214 billion bbl of unproven oil.

Appendix 1 shows production figures from 1960-2008. In 1960, Iraq produced an

average of 0.97 million bbl/day (EIA 2007b), and throughout this decade production generally

increased. In 1973, Iraq attained the 2 million bbl/day mark, but its most impressive feat

occurred in 1979: that year, the country produced approximately 3.5 million bbl/day, a 36%

increase over the previous year’s production and, to this day, the highest level achieved by Iraq.

But the onset of the Iran-Iraq War in 1980 put a dent in Iraq’s progress. By 1981, Iraq

was producing only 1 million bbl/day, and while this figure rose back to 2.9 million bbl/day in

1989, the Gulf War precluded a full recovery. In 1991, Iraq’s oil production plummeted: the

country produced an average of approximately 0.3 million bbl/day that year, an 85% decrease

from the previous year. This was a direct consequence of the heavy bombardment Coalition

forces inflicted on Iraq’s infrastructure as well as the economic sanctions imposed by the United

Nations, which prevented Iraq from exporting oil. Production remained below 0.6 million


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bbl/day until 1997, the year after the UN Oil-for-Food Programme was initiated. Under the

program’s stipulations, the government could export oil in exchange for what were deemed to be

essential products. This newfound demand for Iraq’s oil boosted production, and by 2000, Iraq

was producing nearly 2.6 million bbl/day. The 2003 invasion of Iraq reduced production to levels

below 1.4 million bbl/day; but since 2004, production has hovered around 2 million bbl/day.

While Iraq is currently producing nearly 2.4 million bbl/day, the MoO aims to increase

production to six million bbl/day by the end of 2010 (EIA 2007a). To achieve this goal, the Iraqi

government has prioritized the development of four southern oil fields: Halfaya, Nahr Umar,

West Qurna, and Majnoon. Majnoon ranks among the largest oil fields in the world, with an

estimated 21 billion bbl of oil (Muttitt 2005). Actual output has never topped 60,000 bbl/day, and

the field currently produces only 40,000 bbl/day. Yet Thamer Al-Ghadban, the former Minister

of Oil believes that Majnoon’s potential output could peak at around 600,000 bbl/day. According

to Deutsche Bank, this would entail development costs of approximately $4 billion. The Iraqi

government firmly believes that succeeding in modernizing the petroleum sector will depend

heavily on Majnoon’s development.

1.3 Legal Background

Developing Iraq’s hydrocarbon industry requires a hydrocarbon law that outlines the

terms dictating the development and management of Iraqi oil and natural gas. In 2007, the Iraqi

Cabinet approved the Draft Iraq Oil and Gas Law, which included stipulations for restructuring

Iraq’s Ministry of Oil, creating an Iraqi National Oil Company, and defining revenue-sharing

policy. Appendix 2 is a translated version of the Draft Law.

One of the central elements of the proposed legislation is the creation of the Federal Oil

and Gas Council (FOGC), which “would become the most powerful body in Iraq’s oil sector”

(Blanchard 2007, p. 4). Along with the power to approve or reject the transfer of exploration and


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production rights, it would also possess the authority to review all petroleum contracts and

determine all oil and natural gas industry policies. The Prime Minister or his nominee would

serve as the President of the FOGC, which would also include: the federal government’s

Ministers of Finance, Oil, and Planning; the Director of the Iraqi Central Bank; a regional

government minister from each region; a representative from any producing governorate not

included in a region; the CEOs of major petroleum companies like the INOC and the Oil

Marketing Company; and up to three experts in the fields of economics, finance, and petroleum.

The MoO’s mandate is also laid out in the draft law. Along with the FOGC, the MoO is

responsible for drafting legislation and federal petroleum policies (Blanchard 2007). It also

monitors activities in the industry and enforces legislation. It oversees petroleum operations,

ensures that documented costs are accurate and properly recuperated, and keeps track of

government revenues. The MoO also represents the Iraqi government in regional and

international forums, negotiating multilateral and bilateral treaties with other countries and

organizations. Essentially, the MoO is involved in proposing and enforcing legislation,

monitoring petroleum operations, and representing the Iraqi federal government within and

beyond Iraq.

The INOC is fully owned by the central government, but it “is financially and

administratively independent and runs on commercial bases” (Draft Oil and Gas Law 2007, p.

13). Its main function is to participate in exploration and production operations. It must sell the

crude oil it produces to the Oil Marketing Company at a price that covers delivery costs as well

as a “reasonable” profit. But it is also involved in the downstream processes of transportation,

storage, marketing, and sales. The INOC has the right to participate in international projects

involving both upstream (exploration, development, and production) and downstream

components, to acquire assets in local and foreign entities, and to form fully-owned subsidiaries

throughout Iraq. The federal government, however, must approve all decisions.


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The proposed law, however, is in legal limbo. Parliament has yet to approve the draft law

due to various points of contention (Blanchard 2007). While issues related to provincial

sovereignty, revenue sharing, and management of petroleum reserves remained pertinent, the

draft legislation’s provisions for foreign participation were the major stumbling block. While the

draft does not mandate the use of PSAs, Part 5 of Article 9 states, “The Model Contracts may be

based upon Service Contract, Field Development and Production Contract . . .” (Draft Oil and

Gas Law 2007, p. 16), essentially legalizing PSAs. Many Iraqis have expressed concern about

this de facto “denationalization,” pointing to the fact that Iraq would be the only major

petroleum-producing country in the region that would permit IOCs to control upstream

operations (Muttitt 2005).

1.4 What Course of Action Should Iraq Take?

Muttitt (2005) argues that Iraq should nationalize its petroleum industry. He looks at

PSAs employed in Russia, Libya, and Oman: Libya and Oman both share similar physical

conditions with Iraq, while Russia is the only country employing PSAs that has reserve amounts

comparable to Iraq’s. Comparing revenues generated under these three PSAs to expected

revenues from a nationalization scheme, Muttitt calculates that at a price of $40 per bbl, Iraq

would lose between $74 billion and $194 billion over the lifetime of the proposed PSAs. This

represents around two to seven times the current budget of the Iraqi government. Muttitt also

finds that the PSAs under examination would grant the oil companies annual rates of return

ranging “from 42% to 62% for a small field, or 98% to 162% for a large field.” (2005, p. 23) Oil

companies generally consider projects with internal rates of return of 12% to be profitable. He

also points out that Iraq’s oil-rich neighbors constitutionally ban PSAs, and that Iraq has more

lucrative investment-generating options. These include financing development through

government revenues, using future oil production as collateral to borrow money, or employing


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IOCs to provide technical and consulting services. He therefore concludes that Iraq should

nationalize its oil industry to maximize revenues.

The purpose of this paper is to determine whether Iraq should nationalize its

hydrocarbons industry or open it up for IOCs to develop. I compare (1) the net revenues the Iraqi

federal government would generate over a period of 40 years by nationalizing Majnoon to (2)

those that would be generated under a PSA similar to that employed in Oman. I initially assume

that the INOC is as efficient as any IOC, because Iraq can employ IOCs for consulting services

and technical expertise under a technical service agreement (this assumption is not founded, so I

correct for this by multiplying production figures under nationalization by values between zero

and one. This is to account for the national company’s inherent relative inefficiency and also to

price the value of the technical service agreement, which is treated as an inefficiency).

For now, I assume the INOC is as efficient as an IOC and that a service agreement is free,

and I find that nationalization generates approximately $18.8 billion more in net revenues than a

PSA. Once I account for the aforementioned inefficiencies, I calculate a threshold inefficiency of

approximately 81.5%: this means that nationalization remains the net revenue-maximizing

option so long as it is at least 81.5% as efficient as an IOC. The Iraqi decision-maker must

therefore decide whether Iraqi nationalization with the use of a service agreement would meet

this threshold.

I would propose that if Iraq believes that the INOC can achieve 86.5% efficiency, it

should proceed with nationalizing Majnoon. If, on the other hand, it does not believe the INOC

can achieve at least 76.5% efficiency, then nationalization should be abandoned. This leaves an

interval of 76.5%-86.5% efficiency, which I term the “Indecision Interval”. If the INOC can

achieve an efficiency level within the Indecision Interval, then further study would be required to

determine whether nationalization is the most profitable alternative. How I drove these initial

results will be discussed in subsequent sections.


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2. Literature Review

2.1 Productivity and Demand/Supply Functions

The comparison between a national oil company (NOC) – like the INOC – and major,

integrated IOCs like ExxonMobil, Shell, and BP is essential to analyzing how a country’s

hydrocarbons industry should be developed. But how exactly does one rate the performance of

different firms within the same industry?

The essential function of a firm is to convert inputs into outputs (Coelli et al. 2005). One

basic performance measurement is productivity, which is a measure of the amount of input

required to attain a certain level of output. The basic productivity equation divides firm output by

its inputs:

Productivity ≡ Outputs/Inputs (1)

Yet firms often utilize multiple inputs to produce single or multiple outputs. In such cases, inputs

would need to be aggregated into a single index of inputs. This facilitates the calculation of Total

Factor Productivity (TFP), which is a productivity measure that includes all factors of

production.

An industry is made up of firms with many different productivity levels. Yet the industry

as a whole has a theoretical frontier that represents the maximum production that can be attained

by any given amount of inputs. This is known as the production frontier, and it represents the

current state of technology in the industry. Any firm that produces at the production frontier is

considered technically efficient: for a given level of inputs, it has produced the greatest possible

amount of output. Figure 1 illustrates the production frontier:


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Figure 1: Production Frontier

Coelli, Timothy J, D.S. Prasada Rao, Christopher J. O’Donnel, George E. Battese. 2005. An Introduction to

Efficiency and Productivity Analysis. New York; Springer Science + Business Media, Inc.

The y-axis denotes the output produced by the inputs, which are represented by the x-axis. The

industry’s production frontier is depicted by the curve OF’. As seen, Firms B and C are at the

production frontier: they produce the maximum amount of output given the level of inputs they

utilize. Firm A, on the other hand, does not: although it uses the same amount of inputs as Firm

B, it produces less. Thus, Firms B and C are considered technically efficient, while Firm A is

not.

It is important to touch on the issue of productivity versus efficiency. Although a firm

may be on the production frontier and therefore technically efficient, it may still be able to

increase its productivity. Efficiency only means that a firm has maximized output at a given level

of input, but a firm may be able to achieve greater productivity at another level of input. This is

an issue of scale: the optimal scale of inputs is that level which maximizes productivity. Figure 2

illustrates this concept:


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Figure 2: Optimal Scale of Productivity



In this graph, productivity is measured as the slope of the line going through the origin and the

point of production (y/x ≡ output/input ≡ productivity). As Figure 2 illustrates, line OA has a

smaller slope than line OB, demonstrating that Firm B is more efficient than Firm A. However,

line OC has an even larger slope than line OB, illustrating that while Firm B is technically

efficient, Firm C is more productive. In fact, theoretically speaking, a firm that is not efficient

can technically boast a greater productivity level than another firm that is.

While the production frontier defines the maximum output level for any given level of

input, technical changes in the industry can shift the frontier out. This implies an increase in the

maximum output level for all input levels. Technical changes may be spurred by new technology

or improvements in production processes. Graphically, these changes shift the production

frontier outward.

Essentially, if a firm’s productivity increases, it is due to one of three effects: firm-level

efficiency may have improved and drawn closer to the production frontier, a firm may have

exploited scale economies, and/or technical changes may have occurred in the industry.


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In the case of a firm that utilizes N number of inputs to produce a single output, the

firm’s technical possibilities can be summarized in a production function:

Q = f(x) (2)

x ≡ (x1, x2,…, xN)’

Q denotes the quantity of output, while x is an N x 1 vector of inputs. There are four properties

that are generally assumed:

1. Non-Negativity: the value of f(x) is real, finite, and non-negative.

2. Weak Essentiality: at least one input is required to produce positive output.

3. Monotonicity: increasing input cannot reduce output. If x0 ≥ x1, then f(x0) ≥ f(x1). If the

function is continuously differentiable, this implies that the marginal product of all inputs

is non-negative.

4. Concave in inputs: any linear combination of vectors x0 and x1 will produce an output

whose amount is greater than or equal to the same linear combination of f(x0) and f(x1).

Mathematically, f[φx0 + (1-φ)x1] ≥ φf(x0) + (1-φ)f(x1). If the production function is

continuously differentiable, concavity implies that all marginal products – the output

produced by the last unit of input – are non-increasing. This is the phenomenon of

diminishing marginal productivity, which is calculated as:

MPn = δf(x) / δxn (3)

Figure 1 graphically illustrated the production function representing a single-input,

single-output firm, where output is plotted on the y-axis and input is plotted on the x-axis. In the


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case of a two-input firm, however, this is not feasible; rather, the two inputs are plotted on either

axis, while the output is held constant. Figure 3 illustrates this:

Figure 3: Isoquants for Two-Input Firm



In the graph above, the inputs are variable, while the output is fixed. The curves are known as

isoquants, since they represent the different combinations of inputs that produce a fixed quantity

of output. Another important element of the graph is the relationship between inputs: the

marginal rate of technical substitution (MRTS) measures the rate at which the input on the x-axis

must be substituted for the input on the y-axis to keep output unchanged. MRTS is calculated by

dividing the marginal product of the input on the y-axis by the marginal product of the input on

the x-axis, and multiplying the result by -1:

MRTSnm = - MPm / MPn (4)


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The relationship between the outputs and inputs is also important and is captured in the output

elasticity, which is a measure of the change in output quantity associated with changes in one of

the input’s quantity:

En ≡ %Δ in output quantity / %Δ in input quantity = (δf(x) / δxn) *(xn / f(x)) (5)

The relationship between firm output and individual inputs is captured by the inputs’

marginal productivities. Another important relationship is that between output quantity and

simultaneous input scaling. What happens to output, for example, when both inputs are doubled?

The answer to this question determines the scalability of a firm:

If f(kx) < k(f(x)), then the firm experiences decreasing returns to scale (DRS)

If f(kx) = k(f(x)), then the firm experiences constant returns to scale (CRS)

If f(kx) > k(f(x)), then the firm experiences increasing returns to scale (IRS)

In an environment of DRS, doubling inputs leads to a less than doubling of outputs. This may

suggest that a firm is too large, as increased inputs have a diminished effect on output production

(possibly due to overcrowding or less-centralized management). With CRS, doubling inputs

leads to a doubling of outputs, while IRS implies that doubling inputs leads to a greater than

doubling of outputs. A firm experiencing IRS should consider expanding, as growth could, for

example, facilitate the specialization of labor.

Transformation functions can be used to generalize the production function of a firm that

produces multiple outputs:

T(x, q) = 0 (6)

q ≡ (q1, q2, …, qM)’ ≡ M x 1 vector of inputs


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However, economists often circumnavigate transformation functions by one of two ways: either

they aggregate outputs into a single index measure, or they use price information and represent

technology using cost, revenue, and profit functions.

Up to this point, only technical efficiency has been discussed. With price information,

however, and the behavioral assumptions that firms minimize costs or maximize profits, we can

determine allocative efficiency – a firm’s ability to select the mix of inputs that produces a given

amount of output at minimum cost. Combining allocative and technical efficiency generates an

overall measure of economic efficiency.

A major firm objective is to minimize costs. In deciding the mix of inputs it will utilize to

do so, a competitive firm takes input prices as given. The cost minimization problem can be

depicted mathematically:

c(w,q) = min w’x so that T(q,x) = 0 (7) x

w ≡ (w1, w2,…, wN)’ ≡ vector input prices

Thus, w’x ≡ w1x1 + w2x2 + w3x3, which is the total cost faced by the firm. A firm’s cost function

satisfies five properties:

1. Non-negativity: costs cannot be negative.

2. Non-decreasing in w: an increase in input prices cannot decrease costs. Mathematically,

if w0 ≤ w1, then c(w0,q) ≤ c(w1, q).

3. Non-decreasing in q: an increase in output means an increase in costs. Mathematically, if

q0 ≤ q1, then c(w,q0) ≤ c(w, q1).

4. Homogeneity: multiplying all input prices by an amount k > 0 will lead to a k-fold

increase in costs. Mathematically, k[c(w, q)] = c(kw, q), for k > 0.


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5. Concave in w: any linear combination of vectors w0 and w1 will produce a cost which is

greater than or equal to the same linear combination of c(w0, q) and c(w1, q).

Mathematically, c[φw0 + (1-φ)w1,q] ≥ φ c(wo, q) + (1-φ) c(w1, q). This implies that input

demand functions cannon slope upwards.

In the case when the cost function is twice continuously differentiable, one method of deriving

the conditional input demand of a firm producing multiple outputs using multiple inputs is

known as Shephard’s Lemma:

xn(w, q) = ∂c(w, q) / ∂wn (8)

Essentially, Shepard’s Lemma states that the conditional demand for an input is equal to the

change in total cost associated with a change in the price of that input. If the cost function is

twice-continuously differentiable and satisfies the five aforementioned properties, then Shepard’s

Lemma shows that a firm’s input demand satisfies the properties of non-negativity, homogeneity,

symmetry (∂xn(w, q) / ∂wm = ∂xm(w, q) / ∂wn), and is non-increasing in w and non-decreasing in

q. Either Shepard’s Lemma or the constrained minimum cost approach can be used to determine

the minimum cost of producing a given output vector q.

Another approach taken by firms is that of maximizing revenues for a given input vector

x. For a multiple-input, multiple-output firm, revenue maximization can be illustrates as:

r(p,x) = max p’q so that T(q, x) = 0 (9) q

p ≡ (p1, p2,…, pN)’ ≡ vector output prices


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Thus, p’x ≡ p1q1 + p2q2 + p3q3, which is the total revenue generated by the firm. A firm’s

revenue function satisfies the properties of non-negativity, homogeneity, convexity in p, and it is

non-decreasing in p and x.

We have looked at how firms decide input demand to minimize costs and output demand

to maximize revenues. In reality, however, firms simultaneously decide on the levels of inputs

and outputs to maximize profits:

π(p,w) = max p’q – w’x so that T(q, x) = 0 (10) q, x

The profit function satisfies the properties of non-negativity, homogeneity, convexity in p and w,

and is non-decreasing in p and non-increasing in w. If the profit function is twice-continuously

differentiable, then Hotelling’s Lemma can be used to derive input demand and output supply:

xn(p, w) = - ∂π(p, w) / ∂wn (11)

qm(p, w) = - ∂π(p, w) / ∂pm (12)

2.2 Data Envelopment Analysis

The two most prominent methods of estimating the production frontier – and hence firm-

level inefficiency – are data envelopment analysis (DEA) and stochastic frontier analysis.

DEA involves the use of mathematical linear programming methods to estimate the

production frontier (Coelli et al. 2005). Graphically, the analysis builds a non-parametric

piecewise surface over firm data. After it has estimated the frontier, DEA determines the

efficiency of individual firms relative to this frontier. While previous authors had used similar

estimation techniques, DEA owes its prominence – and coining – to Charnes, Cooper, and


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Rhodes (1978), who proposed an input-oriented, constant returns to scale (CRS) model. Later,

papers by Fare, Gosskopf, and Logan (1983), and Banker, Charnes, and Cooper (1984)

introduced models assuming variable returns to scale.

Linear programming involves the maximization or minimization of a function, subject to

constraints. These constraints are vital: not only do they limit the domain of this optimization

problem, but their vertices also hold the optimization’s solution (Tchoukalov 2009).

Take the example of an industry with I firms, N inputs, and M outputs. The input matrix

A is made up of column vectors xi, which consist of the various inputs a firm employs for

production. The output matrix B is made up of column vectors ci, which represent the outputs

produced by a firm. Further, I define k as a vector of input weights and w as a vector of output

weights. The linear programming model solves for the values of k and w that maximizes each

firm’s ratio form productivity (Coelli et al. 2005):

max w, k (w’ci / k’xi) (13)

st w’cj / k’xj ≤ 1, j = 1, 2,…,I.

w, k ≥ 0

However, there are infinite solutions to this problem: for any solution (w, k), there are other

solutions in the form of (ρw, ρk). To come up with a single solution, the additional constraint of

k’xi = 1 is added. This yields a new linear programming problem:

max η , γ (η’ci) (14)

st κ’xi = 1

η’cj - κ’xj ≤ 0, j = 1, 2,…,I.


20

η , κ ≥ 0

The change in notation – from w to η and from k to κ signifies that this is a different linear

programming problem.

The dual nature of linear programming can then be utilized to simplify the problem.

Through duality, a linear program can be converted into another, unique linear program

(Tchoukalov 2009). In this conversion, the number of constraints becomes the number of

variables, and vice versa. The dual form has fewer constraints (Coelli et al. 2005), thus making

the problem easier to solve:

min ϕ ,µ ϕ (15)

st -ci + Bµ ≥ 0

ϕxi - Aµ ≥ 0

µ≥ 0

where ϕ is a scalar whose value is a firm’s efficiency score and µ is a vector of constraints. A

score of one implies that the firm is on the production frontier.

It is important to note, however, that the above analysis assumes constant returns to scale,

implying that firms are operating at optimal scale. But issues like regulation and imperfect

competition often prevent firms for operating optimally. Thus, the model must be adjusted to

account for production that exhibits variable returns to scale. To do so, the convexity constraint

of I1’µ = 1 is added to the above minimization problem to yield:


21

min ϕ ,µ ϕ (16)

st -ci + Bµ ≥ 0

ϕxi - Aµ ≥ 0

I1’µ = 1

µ≥ 0

where I1 is a Ix1 vector of ones. This constraint ensures that firms are only compared to those of

similar size, which was not the case in the CRS model.

2.3 Stochastic Frontier Analysis

Stochastic Frontier Analysis (SFA) is a second method of measuring firm-level

efficiency, introduced simultaneously by Aigner, Lovell, and Schmidt (1977), and by Meeusen

and Van den Broeck (1977) (Coelli et al. 2005). One problem with the frontier estimated under

DEA is it assumes that any deviation from the production frontier is due to technical

inefficiency; it does not account for measurement errors and statistical noise. Adding a random

variable representing statistical noise is a solution to this problem, which produces a stochastic

production function. Without the random variable, the production frontier can be written as:

yi = f(xi, β) * TEi (17)

where yi is the scalar output of Firm I, xi is a vector of inputs, β is a vector of technology

parameters to be estimated, and f(xi, β) is the production function. TEi is Firm I’s technical

efficiency, which is defined as the ratio of observed output over maximum possible output. Its


22

value lies between zero and one. A stochastic component accounting for random shocks

independent of the firm or technology can be added, modifying the above equation:

yi = f(xi, β) * TEi * exp {νi} (18)

Although each firm faces different shocks, it is assumed that the shocks are independent and are

described by a common distribution. TEi is assumed to be a stochastic variable with a specific

distribution. It can be rewritten as TEi = exp{-ui}, where ui ≥ 0. Assuming that the production

function f(xi, β) takes the log-linear Cobb-Douglas form, then the above equation can be written

as:

ln yi = β0 + Σ βnlnxni + νi - ui (19) n

where n is the number of inputs, νi is the “noise” component, and ui is the technical efficiency

component.

2.4 Studies on Firm-Level Efficiency

Eller, Hartley, and Medlock (2007) compare the revenue-generating efficiency of

national oil companies (NOCs) and private IOCs. They find that, in most cases, national oil

companies tend to be less efficient due to differences in the structural and institutional features of

a private firm (Eller, Hartley, and Medlock 2007). These differences tend to arise from different

firm objectives. A private firm focuses solely on financial objectives, while a national company

accounts for non-commercial goals – such as maximizing employment and “shifting resource

extraction away from the future towards the present” (Eller, Hartley, Medlock 2007, p. 1) – when


23

making decisions. In the petroleum industry, an NOC may also be forced to sell some of its oil

domestically and at subsidized prices. Such non-economic considerations hamper an NOC’s

ability to maximize revenues and thus make it less efficient at generating revenues for a given

level of inputs (labor and reserves).

Eller, Hartley, and Medlock (2007) also discuss principle-agent motivations as reasons

why private firms are more efficient at generating revenues. While managers generally try to

maximize their own income rather than their owners’, some privatization mechanisms limit this

problem. Tradable ownership shares, for example, give owners an incentive to monitor managers

and reduce inefficiency. On the manager’s side, maximizing the firm’s return is important to

maintain a good reputation, increase job security, and increase the value of shares or stock

options the manager may own. From an organizational standpoint, private firms’ decision-

making processes tend to be more decentralized and transparent. These qualities allow private

firms to better focus on strictly financial goals.

The authors collected data on 80 oil companies between 2002 and 2004, and they apply

DEA and SFA. SFA generates the following equation:

ln yn,t= 4.3644

(0.6561)+ 0.4847

(0.0666)* ln L

k ,n,t+ 0.0463

(0.0415)* lnOilRsv

k ,n,t+ 0.1695

(0.0493)* ln NGRsv

k ,n,t

+ 0.3022(0.0307)

* t2003

+ 0.4767(0.0312)

* t2004

+ vn,t! u

n

(20)

where y ≡ revenue, L ≡ labor, OilRsv ≡ oil reserves, NGRsv ≡ natural gas reserves; t ≡ time

effects (prevailing market prices of oil and gas, which are not constant, affect revenue), n refers

to the firm under study, vn ≡ stochastic component assumed to be normally distributed, un ≡ time-

invariant technical efficiency component, and e^(-un) ≡ firm-specific efficiency. The authors


24

conclude that major IOCs – BP, Chevron, ConocoPhillips, Exxon Mobil, and Shell – are the

most efficient firms, while NOCs tend to be the least efficient. Results are found in Appendix 3.

Al-Obaidan and Scully (1991) examine the efficiency of state-owned or controlled

enterprises – which they define as organizations that are at least 30% government-owned – in the

petroleum industry relative to private firms. They note that private firms and state-owned

enterprises (SOEs) differ in the function they seek to maximize: owners of private firms allocate

resources to their highest-valued use within their firm, and thus their objective function has a

single maximand (Al-Obaidan and Scully 1991). SOEs, on the other hand, pursue multiple goals,

many of which are mutually exclusive. They differ from government entities in that they are

susceptible to market pressures, but government intervention softens these market forces.

Because SOE ownership cannot be easily transferred like shares of a private firm, it is difficult to

meter an SOE’s performance; this reduces the incentive for management to achieve optimal

results. This, along with government intervention, contributes to a misallocation of resources.

The authors “estimate an Aigner-Chu deterministic frontier function, a maximum

likelihood stochastic frontier function, and a maximum likelihood Gamma frontier function” (Al-

Obaidan and Scully 1991, pp. 237) to examine a firm’s ability to use assets and employees to

produce output. They find that NOCs are only 63% - 65% as technically efficient as private firms

(Eller, Hartley, and Medlock 2007), and they conclude that “state firms could satisfy the demand

for their output with something less than half of their current resource inputs simply by being

converted to private, for profit enterprises” (Al-Obaidan and Scully 1991, pp. 245-246).


25

3. Methodology and Empirical Evidence

3.1 Revenue Assumptions

The purpose of the paper is to determine whether nationalizing or privatizing Majnoon

will generate the most net revenues – discounted over time – for the Iraqi government. This

entails calculating the revenues and costs associated with each development strategy. As

previously mentioned, I begin with the assumption that because Iraq can employ IOCs to provide

technical and consulting services, production figures under nationalization are equivalent to

those under a PSA. I first estimate the revenues and costs associated with nationalizing Majnoon

over 40 years, from 2009 to 2049. This length of time is convenient for comparisons involving

PSAs, which often last between 25 and 40 years.

The project begins with a three-year exploration and feasibility period, during which no

production is achieved. Thus, Iraqis will only be able to extract Majnoon oil beginning in 2012. I

estimate that Majnoon will produce only 30% of peak production in 2012, 60% of peak

production 2013, and 90% of peak production in 2014. According to Muttitt, three years of

production are required before a field begins to produce at its peak levels (2005). At that point, a

large field like Majnoon will continue to produce at its peak for 20 years, after which its

production declines exponentially at a rate of three percent per year. Thus, Majnoon will produce

at its peak level of 600,000 bbl/day from 2015 until 2035. After that, its production will decrease

exponentially at rate of three percent until 2049.

To calculate revenue, I need to predict the real price of oil over the next forty years. If the

price of oil is expected to rise at a rate greater than the risk-free real interest rate, then an oil-

producing nation has the incentive to reduce current production: the country expects that

producing oil in the subsequent time period will generate more revenues than producing it now,

selling it, and generating interest from the funds (Book 2 – Economics 2008). If, on the other


26

hand, the price of oil is expected to rise at a rate less than the risk-free real interest rate, then a

country has an incentive to produce more oil now, sell it, and invest the funds to generate the

risk-free rate. Based on this Hotelling Valuation Priciple (HPV), the equilibrium real price of oil

is expected to grow at the risk-free real interest rate. It should be noted, however, that this only

takes financial aspects into account. Other strategic, political, and utilitarian factors also affect a

country’s rate of extraction and the price of oil.

I assume that the risk-free real interest rate is 3%, and I use the current price of crude oil

– $56/bbl – as the initial real equilibrium price of oil. Therefore, I predict that the price of oil in

2010 will average $56*(1.03), or $57.68; in 2011, the price will be $56*(1.032), or $59.41, and

so on. Table 1 shows these calculations up to 2049:


27

Table 1: HVP Forecast of Real Price of Oil, 2009-2049

Year Real Price of Oil Prediction (2009 $)

2009 56.00

2010 57.68

2011 59.41

2012 61.19

2013 63.03

2014 64.92

2015 66.87

2016 68.87

2017 70.94

2018 73.07

2019 75.26

2020 77.52

2021 79.84

2022 82.24

2023 84.71

2024 87.25

2025 89.86

2026 92.56

2027 95.34

2028 98.20

2029 101.14

2030 104.18

2031 107.30

2032 110.52

2033 113.84

2034 117.25

2035 120.77

2036 124.39

2037 128.12

2038 131.97

2039 135.93

2040 140.00

2041 144.20

2042 148.53

2043 152.99

2044 157.58

2045 162.30

2046 167.17

2047 172.19

2048 177.35

2049 182.67


28

3.2 Costs Under Nationalization

There are five major costs associated with oil production, and those are feasibility,

development, fixed, and variable costs, along with the cost of a technical service agreement

(Muttitt 2005). The onset of a project consists of a feasibility study to assess whether a field

contains economically-extractable oil. Muttitt estimates that feasibility costs amount to

approximately $10 million a year for the three years prior to production, which I will assume.

Development costs consist of expenditures associated with developing a production plan and

establishing facilities to optimize production. Deutsche Bank pegs Majnoon’s development costs

at approximately $4 billion. I assume that half of these costs – $2 billion – are incurred up front

(2009), while $1 billion is incurred in 2010. An oil production project typically incurs

development costs until two years after peak production, so I divide the remaining $1 billion

equally from 2011 until 2037. This amounts to an annual cost of approximately $37 million.

Fixed and variable costs are also accounted for in this analysis. Muttitt estimates that

fixed costs generally amount to 5% of development costs, which in Majnoon’s case would

amount to $200 million. Iraqi authorities estimate the variable costs per barrel of oil to be

approximately $1-$1.5. I assume a variable cost of $1/bbl until the field ceases to produce at

peak level, at which point variable costs rise to $1.5/bbl. Multiplying the per-barrel variable cost

by the production amount yields total variable costs (VC).

The final – and most difficult – cost that must be accounted for is the cost of the technical

service agreement. Terms of such agreements are often kept secret and rarely published, thus

making it difficult to estimate their cost. For now, I assume that the technical services provided

by the IOC are free; I will account for this cost later in the analysis.

Net revenues are calculated by subtracting yearly costs from yearly revenues. But the

Iraqi decision-maker is interested in the net present value (NPV) of future net revenues, because

the value of future payments are discounted due to the opportunity cost of delaying payment: the


29

revenues could have been invested in other revenue-generating projects. NPV is the discounted

difference between future cash inflows and future cash outflows. It compares the value of a

dollar in different periods, taking into account rates of return. Generally, if the NPV of a project

is positive, a decision-maker should engage in the project. In my analysis, however, I am

comparing the NPV of nationalization to the NPV under a PSA to determine which project

possesses a greater NPV. NPV is calculated as follows:

NPV = ∑ [(Rt-Ct) / (1+r)t (21)

where Rt ≡ revenue at time t, Ct ≡ cost at time t, and r ≡ discount rate. How should a nationalized

oil company discount future cash flows? One method is to simply use the country’s real interest

rate: the Iraqi Central Bank has currently set a nominal interest rate of 11% (Iraq Directory

2009), while inflation has hovered around 5% (Index Mundi 2008), producing a real interest rate

of 6%. However, another method is to calculate the social discount rate; this is the discount rate

applied to social investments, and it measures the rate at which a society is willing to trade

present for future consumption. The social discount rate can be estimated by summing a

country’s population growth rate with its depreciation rate (Rothwell 2009), as this summation

yields the rate at which a country’s economy must grow to sustain itself. Iraq’s population

growth rate in 2009 is 2.5% (CIA 2009). There is little information on the rate of depreciation of

Iraq’s hydrocarbon capital. The depreciation rate of India’s oil and gas pipelines in 2005 was

adjusted to 3.17% (Mukul 2005). After years of destruction and underinvestment, Iraq’s

hydrocarbon infrastructure is sure to be in worse condition than India’s. Thus, I estimate that

Iraq’s hydrocarbon capital depreciation rate is 8.5%. Adding this rate to the population growth

rate yields an estimated social discount rate of 11%. I discount future cash flows from the oil


30

field using the social discount rate, as it is tailored to social projects and, in this case, to the oil

industry as well (later I will test this assumption).

Appendix 4 presents all of the revenues and costs associated with nationalization,

discounting future cash of net revenues over the next 40 years from Majnoon. The socially-

discounted cash flows are worth $98.5 billion in today’s terms.

3.3 Development under an Omani-style PSA

Under the terms of the Omani PSA, the IOC pays neither royalties nor taxes to the

government (Muttitt 2005). Cost oil is limited to 40% of production, and profit oil is split 80:20

in favor of the government. The government rewards the IOC with a $3 million bonus for

discovering oil in a field and with a $1 million bonus for every 25,000 bbl/day increase in

production levels, until the IOC produces at a rate of 150,000 bbl/day. For its part, the IOC

compensates the government with a signing bonus of $250,000.

This analysis adopts all of these terms except for the signing and discovery bonuses.

Since the presence of oil has already been confirmed in Majnoon, the hypothetical PSA

employed for Majnoon will not include a discovery bonus. As for the signing bonus, it is not

reflective of the sheer potential of Majnoon’s production. In 2007, Reliance Industries, India’s

largest private-sector conglomerate, paid a signing bonus of between $15.5 - $17.5 million for

the rights to explore and develop two Iraqi Kurdish blocks (Earth Times 2009). I therefore

include a signing bonus of $25 million for the Iraqi government as part of the PSA analysis, to be

paid up front.

Appendix 5 presents the revenues and costs associated with developing Majnoon through

a PSA. The timeline and production levels of the Majnoon field under the PSA are assumed to be

identical to those under a nationalized scheme. This is based on Muttitt’s assumption that, with a

technical service agreement, a national oil company is as efficient as the major international


31

companies. More formally, this assumption states that the INOC would be at the production

frontier of the oil industry, achieving the highest level of industry efficiency (an assumption that

will later be relaxed). Therefore, production under the PSA is identical in timing and value to

that under nationalization. With the exception of the additional $25 million in the first year of

project development (2009), government revenues under both scenarios are identical.

Under a PSA, all costs are absorbed by the IOC, which subsequently recuperates them

through cost oil. The feasibility, development, fixed, and variable costs incurred by the IOC are

identical to those incurred by the government under nationalization. The IOC begins to

recuperate cost oil once it achieves production (2012). In this year, it will begin recuperating the

capital costs it has injected into the project, which are illustrated in the table below:

Table 2: IOC Capital Costs, 2009-2011

Year Feasibility Costs ($)

Development Costs ($)

Fixed Costs ($)

Variable Costs ($)

Total Costs ($)

2009 10,000,000 2,000,000,000 200,000,000 0 2,210,000,000 2010 10,000,000 1,000,000,000 0 0 1,010,000,000 2011 10,000,000 37,037,037 0 0 47,037,037

Total 3,267,037,037

Thus, by 2012, the IOC wants to recuperate approximately $3.267 billion in initial capital costs.

However, under the terms of the PSA, it can only recover up to 40% of annual revenues, which

amounts to $1.608 billion (0.4 x 2012 revenues). Subtracting this payment from the $3.267

billion initially invested by the IOC, the IOC still needs to cover $1.659 billion of capital

investment. Thus, in 2012, the IOC will claim this amount, along with new capital investments

made that year, when recuperating cost oil:


32

Table 3: IOC Capital Costs, 2012

The cost oil from 2012 is recuperated from revenues in 2013. Forty percent of these revenues

amounts to $3.313 billion, which is greater than the cost oil of $1.762 billion. Therefore, in 2013,

the government reimburses the IOC only $1.762 billion, covering all of the IOC capital

investments up to this point. From 2014 until the end of the project, the IOC recovers whatever

annual development and variable costs it incurs. These costs do not amount to the 40%-of-

revenue limit imposed on cost oil.

Once cost oil is accounted for, the government keeps 80% of net revenues, while the IOC

lays claim to the remaining 20%. Finally, the government must pay the IOC its production

bonuses: as seen in Appendix 5, this amounts to payments of $2 million in 2012, $3 million in

2013, and $1 million in 2014.

After accounting for the signing bonus, cost oil, the 80:20 net revenue split, and the

production bonus, we are left with government net revenues, which must be discounted to

generate the NPV of these future cash flows. It is true that a national oil company’s discount rate

will differ from that of an IOC, but the cash flows being analyzed in each situation belong to the

government. Thus, I will use the same discount rate as that employed under nationalization, 11%

(we will test this assumption later).

Appendix 5 reveals that the NPV of net revenues under the PSA amounts to $79.7 billion,

which is approximately $18.8 billion less than the NPV of net revenues under nationalization.

However, the inherent relative inefficiency of a national company – even with technical support

Year Unpaid capital costs from 2009-2011 ($)

Feasibility Costs ($)

Development Costs ($)

Fixed Costs ($)

Variable Costs ($)

Total Costs ($)

2012 1,658,855,529 0 37,037,037 0 65,700,000 1,761,592,566


33

from an IOC – has yet to be taken into account. Neither has the cost of the technical service

agreement.

3.4 Comparing Alternatives

To this point, the analysis has revealed that nationalizing Majnoon would generate $18.8

billion more in NPV than developing it under a PSA. Yet the analysis made two assumptions that

must be relaxed. The first assumption made – namely by Muttitt – was that the INOC, with

technical support from an IOC, would be as efficient as an IOC. In fact, this is not realistic: if

providing technical services makes a national oil company as efficient as an IOC, this would

make a country favor a technical service agreement rather than a PSA. This is not in the best

interest of the IOC, as it prefers engaging in a PSA. Thus, I must account for the inherent

inefficiency of the INOC relative to a major IOC.

The second assumption that must be relaxed is related to the cost of a technical service

agreement. Until now, my analysis has assumed that the technical service agreement is free. But

it is not, and if accounted for as a cost to the government under nationalization, it may be

expensive enough to make a nationalized Majnoon less profitable than Majnoon under a PSA.

Unfortunately, it is difficult to assess the INOC’s efficiency relative to an IOC, and it is

even more difficult to determine whether the inefficiency is manifested in the form of lower

production levels, higher costs, or both. At the same time, determining the cost of a technical

service agreement for a major field like Majnoon is challenging, because negotiations between

governments and oil companies tend to be highly secretive.

The first step in dealing with these issues is to treat the technical service agreement as an

“inefficiency”: it is a cost incurred by a national oil company, but not by an IOC. Therefore, it

contributes to the relative inefficiency of the INOC. This allows me to classify both crucial

assumptions in terms of inefficiency.


34

My analysis estimated that nationalization generates $18.8 billion more in NPV, not

accounting for the assumptions. The Iraqi decision-makers must now determine whether

nationalization is still more profitable when accounting for the cost of technical services

provided by an IOC as well as the national company’s relative inefficiency. Thus, the decision-

makers are interested in determining the threshold efficiency level, the point at which

nationalization becomes less profitable than a PSA. With this knowledge, they can use

information on the cost of a potential technical service agreement as well as information on the

inefficiency of the INOC – both of which they are privy to – to determine whether

nationalization generates greater net revenues. As such, it is not required for me to determine

these values. All I need to provide them with is the threshold efficiency level, and from there

they can use the information available to them to make a decision.

Therefore, I must address the general issue of inefficiency – whether in the form of

production, costs, or the technical service agreement – and I do so through production

reductions. Specifically, I multiply the production levels under nationalization (Appendix 4) by

factors less than one. In summary, I treat the two assumptions as inefficiencies, and I account for

all inefficiencies as production reductions.

For example, to test whether nationalization is more profitable when the INOC is 90% as

efficient as an IOC, I multiply the annual production figures in Appendix 4 by 0.9 and observe

the change in the NPV of the net revenues generated. If net revenues under nationalization

remain greater than $79.7 billion – the NPV of net revenues under a PSA – then I multiply

production by a smaller percentage, say 85%, and continue to test different efficiency levels until

I find the level at which the NPV of net revenues first dips below $79.7 billion. At this

inefficiency level, a PSA is more profitable for Iraq. Appendix 6 reveals that the threshold

efficiency level is approximately 81.5%; this is the point at which net revenues are

approximately equal under both development strategies.


35

4. Initial Conclusions and Sensitivity Analysis

4.1 Efficiency Intervals

The decision-makers will need to price inefficiency information in terms of barrels of oil.

For example, if the technical service agreement costs $3 billion up front, they must divide this

number by the current price of a barrel of oil ($56), to come up with 53.5 million barrels of oil.

Other inefficiencies can also be translated into barrels of oil in a similar fashion. In this way, the

decision-makers can shift all inefficiencies to production reductions and assess whether

nationalization remains more profitable. To generate an efficiency “score” for the INOC, the

decision-makers would subtract the barrels representing total inefficiency – I term these

“Inefficiency Barrels” – from the total barrels produced under a PSA, then divide this number by

the total barrels produced under a PSA:

Efficiency % =[(Total Barrels PSA –“Inefficiency Barrels”) / Total Barrels PSA] x 100 (22)

In Iraq’s case, if this percentage is greater than 81.5%, then the decision-makers would generate

more net revenues by nationalizing Majnoon. If not, then they should consider engaging in a

PSA with an IOC. However, due to the estimative nature of many of the assumptions, I propose

that the Iraqi government distinguish between three efficiency intervals, which are created by

first adding five percent to the threshold efficiency level and subtracting five percent from it:

efficiency levels below 76.5%, between 76.5%-86.5%, and greater than 86.5%. At efficiency

levels greater than 86.5%, the analysis would unequivocally conclude that nationalization of

Majnoon generates more net revenues. At efficiency levels below 76.5%, Majnoon’s

nationalization would undoubtedly generate less net revenues that under a PSA. Efficiency levels

between 76.5% and 86.5% represent the “Indecision Interval”. If the Iraqis believe the INOC can


36

achieve an efficiency level within this interval, then it is unclear which alternative is more

profitable. Further study would be required to determine the optimal strategy.

What relative efficiency can the INOC realistically achieve? This is a difficult question to

answer, but Iraq’s previous experience of nationalizing its oil industry provides interesting

observations. The country began nationalizing its oil in 1961, a process that was complete by

1972. In 1960, when foreign oil companies had concessionary control over the industry, Iraq was

producing an average of 0.97 million bbl/day. As the nationalization process intensified in the

1960s, production growth showed no signs of stagnation, with the one exception being 1967.

This suggests that Iraq was able to increase production despite its movement towards

nationalization.

In 1972, however, production declined by 13% from the previous year, hinting that the

completion of the nationalization process that year may have contributed to the production drop.

But 1973 witnessed a 37% rise in production, and by 1975 production spiked to 2.26 million

bbl/day. In 1979, at the dawn of the Iran-Iraq War, this figure rose to 3.48 million bbl/day.

These numbers suggest that once Iraq had fully transitioned to a nationalized oil industry, its

production rose dramatically.

This alone, however, is not enough evidence to conclude that the INOC was more

efficient than the IOCs. First, these figures only illustrate output performance, but they say

nothing about the amount of input required to achieve them. While Iraq was producing more oil

under nationalization, it is quite possible that the INOC had to spend much more than an IOC

would have had to in order to achieve these figures. Thus, I can make no conclusions on the

INOC’s relative efficiency. The second issue is that while Iraq’s oil industry was nationalized, it

had already benefited from years of capital investment and knowledge exchange from the IOCs.

Thus, the IOCs’ effects on the INOC cannot be completely isolated. Finally, while production

increased under nationalization, there is no telling how much more it may have increased under


37

IOC management. The observed increase may have just been a result of technological

advancements in the industry in general. Thus, little can be concluded from Iraq’s nationalization

in 1972, but it is clear that maintaining and even increasing absolute production levels is not

unimaginable.

4.2 Sensitivity Analysis: Testing the Assumptions

I have determined the implications of the various efficiency intervals, but I made

assumptions to do so. How much do these assumptions actually affect the results? I conduct a

sensitivity analysis on three of the major assumptions made: the discount rate, the price of crude,

and Majnoon’s peak production level. If the sensitivity analysis finds that manipulating these

factors has little effect on the efficiency results that I have driven, this would legitimize my

analysis’ conclusions. If, however, the efficiency results change drastically, then more research

will have to be conducted to estimate these three factors more accurately.

I first test the discount rate assumption’s effect on the findings. In the analysis, I

discounted future net revenues by 11%, because I assumed this value to be Iraq’s social discount

rate. However, Iraq’s current real interest rate is 6%, and Muttitt used 12% in his analysis,

claiming this is a typical rate of return that oil companies use to evaluate projects (2005). Thus, I

recreate the analysis, discounting net revenues by 3%, 6%, 9%, and 12%; I compare the

threshold efficiency level determined under these discount rates to the threshold under my initial

assumption of 11%:


38

Table 4: Discount Rate Sensitivity Analysis

Holding all other factors constant, the threshold efficiency increases with the discount

rate, from a level of 80.5% at a discount rate of 3% to a level of 82% at a discount rate of 12%.

Thus, the Indecision Interval also increases slightly with the raise in the discount rate. As the

discount rate rises, the INOC must achieve a higher relative efficiency score for nationalization

to be as profitable as a PSA. The intuition behind this result is that, while raising the discount

rate reduces the present value of all net revenues, this effect has more of an impact for the

government under nationalization. In a nationalized scheme, a government sacrifices current

revenue – in the form of capital investments – in return for keeping 100% of all net revenues

from the project. Thus, the benefit of nationalization materializes in the future, while its costs are

incurred now. By raising the discount rate, this benefit is reduced, thus making nationalization

less attractive relative to a PSA. To compensate for this effect, the INOC must achieve a higher

efficiency score.

The sensitivity analysis finds that manipulating the discount rate has no major effect on

the efficiency threshold. Increasing the discount rate from 3% to 12% causes the threshold to

increase by only 1.5%, a change that represents only 1.8% of the original threshold value. Thus,

my decision to discount net revenues by 11% does not – on its own – have a significant impact

on the results.

The second assumption I test is the real interest rate used to predict crude oil prices. I

assumed a risk-free real interest rate of 3%, but I will now test rates of 2% and 5%:

Discount Rate 3% 6% 9% 11% 12%

PV Net Rev. Nationalization, $ Billion 396.9 218.8 132.2 98.5 86

PV Net Rev. PSA, $ Billion 318.3 175.9 106.6 79.7 69.7

Threshold Efficiency Level 0.805 0.810 0.810 0.815 0.820

Indecision Interval

75.5%-

85.5% 76%-86% 76%-86%

76.5%-

86.5% 77%-87%


39

Table 5: Risk-Free Real Interest Rate Sensitivity Analysis

The threshold efficiency was 81.5% at the 3% risk-free rate. Increasing the risk-free rate to 5%

only reduces the threshold efficiency to 81%, while decreasing it to 2% only increases the

threshold to 82%. Consequently, the Indecision Interval change only slightly. The changes are

not large, suggesting that fixed growth price forecasts, while important to revenue figures, may

not have a considerable effect on the difference in net revenues between the two development

options.

I also test the results’ sensitivity to the assumption made regarding Majnoon’s peak

production. Based on Muttitt’s analysis, I assume that Majnoon’s production peaks at 600,000

bbl/day (2005). I track how the threshold efficiency level changes at a peak production of

400,000 bbl/day and 800,000 bbl/day:

Table 6: Peak Production Sensitivity Analysis

As I increase peak production, the threshold efficiency level decreases, but only slightly: at

400,000 bbl/day, the INOC must achieve an efficiency score of 82%; at 800,000 bbl/day, this

score must be 81%. This is a 1% change that represents only 1.23% of the original threshold

Risk-Free Real Interest Rate 2% 3% 5%

PV Net Rev. Nationalization, $ Billion 85.6 98.5 132.4

PV Net Rev. PSA, $ Billion 69.4 79.7 106.8

Threshold Efficiency Level 0.820 0.815 0.810

Indecision Interval 77%-87% 76.5%-86.5% 76%-86%

Peak Production Level, 1,000 bbl/day 400 600 800

PV Net Rev. Nationalization, $ Billion 64.7 98.5 132.4

PV Net Rev. PSA, $ Billion 52.6 79.7 106.9

Threshold Efficiency Level 0.820 0.815 0.810

Indecision Interval 77%-87% 76.5%-86.5% 76%-86%


40

efficiency score. Consequently, the Indecision Interval does not undergo a sizable change. The

peak production assumption on its own does not have a significant impact on the threshold

efficiency results.

It is, however, possible that simultaneously manipulating multiple assumptions can have

a significant effect on the results. Thus, I create three charts displaying all of the possible

efficiency threshold outcomes obtained with different assumptions. Each chart displays the

efficiency outcomes of manipulating prices and discount rates, while holding peak production

constant:

Table 7: Efficiency Thresholds at Peak Production = 400,000 bbl/day


2% 3% 5%

3% 0.805 0.805 0.8

6% 0.81 0.805 0.805

9% 0.815 0.81 0.81

11% 0.815 0.815 0.81

12% 0.82 0.815 0.815

Risk-Free Real Interest Rate

Dis

count

Rate

2% 3% 5%

3% 0.805 0.805 0.805

6% 0.81 0.805 0.805

9% 0.81 0.81 0.805

11% 0.815 0.81 0.81

12% 0.815 0.815 0.81Dis

count

Rate



41


With the above figures, the Iraqi decision-makers can essentially determine the threshold

efficiency that the INOC must meet at different assumptions regarding price, discount rates, and

peak production. If, for example, the decision-makers believe that the price of oil over the next

forty years will grow at a rate of 3%, that peak production will be 800,000 bbl/day, and they

choose to discount future net revenues at 6%, then Table 9 tells them that the threshold

efficiency the INOC must achieve is 81%. Because of the estimations made in the analysis, I

create an Indecision Interval of ± five percent around each threshold efficiency score. Thus, in

the above example, if the INOC can achieve any score greater than 86%, nationalization is more

profitable; if it can only achieve a score less than 76%, then a PSA is more profitable. Any score

in between would require further study before the Iraqis make a decision.

The general trend that emerges from these figures is that the INOC needs to achieve a

higher efficiency score when changes in assumptions reduce the present value of net revenues. In

each of the three figures, the efficiency threshold increases as one moves down or to the left of

the figure. Such movements lower the assumed price and raise the discount rate, thus lowering

net revenues. The bottom-left cell always contains the highest threshold level. Thus, while the

figures present efficiency scores that the INOC must meet to be more profitable than a PSA, it

2% 3% 5%

3% 0.805 0.805 0.8

6% 0.81 0.81 0.805

9% 0.815 0.815 0.81

11% 0.82 0.82 0.815

12% 0.825 0.825 0.82Dis

co

un

t R

ate



42

also suggests to the Iraqis that as net revenues decline, the INOC will have to achieve a higher

efficiency score to remain more profitable than a PSA.

What is most important to note, however, is that the threshold scores vary only slightly as

we manipulate the multiple assumptions. The lowest threshold calculated in the sensitivity

analysis is 80%, while the highest is 82.5%. This difference of 2.5% is represents only 3.1% of

the original threshold efficiency of 81%. This implies that my assumptions have a very slight

impact on the results, thus bolstering the conclusions of the analysis.

While my analysis concluded that the Indecision Interval lies between 76.5% and 86.5%,

the sensitivity analysis allows me to create a broader and “safer” Indecision Interval of 75% -

87.5%. I do so by adding five percent to the highest efficiency threshold calculated under the

sensitivity analysis and subtracting five percent from the lowest efficiency threshold. Essentially,

if the Iraqi government does not believe the INOC can achieve 75% efficiency, then it should

without a doubt engage in a PSA. If, on the other hand, the INOC can achieve greater than 87.5%

efficiency, then the Iraqis should definitely nationalize Majnoon.

4.3 Other Issues to Consider

My analysis has concluded that the Iraqi government’s Indecision Interval lies between

75% and 87.5%, which suggests to the Iraqis that nationalization should at least be considered at

any efficiency level 75% or greater. Yet the analysis has its limitations.

The first limitation of the analysis is that it only looked at Majnoon’s development. While

Majnoon is one of the world’s largest fields whose development is a priority for the MoO, Iraq

possesses nearly 70 other fields (Al-Mehaidi). Does a case study of Majnoon capture all of the

issues associated with developing Iraq’s entire industry?

One factor to consider is project financing. In answering whether it should nationalize its

oil, Iraq must account for how it will secure the funds necessary for field development. A PSA


43

stipulates that the IOC provides the initial capital necessary to develop a field; under

nationalization, it is the government’s duty to secure financing. While Iraq may be able to

finance Majnoon’s development, it will be severely hard-pressed to finance the reconstruction of

the entire industry.

One financing option involves borrowing from financial institutions abroad. It is

conceivable that the government can secure loans using future production as collateral, but the

terms of any loan would have to be accounted for as a cost. I would therefore have to account for

debt servicing costs in the analysis.

A second financing option would be for Iraq to channel its own revenues – most of which

is generated from oil sales – away from projects being undertaken by other ministries and toward

field development. Of course, this would entail an opportunity cost that would also need to be

accounted for in the analysis. This would involve calculating the net revenues that these non-oil

projects would have garnered for the government.

Another issue with the analysis is my decision to maximize government net revenues.

The ultimate purpose of the paper is to determine how to develop Iraq’s oil industry to maximize

the welfare of the Iraqi people. In economics, welfare is subjective, and an economic unit may

seek to maximize welfare through combinations including, but not limited to, net revenue, GDP,

growth, employment, and equity. While government net revenues is one such indicator, it may

not be the most appropriate, especially if a government is not stable or does not possess proper

distribution mechanisms. Nevertheless, Iraq does seek to maximize government net revenues,

which, ceteris paribus, is likely to increase welfare.

I also assumed that the Iraqi government itself desires to maximize net revenues over the

next forty years. Recently, however, Iraq announced that it “is seeking to boost its oil production

as much as possible in the shortest possible time” (Platts 2009), and it has asked IOCs to provide

$2.6 billion in what it calls “soft loans”. Deputy Prime Minister Barham Salih noted that


44

declining oil prices had dictated the desire to boost short-term production., while Oil Minister

Hussein Al-Shahristani assured that Iraq would reimburse these loans from production-generated

revenue. Essentially, the government’s main concern is to raise funds in the short-term, because

lower oil prices have slashed government revenues. Thus, production in the short-term is more

valued than long-term production. To account for this in my analysis, I would have to place

greater weight on production in the early years of development. If PSAs are more effective in

boosting production quickly, then they may become more favorable among Iraqi decision-

makers.

Iraqi production is also subject to external influences. In Majnoon’s case, I claimed that

Iraq would maximize production, an assumption bolstered by the government’s desire to boost

short-term production. But as a member of the Organization of Petroleum-Exporting Countries

(OPEC), Iraq is subject to OPEC production quotas. While OPEC does not currently require Iraq

to abide by its quotas (due to its rebuilding hydrocarbons industry) (Iraq Oil Report 2008), this

exemption may not last over the next forty years. An IOC may also curb production levels under

a PSA for strategic purposes. IOC and OPEC limitations would affect the revenue figures I

estimated in the analysis.

Hydrocarbon development will also have significant spillover effects that I did not

account for. One specific issue to consider is foreign investment: PSAs may pave the way for

foreign investment not only in the oil sector but in other industries as well. Nationalizing

industries may guarantee greater sovereignty, but it may also dissuade foreign companies from

investing in the country as a whole. This is especially pertinent to Iraq, where political and

security concerns heighten the risks associated with investment in the country. Thus, foreign

companies require high risk premiums to invest their capital in the country. Nationalizing the oil

industry may portend the nationalization of other industries, a threat to the capital that foreign

firms have or will be investing in the country. My analysis would have to include the effect on


45

government net revenues of declines in foreign investment in other industries, as nationalizing

Iraqi oil has implications beyond the hydrocarbons industry.

The analysis also focused exclusively on the upstream processes of an oil industry, which

include the exploration and production of crude oil. However, the downstream processes of

refining oil and selling and distributing products derived from oil are equally important.

Nationalizing Iraq’s oil industry entails the nationalization of both upstream and downstream

components. Major IOCs generally engage in both components, as they are involved in the

recovery, refining, and selling of oil and its derivatives. Thus, it is important to also observe

effects on the downstream processes under nationalization and under a PSA. It is likely that IOCs

are also more efficient at refining and selling petroleum products as they are at producing oil.

This is an important factor for the Iraqi decision-makers to consider.

Finally, my analysis relied on economic foundations, but Iraqi politics will dictate the

nature of the new hydrocarbon law as much as economics will. In this regard, the major issue

relates to jurisdiction: who actually possesses decision-making authority over the country’s

fields? The Kurdistan Regional Government (KRG), for example, has already signed agreements

with IOCs to develop some of the northern oil fields, and this was done without the consent of

the national government. While the MoO continues to claim control over all oil fields, it recently

gave the KRG permission to export some of the oil produced in the Kurdish region. Specifically,

the KRG will be able to export 60,000 bbl of oil per day from the Tawqe field, and another

40,000 bbl/day from the Taq-Taq field. But “the oil will be marketed by the central government

and all revenue will go to Baghdad” (Robertson 2009, p. 1). Thus, while the central government

has softened its position, it continues to insist on ownership of the revenues.

More generally, there is friction between central and regional authorities throughout the

entire country: discussions on whether Iraq should employ a federalist structure – where regional


46

authorities have greater autonomy – have yet to be resolved. Once they are, field jurisdiction will

be more clearly defined.

4.4 Final Conclusions

The issues mentioned above are important for the Iraqi government to consider, and they

will certainly affect the INOC’s threshold efficiency level. Regardless, my analysis provides a

starting point in answering whether Iraq should nationalize its oil. It highlights some of the issues

related to nationalization as well as PSAs, and it explores the implications of a case study

comparing alternative ways of developing an oil field.

I initially found that the INOC faced an Indecision Interval of 76.5%-86.5%. The

sensitivity analysis demonstrated that modifying my assumptions only slightly altered the results,

but it dictated an adjustment of the Indecision Interval to 70%-87.5%. Thus, I conclude that the

INOC must achieve an efficiency score of at least 70% – relative to an IOC – to consider the

option of nationalization. Otherwise, Iraq should engage in PSAs to maximize government net

revenue. Any efficiency score above 87.5% suggests that Iraq should nationalize its oil, and any

score within the Indecision Interval would require further study before the Iraqis make a

decision.

This decision will have a significant impact on the shape of the country’s reconstruction

as a whole. Relying as heavily on oil revenues as Iraq does guarantees that the oil industry will

pave the way for the country’s development. It is therefore vital that the Iraqis make a sound

economic decision with respect to rebuilding its hydrocarbons industry. I provide the Iraqi

decision-makers with the foundational analysis necessary to begin exploring development

options. It is up to them to utilize it.


47

Appendix 1: Iraqi Crude Oil Production, 1960-2007

Energy Information Administration. 2007. “World Crude Oil Production, 1960-2007.”

http://www.eia.doe.gov/aer/txt/ptb1105.html, accessed June 1, 2009.

Year Avg. Production (million bbl/day) Total Annual Production (million bbl) % Change

1960 0.97 354.1 -

1961 1.01 368.7 4.1

1962 1.01 368.7 0.0

1963 1.16 423.4 14.9

1964 1.26 459.9 8.6

1965 1.32 481.8 4.8

1966 1.39 507.4 5.3

1967 1.23 449.0 -11.5

1968 1.50 547.5 22.0

1969 1.52 554.8 1.3

1970 1.55 565.8 2.0

1971 1.69 616.9 9.0

1972 1.47 536.6 -13.0

1973 2.02 737.3 37.4

1974 1.97 719.1 -2.5

1975 2.26 824.9 14.7

1976 2.42 883.3 7.1

1977 2.35 857.8 -2.9

1978 2.56 934.4 8.9

1979 3.48 1270.2 35.9

1980 2.51 916.2 -27.9

1981 1.00 365.0 -60.2

1982 1.01 368.7 1.0

1983 1.01 368.7 0.0

1984 1.21 441.7 19.8

1985 1.43 522.0 18.2

1986 1.69 616.9 18.2

1987 2.08 759.2 23.1

1988 2.69 981.9 29.3

1989 2.90 1058.5 7.8

1990 2.04 744.6 -29.7

1991 0.31 113.2 -84.8

1992 0.43 157.0 38.7

1993 0.51 186.2 18.6

1994 0.55 200.8 7.8

1995 0.56 204.4 1.8

1996 0.58 211.7 3.6

1997 1.16 423.4 100.0

1998 2.15 784.8 85.3

1999 2.51 916.2 16.7

2000 2.57 938.1 2.4

2001 2.39 872.4 -7.0

2002 2.02 737.3 -15.5

2003 1.31 478.2 -35.1

2004 2.01 733.7 53.4

2005 1.88 686.2 -6.5

2006 2.00 730.0 6.4

2007 2.09 762.9 4.5

2008 2.36 861.4 12.9


48

Appendix 2: Draft Iraq Oil and Gas Law

COUNCIL OF MINISTERS

OIL AND ENERGY COMMITTEE

REPUBLIC OF IRAQ

DRAFT IRAQ OIL AND GAS LAW

NO. _______ OF 2007

15 FEBRUARY 2007

TABLE OF CONTENTS

CHAPTER/ARTICLE TITLE

PREAMBLE

CHAPTER I: FUNDAMENTAL PROVISIONS

Article 1: Ownership of Petroleum Resources

Article 2: Scope of Application

Article 3: Purpose

Article 4: Definitions

CHAPTER II: MANAGEMENT OF PETROLEUM RESOURCES

Article 5: Competence of Authorities

Article 6: Creation of the Iraq National Oil Company

Article 7: Reorganising the Ministry of Oil

Article 8: Oil Fields’ Development and Production

Article 9: Grant of Rights

Article 10: Mechanisms of Negotiations and Contracting


49

Article 11: Petroleum Revenues

Article 12: State Participation

CHAPTER III: EXPLORATION AND FIELD DEVELOPMENT OPERATIONS

Article 13: Exploration and Production Contracts

Article 14: Obligations of the Holders of Exploration and Production Rights

Article 15: Building Local Content and Expertise

Article 16: Unitisation

Article 17: Conservation

Article 18: Access to Main Pipelines and Field Pipelines

Article 19: Ownership of Data

Article 20: Restrictions on Production Levels

CHAPTER IV: TRANSPORTATION

Article 21: Main Pipelines

Article 22: Rights and Obligations Regarding Pipelines

CHAPTER V: GAS

Article 23: Exploitation of Gas

Article 24: Associated Gas

Article 25: Flaring of Gas

Article 26: Non-Associated Gas

CHAPTER VI: REGULATORY MATTERS

Article 27: Regulations for Petroleum Operations

Article 28: Use and Benefit of Land and Rights of Way

Article 29: Access to Zones Subject to Maritime Jurisdiction


50

Article 30: Inspection

Article 31: Environmental Protection and Safety

Article 32: Transfer of Ownership and Decommissioning

CHAPTER VII: FISCAL REGIME

Article 33: Taxation

Article 34: Royalty

Article 35: Maintaining Records

CHAPTER VIII: MISCELLANEOUS PROVISIONS

Article 36: Transparency

Article 37: Implementing Anti-corruption Laws

Article 38: Competitive Public Bidding

Article 39: Resolution of Disputes

Article 40: Existing Contracts

Article 41: Changes in Administrative Borders

Article 42: Relationship to Existing Legislation

Article 43: Entry into Force

ANNEX NO. 1: PRESENT PRODUCING FIELDS ALLOCATED TO THE IRAQ

NATIONAL OIL COMPANY

ANNEX NO. 2: DISCOVERED (UNDEVELOPED) FIELDS ALLOCATED TO

THE IRAQ NATIONAL OIL COMPANY

ANNEX NO. 3: DISCOVERED (UNDEVELOPED) FIELDS OUTSIDE THE

OPERATIONS OF THE IRAQ NATIONAL OIL COMPANY

ANNEX NO. 4: EXPLORATION AREAS


51

PREAMBLE

WHEREAS the Republic of Iraq has entered a new era after the adoption of the Constitution

In 2005;

WHEREAS, Article 111 of the said Constitution declares that Oil and Gas are owned by all

the people of Iraq in all the Regions and Governorates;

WHEREAS, Articles 110, 112, 114 and 115, seen in the light of Article 111, broadly define

the authorities and responsibilities of the Federal, Regional and Governorate Authorities

including those in the Petroleum sector;

WHEREAS, the Iraq Republic is endowed with rich Oil and Gas resources, a great portion of

which is already discovered and ready for Development whilst more Petroleum resources are

yet to be discovered;

WHEREAS, Iraq's Production capacity during the last decades has been low and at great

disparity with its exceptionally rich Oil and Gas resources;

WHEREAS, the Iraqi people find themselves at the crossroad to a new and more prosperous

future which will require quick and substantial funding of reconstruction and modernization

projects;

WHEREAS revenues from Oil and Gas represent the most important basis for redeveloping

the country in general and the Iraqi economy, in particular on sustainable and robust basis in

a planned and coordinated manner that takes into consideration the objectives of the

Constitution, including the unity of the Iraq Republic, the exhaustible nature of Petroleum

resources, the need for preserving the environment;

To help the Iraqi Ministry Of Oil focus on its main duties of creating policies, planning, and


52

supervision, while achieving the necessary upgrading to enhance operational quality, the oil

activates operated solely by the Ministry of Oil have to be transferred to technical and

commercial entities and institutions including an independent Iraq National Oil Company, to

provide authorities to the Regions and Producing Governorates;

WHEREAS, the rehabilitation and further development of the Petroleum industry will be

enhanced by the participation of international and national investors of recognized technical,

managerial and operational skills as well as robust capital resources to help upgrade and

develop national expertise and efficiency in the Petroleum sector;

WHEREAS, the national private industry directly and indirectly related to the Petroleum

sector are in need of proactive encouragement and support to play a prominent role in the

development of the sector;

WHEREAS, the positive interplay between the Federal and Regional authorities requires

appropriate legislative and institutional framework conditions to ensure efficient coordination;

WHEREAS, the introduction of a variety of national and international players in the

development of the Petroleum sector calls for clear legislative, institutional and operational

framework conditions to ensure co-ordination and efficiency between the relevant Iraqi

authorities and the commercial players as well as among these players;

WHEREAS, the development of the petroleum sector must be closely coordinated and

harmonized with the development of the society and the national economy in a manner that

maintains sustainable development for the economy and the environment and in the long term

decreases dependence on Oil and Gas revenues;

WHEREAS, the conditions for regulating the Petroleum sector are of great importance to the

whole nation as well as to all Investors in the sector, there is a need for a clear, fair,


53

transparent and efficient system of governance that inspires confidence, efficiency and

cooperation

among all participants in the petroleum sector, including governmental authorities

at Federal, Regional and Governorate level, and among national and international actors;

THEREFORE THIS LAW IS ENACTED:

CHAPTER I: FUNDAMENTAL PROVISIONS

Article 1: Ownership of Petroleum Resources

Oil and gas are owned by all the people of Iraq in all the Regions and Governorates.

Article 2: Scope of Application

(a) This law applies to Petroleum Operations in all the territory of the Republic of Iraq,

including the soil and subsoil on land, as well as inland waters and territorial waters.

(b) The scope of this Law excludes the refining of Petroleum, its industrial utilization as

well as the storage, transport, and distribution of Petroleum Products.

Article 3: Purpose

(a) This law establishes the regime for the management of Petroleum Operations in the

Republic of Iraq, taking into account the existing international treaties between the Republic

of Iraq and other countries on Crude Oil transportation.

(b) The law aims to build upon existing co-operation between the relevant Ministries in the

Federal Government administration, in addition to building a base for coordination and

discussions among the Federal, Regional, and Producing Governorates’ authorities.


54

Article 4: Definitions

For the purposes of this law, the following terms and expressions shall have the meaning

indicated as follows, unless the context in which used requires a different meaning:

1- "Discovery": the first Petroleum encountered in a Reservoir by drilling that is recoverable

at the surface by conventional petroleum industry methods;

2- "Commercial Discovery": a Discovery which has been deemed to be commercial for

Development purposes by the holder of Exploration and Production;

3- “Region”: the Kurdistan Region or any other Region created in Iraq after issuing this law

according to the Constitution of Iraq;

4- "Good Oilfield Practices": all those practices related to Petroleum Operations that are

generally accepted by the international petroleum industry as good, safe, environmentally

friendly, economic and efficient in exploring for and producing Petroleum;

5- "Good Pipeline Practices": all those practices related to transportation by pipelines

including the design, construction, commissioning, maintenance, operation and

decommissioning of pipelines that are generally accepted in the international petroleum

industry as good, safe, environmentally friendly, economic and efficient in transporting

Petroleum;

6- "Production": the extraction and disposal of Petroleum;

7- "Petroleum": all Crude Oil or Natural Gas, or other hydrocarbons produced or capable of

being produced from Crude Oil, Natural Gas, oil rocks or tar sands;

8- "Development": the activities carried out by the holder of Exploration and Production

based on either the Field Development Plan or the Main Pipeline Development Plan, which


55

aim at Production and transportation of Petroleum;

9- "Exploration": the search for Petroleum by geological, geophysical and other means

including drilling of exploration and appraisal wells;

10 -"Field": an area consisting of a single Reservoir or multiple Reservoirs connected to the

same individual geological structural feature or stratigraphic condition. The field name refers

to the surface area, although it may refer to both the surface and the underground productive

formations.

11- "Field Pipeline": a pipeline, including valve stations, pump stations, compressor stations

and associated installations, collecting Crude Oil or Natural Gas from a Field or a group of

Fields and delivering it to a transfer point for further transportation;

12- “Pipeline”: an entity that consists of a linear pipeline accompanied with other

components on the ground level including stations of pumping, valves, compression, and

other accompanied accessories for gauging, supervision, telecommunications, remote control,

for the purposes of transporting Crude Oil and Natural Gas from the Transfer Point to the

Delivery Point.

13- "Main Pipeline": the principal pipeline, including valve stations, pump stations,

compressor stations and associated installations built by the Transporter, for the

transportation of Crude Oil or Natural Gas from one or several Fields or sources inside or

outside Iraq;

14- "Field Development Plan": a scheduled programme and cost estimate specifying the

appraisal and Development activities required to develop and produce Petroleum from a

specific Field or group of Fields by the holder of an Exploration and Production contract,

prepared in accordance with this law and the relevant provisions in the Regulations for


56

Petroleum Operations and the Exploration and Production Contract covering that contract

Area;

15- "Main Pipeline Development Plan": a scheme and cost estimate specifying all activities

to be carried out by the transporter for the transportation of Petroleum by pipeline inside Iraq

and across the territory of neighbouring States, prepared in accordance with this Law, the

relevant provisions in the regulations for Petroleum Operations and the Exploration and

Production Contract covering that Contract Area and any relevant bilateral agreements;

16- "Decommissioning Plan": a scheme for the closure of Petroleum Operations and

restoration of the operating environment including the removal and disposal of all

installations;

17- "Iraqi Person": any citizen with Iraqi nationality or any company or institution with legal

personality established and registered pursuant to Iraqi legislation, with its headquarters in

Iraq and having at least fifty percent (50%) of its share capital held by national citizens or by

Iraqi public or private companies or institutions;

18- "Foreign Person": any non-Iraqi citizen or any company or institution with legal

personality established and registered pursuant to Iraqi legislation, and having less than fifty

percent (50%) of its share capital held by national citizens or by Iraqi public or private

companies or institutions;

19- "Petroleum Operations": all or any of the activities related to Exploration, Development,

Production, separation and treatment, storage, transportation and sale or delivery of

Petroleum at the Delivery Point, Export Point or to the agreed Supply Point inside or outside

Iraq, and includes Natural Gas treatment operations and the closure of all concluded

activities;


57

20- "Natural Gas": all hydrocarbons which are in a gaseous state at atmospheric conditions of

temperature and pressure, that might be associated or not with liquid hydrocarbons, as well as

the residue gas remaining after the extraction of liquid hydrocarbons from the Reservoir;

21-"Associated Natural Gas": Natural Gas which under Reservoir conditions is either in

solution with liquid hydrocarbons or as gas-cap gas which overlies and is in contact with

Crude Oil;

22- "Non-associated Natural Gas": the free Natural Gas other than Associated Natural Gas;

23- "Operator": the entity designated by the Designated Authority, in consultation with the

holder of Exploration and Production right, to conduct Petroleum Operations on behalf of the

latter;

24- “Producing Governorate”: any Iraqi Governorate that produces Crude Oil and natural gas

continually on rates more than one hundred and fifty thousand (150,000) barrels a day;

25- "Reservoir": a separate accumulation of Petroleum in a geological unit limited by rock

characteristics, structural or stratigraphic boundaries, contact surfaces between Petroleum and

water in the formation; or a combination of these, so that Petroleum Production from any

portion of the accumulation will affect the pressure in the accumulation as a whole;

26- "Contract Area": the area within which the holder of an Exploration and Production right

is authorized to explore for, develop and produce Petroleum;

27- "Development and Production Area": a part of the Contract Area which following a

Commercial Discovery has been delineated according to the terms and conditions of the

Exploration and Production Contract;

28- "Crude Oil": all hydrocarbons, regardless of specific gravity, which are produced and

saved from the Field in liquid state at atmospheric pressure and temperature, including


58

asphalt, tar and the liquid hydrocarbons known as distillates or condensates obtained from

Natural Gas within the Contract Area;

29- 'Transporter": the entity designated by the Council of Ministers to receive Crude Oil or

Natural Gas from the holder of Exploration and Production right at the Transfer Point and

deliver Crude Oil for export or Natural Gas to the holder of Exploration and Production right

at the Delivery Point;

30- "Production Measurement Point": the place(s) at which volumes and qualities of Crude

Oil or Natural Gas to be transferred at the Transfer Point are measured;

31- "Transfer Point": the inlet flange(s) of the outgoing Pipelines from the Production

Measurement Point, where the Transporter shall receive Crude Oil or Natural Gas from the

holder of Exploration and Production right;

32- "Delivery Point": the point(s) of the loading facility at which Crude Oil reaches the inlet

flange of the receiving tank-ship or such other point inside or outside Iraq, as agreed to under

the Exploration and Production Contract. In the case of Gas it is the flange of the inlet to the

receiving installation for Natural Gas;

33- "Supply Point": the place at which Crude Oil or Natural Gas is transferred from a Main

Pipeline or a Field Pipeline to a different type of transport, processing or use;

34- "The Ministry": is the Ministry of Oil in the Republic of Iraq and other companies and

organizations specifically authorized by it;

35- “Designated Authority”: the Ministry of Oil, the Iraq National Oil Company, or the

Regional Authority;

36- “Regional Authority”: the authorized ministry in the Regional Government;

37. “Federal Oil and Gas Council”: the Council which is formed by the Council of Ministers


59

according to Article 5D of this law to exercise the authorities designated to it according to the

provisions of this law; and

38. “Panel of Independent Advisors”: the panel of experts that is appointed by the Federal

Oil and Gas Council, according to the provisions of this law.

CHAPTER II: MANAGEMENT OF PETROLEUM RESOURCES

Article 5: Competence of Authorities

(a) The Council of Representatives

First: The Council of Representatives shall enact all Federal legislation on Crude Oil and

Natural Gas.

Second: The Council of Representatives shall approve all international petroleum treaties

related to Petroleum Operations that Iraq signs with other countries.

B. The Council of Ministers

First: The Council of Ministers shall be responsible for recommending proposed legislation

to the Council of Representatives on the development of the country's Petroleum resources.

Second: The Council of Ministers is the competent authority to formulate Federal Petroleum

policy and supervise its implementation. It also administers the overall Petroleum Operations

including the formulation of Federal policy on all matters within the scope of this law,

including Exploration, Production, Transportation, Marketing, the proposal of Petroleum

legislation, and the approval of such regulations as may be necessary from time to time on the

said matters.

Third: In carrying out the above functions, the Council of Ministers shall ensure that the

Federal Oil and Gas Council and the Ministry adopt appropriate and effective mechanisms


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for consultation and co-ordination with the Regional and Producing Governorate authorities

in accordance with the provisions of this law.

C. The Federal Oil and Gas Council

First: To assist the Council of Ministers in creating Petroleum policies and related plans,

arranged by the Ministry in coordination with the Regions and Producing Governorates, and

to put important legislation for Exploration and Production based on Article 9 of this law the

Council of Ministers shall create an entity to be named “the Federal Oil and Gas Council”.

The Prime Minister or his nominee shall be the president of this Council, and the Council

shall include:

1- the Federal Government’s Ministers of Oil, Finance, and Planning;

2- the Director of the Iraq Central Bank;

3- a Regional government minister representing each Region;

4- a representative from each Producing Governorate not included in a Region;

5- the Chief Executives of important related petroleum companies including the Iraq National

Oil Company and the Oil Marketing Company; and

6- Experts in petroleum, finance, and economy, with their number not exceeding three (3), to

be appointed for a period not exceeding five (5) years based on a resolution from the Council

of ministers.

The formation of the Federal Oil and Gas Council shall take into consideration a fair

representation of the basic components of the Iraqi society.

Second: The Federal Oil and Gas Council holds the responsibility of putting Federal

Petroleum policies, Exploration plans, Development of Fields and main pipeline plans inside

Iraq, and this has the right to approve any major changes in such plans and policies.


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Third: The Federal Oil and Gas Council reviews and changes the Exploration and Production

contracts that give the rights of Petroleum Operations according to Article 10 of this Law,

and what might be relevant to the Republic of Iraq.

Fourth: The Federal Oil and Gas Council approves the types of, and changes to, model

Exploration and Production contracts, according to the criteria defined in this Law, and

selects appropriate model contract types according to the nature of the Field or Exploration

area to provide maximum returns to the people of Iraq.

Fifth: The Federal Oil and Gas Council sets the special instructions for negotiations

pertaining to granting rights or signing Development and Production contracts, and setting

qualification criteria for companies.

Sixth: To assist the Federal Oil and Gas Council in reviewing Exploration and Production

contracts and Petroleum Fields’ Development plans, the Council relies on the assistance of a

panel called the “Panel of Independent Advisors” that includes oil and gas experts, Iraqis or

foreigners. The Council shall decide their number. They should be qualified and have a good

reputation and long practical experience in Exploration and Production operations and in

Petroleum contracts, and they should be chosen by a unanimous decision of the Council and

contracted for a year, which can be extended. The Panel of Independent Advisors gives its

recommendations and advice to the Federal Oil and Gas Council on issues related to

contracts, Field Development plans, and any other related issues requested by the Federal Oil

and Gas Council.

Seventh: The Federal Oil and Gas Council is the competent authority to approve the transfer

of rights among holders of Exploration and Production rights and associated amendment of

contracts provided this does not adversely affect the national content including the percentage


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of national participation.

Eighth: The Federal Oil and Gas Council and the Ministry are responsible for ensuring that

Petroleum discovered resources are developed, and produced in an optimal manner and in the

best interest of the people in accordance with legislation, regulations and contractual

conditions as well as recognised international standards.

Ninth: Members of the Federal Oil and Gas Council can suggest policies and law drafts to the

Federal Oil and Gas Council.

Tenth: The Federal Oil and Gas Council may create entities necessary for the implementation

of its duties.

Eleventh: The Federal Oil and Gas Council shall adopt an internal procedure to regulate its

internal processes to take its decisions by a two-thirds (2/3) majority on setting Petroleum

policies, planning, model contracts and guidelines for negotiations of contracts.

D. The Ministry of Oil

First: The Ministry is the competent authority for proposing Federal policy, laws and plans.

Second: The Ministry creates legislation as well as issuing regulations and guidelines to

implement the Federal plans.

Third: The Ministry undertakes the necessary monitoring and supervisory actions in

coordination

with the Regional Authorities and Producing Governorates, to ensure their proper,

coordinated, and uniform implementation throughout Iraq.

Fourth: On the basis of policies, regulations, guidelines and requirements under Article 5D

First, and 5D Second, and in accordance with the overall economic and social policies of the

Federal Government, the Ministry shall in consultation with the Regional Authorities and


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Producing Governorates draw up Federal policies and plans on Exploration, Development

and Production on an annual or as needed basis. Such policies and plans shall address both

the short term as well as the long term requirements. The geographical distribution and

timing of actions and projects shall comprise proposals from the Regions and Governorates in

accordance to Annex Nos. 1, 2, 3 and 4. The suggestions for petroleum policies and related

plans are to be submitted to the Federal Oil and Gas Council to be reviewed and decided

upon.

Fifth: The Ministry is the competent authority to represent the Iraqi Republic in regional and

international forums.

Sixth: The Ministry is empowered to negotiate with other countries and organizations

multilateral and bilateral treaties related to Oil and Gas, subject to approval in accordance

with the Constitution.

Seventh: The Ministry is responsible for monitoring Petroleum Operations to ensure

adherence with the laws, regulations, and contracting terms. In addition to its administrative

and technical monitoring duties, the Ministry shall carry out verification of costs and

expenditures incurred by the holders of rights to ensure correct and justified cost recoveries

for the purpose of determining revenues accruing to the Government. The Ministry shall

through inspection, technical audits and other appropriate actions verify conformance with

legislation, regulations, contractual terms and internationally recognised practices. The

Ministry must coordinate with Regional Governments and Producing Governorates to create

specialized entities that carry out the above responsibilities instead of the Ministry.

Eighth: The Ministry has the right to execute contracts related to Oil and Gas supply services

other than those covered by Exploration and Development Contracts and according to other


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applicable legislation.

E. The Iraq National Oil Company

First: The Iraq National Oil Company (INOC), in accordance with Article 6 of this Law, can

participate in Exploration and Production operations inside Iraq on behalf of the Government.

INOC is obligated to sell its share of Crude Oil to the Oil Marketing Company based on the

delivery price that covers the cost in addition to a reasonable profit that would facilitate the

company’s development in Exploration and Production.

Second: The tasks and scope of operation of INOC shall include carrying out Oil and Gas

Exploration, Development, Production, Transportation, Storage, Marketing and sales down to

the Delivery Point in accordance with the rights and obligations under this law including the

necessary contracts, permits and approvals applicable to all other holders of rights.

Third: INOC shall have the right to participate as a commercial partner in international

projects related to the transportation, marketing and sale of Oil and Gas. It may also

participate in Exploration and Production contracts outside the Republic of Iraq subject to

approval by the Council of Ministers.

Fourth: INOC shall form fully owned Subsidiary companies in selected areas in Iraq based on

the location of Fields, size of Petroleum reserves, Production capacity and cost benefit

analysis, or based on rearrangements and task management of existing companies based on

its work capacity leading to better efficiency based on appropriate bylaws and procedures to

be issued for the purpose.

Fifth: INOC shall have the right to establish in association with others affiliated companies or

acquire shares in existing companies inside the Republic of Iraq. INOC may also undertake

the same outside the Republic of Iraq subject to the approval of the Council of Ministers.


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Sixth: INOC shall have the right to acquire tangible and intangible assets belonging to natural

or legal entities for the purpose of achieving its objectives and in accordance with the law.

F. Regional Authority

The Regional Authorities shall have the following competencies:

First: The Regional Authorities shall undertake the necessary preparations in order to propose

to the Federal authorities activities and plans on behalf of the Region to be included in the

Federal plans for Petroleum Operations. It shall further assist the Federal Authorities in

discussions leading to the finalisation of the Federal plan as required.

Second: Carry out the licensing process regarding activities within its respective Region

related to Exploration and Production of discovered but undeveloped Fields mentioned in

Annex No. 3 according to mechanisms mentioned in Article 9 and based on contracting types

prepared by the Federal Oil and Gas Council and in accordance to regulations issued by

Federal Oil and Gas Council with qualified international oil companies on the bases put

forward by the Federal Oil and Gas Council.

Third: Be represented in discussions carried out by the Federal Oil and Gas Council in

accordance with Article 5 of this Law.

Fourth: Collaborate with the Ministry to undertake the monitoring and supervision of

Petroleum Operations to ensure adherence to legislation, regulations, guidelines and the

specific terms of the relevant Exploration and Production Contracts. Such functions shall be

carried out in close coordination and harmonisation with the Ministry to ensure uniform and

consistent implementation throughout the Republic of Iraq.


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Article 6: Creating the Iraq National Oil Company

A- The Iraq National Oil Company (INOC) is a holding company fully owned by the Iraqi

Government and based in Baghdad. INOC is financially and administratively independent

and runs on commercial bases.

B- Its scope of operations shall include:

First: Managing and operating existing producing Fields mentioned in Annex No. 1, and both

the North Oil Company and the South Oil Company are linked to it.

Second: Participation in the Development and Production of discovered and yet not

developed Fields mentioned in Annex No. 2.

Third: Carrying out for Exploration and Production operations in new areas outside its

respective areas in adherent to this law through applying for Exploration and Production

rights in the new areas on a competitive basis.

Fourth: INOC shall also own, manage and operate the Main Oil and Gas Pipeline Network

and the export ports in the Republic of Iraq and enter into contracts with existing and future

shippers of Oil and Gas in accordance with this Law. The company continues its

responsibilities in operating the Main Oil and Gas Pipeline Network and the export ports in

Iraq during a transitional period not exceeding two years until the reorganization of the

companies in the Ministry is completed. Then, the Federal Oil and Gas Council shall decide

the entity responsible of operating the Main Oil and Gas Pipeline Network and the export

ports in Iraq based on a proposal submitted by the Ministry after coordinating with the INOC

in adherence to this Law and after the approval of the Council of Ministers.

Fifth: To ensure and develop the coordination and collaboration with Regions and Producing

Governorates, INOC establishes subsidiary companies which it owns in total and which will


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undertake the Petroleum Operations in the Regions and Producing Governorates. These

subsidiary companies will be represented on the INOC board and will be paid for the cost

they incur in addition to a specific reasonable profit in order that they can develop and

enhance their operations

Sixth: The board of the INOC oversees the INOC and its subsidiary companies; in

accordance to the INOC law, the board includes members from the Federal Government, the

Regions, and the Producing Governorates.

Article 7: Reorganising the Ministry of Oil

A- The Ministry, pursuant to a law, must create the important institutional and methodology

changes to reflect its new responsibilities and duties. In particular, the Ministry shall create a

new department as soon as possible specialized in planning, developing, and following up the

process of obtaining rights. This new department must consist of members of the Ministry

trained and specialized in the bidding process and conduct professional negotiations with oil

companies to sign contracts of Exploration and Production rights in accordance with the

Ministry’s authorities and in accordance with Article 9 of this Law. In addition, this

department must include in each and every negotiations representatives from the related

Producing Governorates. It is permissible that the negotiation and rights teams include expert

advisers with a distinguished international reputation and experience.

B- The law of reorganization of the Ministry of Oil must include the suggested mechanisms

that will be the basis of re-structuring the relationship between the Ministry and other related

companies and regulating entities in a way that guarantees a full separation between, on the

one hand, the Production and oil services companies, and, on the other hand, the regulatory,


68

monitoring, and supervisory departments in the Ministry. In addition, there must be

separation yet integration between the producing units and the services departments in a way

that guarantees increasing productivity and maximizing profits.

Article 8: Field Development and Oil and Gas Exploration

A- Regarding the priorities aimed at restoring and increasing Production related to existing

Fields, INOC is the Operator and is authorized to directly sign services contracts or

administrative contracts with appropriate oil or services companies, in case this was needed

to accelerate reaching to the goals stated in this Article.

B- The Ministry, and after coordinating with Regions and Producing Governorates, and in

adherence to Article 9 of this Law, is to propose to the Federal Oil and Gas Council the best

methods to develop the discovered but yet not developed Fields.

C- The Ministry prepares model Exploration and Production contracts to be approved by the

Federal Oil and Gas Council and to be appended to this law. These model contracts must

guarantee the best levels of coordination between the Oil Ministry, INOC, and the Regions

each according to their specific responsibility in relation to both this Law and the

international oil companies.

D- Utmost effort must be put into ensuring speedy and efficient Development of the Fields

discovered but partially or entirely not yet developed when this law is enacted, and it is

permissible to develop these Fields in collaboration with reputable oil companies that have

the efficient financial, administrative, technical, operational capabilities according to the

contracting terms and the regulations issued by the Federal Oil and Gas Council.

E- The Federal Oil and Gas Council, the Oil Ministry, INOC, and the Regional Authorities


69

have to carry out an exploratory program in Iraq to assess the Oil and Gas resources and to

compensate Production, and to add new reserves.

F- The Ministry must provide the Federal Oil and Gas Council with a comprehensive

proposal for Oil and Gas Exploration throughout the Republic of Iraq in coordination with

the Regions and the Producing Governorates, sorting out the areas according to their Oil and

Gas potential, implemented within a short time table in order to guarantee increasing reserves

and continuing Production and Development.

Article 9: Grant of Rights

A- The rights for conducting Petroleum Operations shall be granted on the basis of an

Exploration and Production contract. The contract shall be entered between the Ministry (or

the Regional Authority) and an Iraqi or Foreign Person, natural or legal, which has

demonstrated to the Ministry or the Regional Authority the technical competence and

financial capability that are adequate for the efficient conduct of Petroleum Operations

according to the guidelines of the Federal Oil and Gas Council and as mentioned in Article

5C Fifth, and in accordance with the mechanisms of negotiations and contracting stated in

Article 10 of this Law.

B- The licensing process shall be based on transparent and accountable tendering and shall

take into account recognised practices by the international petroleum industry. It shall adhere

to the following principles and procedures:

First: Competitive licensing rounds based on clearly defined terms and terms of application

as well as the criteria to be used in the selection of successful candidates.

Second: The contractual terms offered to applicants shall be specified in model contracts


70

accompanying the letter of invitation.

Third: The form and terms of the model contract shall take account of the specific

characteristics and requirements of the individual area, Field or prospect being offered,

including whether the resources are discovered or not, the risks and potential rewards

associated with the investments under consideration, and the technological and operational

challenges presented.

Fourth: All model contracts shall be formulated to honour the following objectives and

criteria:

1- National control;

2- Ownership of the resources;

3- Optimum economic return to the country;

4- An appropriate return on investment to the investor; and

5- Reasonable incentives to the investor for ensuring solutions which are optimal to the

country in the long-term related to

a- improved and enhanced recovery,

b- technology transfer,

c- training and development of Iraqi personnel,

d- optimal utilisation of the infrastructure, and

e- environmentally friendly solutions and plans.

Fifth: The Model Contracts may be based upon Service Contract, Field Development and

Production Contract, or Risk Exploration Contract provided they are adapted to best meet the

objectives and criteria under Article 9B above which serve the best interest of the Republic of

Iraq.


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Sixth: Only pre-qualified companies by the Ministry or the Regional Authority shall be

considered in any licensing round. The criteria for prequalification shall be specified in the

invitation to bidding according to the regulation and instructions issued by the Federal Oil

and Gas Council.

Seventh: Evaluation of pre-qualified applicants shall aim at establishing a short list of

successful candidates for negotiations.

Eighth: The selection and ranking of successful applicants shall be on the basis of the quality

and relevance of the proposed work plan and the anticipated economic return to Iraq.

Ninth: The overall allocation of Exploration and Production rights throughout the Republic of

Iraq shall aim at achieving variety among oil companies and Operators with different

background, expertise, experience and approach so as to enhance efficiency through positive

competition, benchmarking of performance and transparency. The possibility of using

consortia of selected companies, particularly in large Fields, should be considered.

Tenth: Not later than two (2) months after the endorsement of approval of Exploration and

Production contracts, the contract must be published.

C- The granting of rights for the activities referred to in Article 9A shall always respect

national interests, for example those related to defense, navigation, research and

development, conservation, health and safety and a high level of environmental protection.

D- The Designated Authority is to regulate the form and manner in which rights are granted

under this Article in a manner consistent with this law and the regulations of the Federal Oil

and Gas Council.


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Article 10: Mechanisms of Negotiations and Contracting

A- The Ministry, the INOC, or the Regional Authority, based on their respective specialties

and responsibilities, and after completing initial procedures for granting rights as indicated in

Article 9 there will be an initial signing of Exploration and Production contracts with the

selected contractor.

B- The Exploration and Production contracts mentioned in Article 10A must include the

following: “the contract is valid with no objection from the Federal Oil and Gas Council

according to the provisions of the Oil and Gas Law No. ____ of 2007 including the

contractual guidelines on negotiations and model contracts and any amendments to these that

might be issued by the Federal Oil and Gas Council”.

C- The initial contract mentioned in Article 10B must be submitted to the Federal Oil and

Gas Council within thirty (30) days from the day of the initial signing or it is considered

cancelled.

D- The Federal Oil and Gas Council must adhere to the following steps when deciding on the

contracts submitted to it by Ministry, INOC, or the Regional Authority:

First: Submit the initial contract stated in Article 10C, if the Federal Oil and Gas Council

finds it advisable, to the Panel of Independent Advisors for analysis on the extent of its

compliance with the model contracts approved by the Federal Oil and Gas Council and its

regulations pertaining to Exploration and Production rights in accordance with Article 9.

Second: In case the initial contract has serious discrepancies as compared to the model

contracts and guidelines issued by the Federal Oil and Gas Council, the Federal Oil and Gas

Council will make a decision on the contract relying on the opinion of the Panel of

Independent Advisors, which decision shall require a two-thirds (2/3) majority of the


73

members in attendance.

Third: The Ministry, INOC, or the Regional Authority must be informed of the objection of

the initial contract in accordance to the legal reasons within sixty (60) days of receipt of the

initial contract by the Federal Oil and Gas Council, and the contract remains valid in case no

objection is made by the Federal Oil and Gas Council within the stated period. In case the

Federal Oil and Gas Council cannot hold a meeting within sixty (60) days of receiving the

initial contract due to extraordinary reasons, the Council must take a decision regarding the

contract within forty five (45) days using all the possible means. The contract remains valid

in case no decision is made by the Federal Oil and Gas Council within the stated period.

C- The Ministry, INOC, or the Regional Authority shall address the reasons for objection

issued by the Federal Oil and Gas Council by amending the initial contract and submitting it

again according to the steps mentioned in this Article.

Article 11: Petroleum Revenues

A- According to the Constitution of Iraq (Articles 106, 111, 112 and 121(3)) regarding the

ownership of Oil and Gas resources, the distribution of its revenues, and the monitoring of

federal revenue allocation, the Council of Ministers must submit a draft federal revenue law

to the Council of Representatives regulating these matters in adherence to the sections of this

Article.

B- The oil revenues include all the government revenues from Oil and Gas, royalties, signing

bonuses and production bonuses of Petroleum contracts with foreign or local companies.

C- The revenues mentioned in Article 11B must be deposited in an account called “the Oil

Revenue Fund” established for this purpose, and the federal revenue law shall regulate the


74

Oil Revenue Fund and ensure its fair distribution according to the Constitution.

D- Another fund must be created under the name “The Future Fund”, and a certain portion of

the Oil Revenue Fund must be deposited in the Future Fund and be regulated by the law.

Article 12: State Participation

A- The Republic of Iraq shall aim at achieving real national participation in the management

and Development of its Petroleum resources in adherence to Article 111 of the Constitution.

B- The Exploration and Production rights with regard to existing producing Fields are hereby

given to INOC, and also the granting of additional Exploration and Production regarding not

yet developed Fields to be implemented by the Federal Oil and Gas Council in accordance

with Article 6 and Annex No. 2 of this Law.

C-The Main Pipeline network inside Iraqi territories is hereby assigned to INOC or any

specialized company created for this purpose. The formal procedure for this assignment and

necessary approvals shall be established by the Federal Oil and Gas Council in accordance

with Article 21 this Law.

D- The Republic of Iraq reserves the right to participate in Petroleum Operations in any phase

of Petroleum Operations on terms and conditions that are established by contract.

E- The Federal Oil and Gas Council is authorised to designate INOC to exercise the Republic

of Iraq's participation share in accordance with Article 15E of this law.


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CHAPTER III: FIELD EXPLORATION AND FIELD DEVELOPMENT

OPERATIONS

Article 13: Exploration and Production Contracts

A- An Exploration and Production Contract shall give the holder an exclusive right to

conduct Petroleum Exploration and Production in the Contract Area. In addition, the contract

shall give the holder the right of transportation in accordance with Article 21A of this Law.

B- Except if additional time is needed to complete the operations to assess a Discovery, the

exclusive Exploration and Production right shall be granted as follows:

1- A First Period shall be a maximum of four (4) years.

2- Subject to having fulfilled all commitments by the holder, the Designated Authority may

grant a Second Period of two (2) years provided however that a substantial work program is

committed to under this period.

C- A Third Period of Exploration can for special considerations of continuity be granted by

the Designated Authority provided however that such extension is justified by the quality and

substance of the work program and does not exceed two (2) years.

D- All extensions shall be subject to the provisions concerning the relinquishment of Contract

Areas in adherent to the Petroleum regulations.

E- In the event of a Discovery, the exclusive Exploration and Production right may be

retained by the holder for the purposes of completing the operations initiated within a

specified area to assess or determine the commercial value of a Discovery for an additional

period of two (2) years or, in the case of a non-associated Natural Gas Discovery, for an

additional period not to exceed four (4) years.

F- On the basis of a Field Development Plan prepared and approved in accordance with this


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Law and the relevant contract, INOC and other holders of an Exploration and Production

right may retain the exclusive right to develop and produce Petroleum within the limits of a

Development and Production Area for a period to be determined by the Federal Oil and Gas

Council varying from fifteen (15) to twenty (20) years, not exceeding twenty (20) years

dating from the date of approval of the Field Development Plan, depending on considerations

related to optimal oil recovery and utilisation of existing infrastructure. In cases which for

technical and economic considerations warrant longer Production period, the Federal Oil and

Gas Council, on newly negotiated terms, has the authority to grant an extension not

exceeding five (5) years. The remaining acreage outside the Development and Production

Area shall be relinquished at the end of the Exploration and Production right.

G- The appointment of an Operator shall be approved by the Designated Authority, and the

procedures for such appointment are stated in the initial Contract, and according to the

guidelines issued by the Federal Oil and Gas Council, and the Operator should be named in

the initial Contract.

Article 14: Obligations of the Holders of Exploration and Production Rights

A holder of Exploration and Production right is obliged, mutatis mutandis, to:

A- Conduct Petroleum Operations in accordance with the terms of this law, the Regulations

for Petroleum Operations as well as other applicable legislation and Good Oil Field Practices;

B- Promptly report any Discovery within the Contract Area to the Designated Authority;

C- Conduct the necessary delineation and evaluation of the Discovery with a view to

determining its commercial potential and keep the Designated Authority fully informed of

progress and results;


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D- In the event of a Commercial Discovery, prepare and submit to the Designated Authority,

in accordance with the Regulations for Petroleum Operations, a Field Development Plan for

the Discovery:

E- Prepare and submit a revised Field Development Plan for any material amendment to the

original Plan for approval by the Designated Authority;

F- Implement the Field Development Plan or the revisions thereto once these have been

approved by the Designated Authority;

G- Submit a Decommissioning Plan to the Designated Authority, not later than two (2) years

before the planned termination of Production;

H- Compensate the Injured parties for any losses or damages resulting from the conduct of

the Petroleum Operations as provided by law;

I- When the national interest so requires, give preference to the Designated Authority in the

acquisition of Petroleum produced in the Contract Area, and access to pipeline transportation,

in accordance with terms and conditions to be agreed upon with the Designated Authority;

J- Provide the greatest possible support for required research and development activities in

connection with Petroleum Operations and endeavour to carry out as much of these activities

by Iraqi institutions;

K- Collect, organise and maintain in good condition usable data from all phases and on all

aspects of Petroleum Operations in accordance with this Law and with Petroleum regulations,

and

L- At no cost, supply the Ministry and affiliated companies, with, all data collected and

assembled from Petroleum Operations, in accordance with Article 19 of this Law.


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Article 15: Competence Building and Local Content

A- The Republic of Iraq aims at the development of a competent and effective Iraqi private

sector capable of substantial participation in Petroleum Operations including the acquisition,

alone or together with international companies, of Exploration and Production rights. Such

development shall however adhere to the objectives of professional competence in

accordance with this Law. Towards this end holders of Exploration rights are encouraged to

pursue cooperation and association with serious and qualified Iraqi private initiatives.

B- INOC and other holders of Exploration and Production rights shall give preference to the

purchase of Iraqi products and services whenever they are competitive in terms of price,

comparable in terms of quality and available on a timely basis in the quantity required.

C- INOC and other holders of Exploration and Production rights shall to the maximum

reasonable extent undertake to employ Iraqi citizens having appropriate qualifications and

shall undertake to train and prepare potential candidates towards this objective.

D- INOC and other holders of Exploration and Production rights shall maximise to the

greatest reasonable extent, training and technology transfer opportunities for Iraqi nationals,

at all levels of Petroleum Operations including management.

E- INOC and other holders of Exploration and Production rights are required to diligently

seek and develop associations, affiliations, joint ventures and other forms of partnership and

or co-operation in order to promote the rapid growth of an Iraqi private sector capable of

assisting and enhancing Petroleum Operations to the mutual benefit of the said holders and

the nation.


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Article 16: Unitisation

A- A Petroleum Discovery which is located partly in one Contract Area and partly in another

Contract Area shall be developed and operated jointly pursuant to a unitization agreement

which shall be submitted for approval by the Federal Oil and Gas Council to be approved.

Should the right-holders fail to reach agreement on the modalities of unitisation, the Federal

Oil and Gas Council has the right to decide on the terms six (6) months after serving notice to

the parties to this effect.

B- A Petroleum Discovery which extends from areas authorized for Production into areas not

authorized for Production shall be developed only after consultation with the Federal Oil and

Gas Council about the measures necessary to protect the interests of the Republic of Iraq.

C- The Council of Ministers shall adopt the necessary measures to protect the interests of the

Republic of Iraq in Petroleum Discoveries extending beyond the borders of the Republic. In

such cases efforts shall be made to seek joint solutions with the said neighbouring countries.

Article 17: Conservation

A- The extraction of Petroleum resources shall aim at the avoidance of waste, including

preventing leakages from Pipelines, and the optimal maintenance of energy in the Reservoir

in accordance with Good Oilfield Practices and Good Pipeline Practices.

B- INOC and other holders of an Exploration and Production right shall diligently apply the

latest technologies and oilfield practices that lead to optimum recovery from the individual

Reservoir or a group of Reservoirs that are targeted under the Field Development Plan(s).

C- The Field Development Plan shall be based on thorough investigations of alternative

extraction strategies in order to select a solution that combines the highest level of Petroleum


80

recovery with acceptably high levels of Production and as low cost as possible.

D- Subsequent to the approval of a Field Development Plan, INOC and other holders of

Exploration and Production right shall continue to improve Reservoir understanding through

optimal data collection and Reservoir monitoring and shall accordingly seek to identify and

implement actions that would improve Petroleum recovery.

Article 18: Access to Main Pipelines and Field Pipelines

A- The Main Pipelines are the property of the Federal Government.

B- INOC as the Transporter with respect to Main Pipelines and the holder of Exploration and

Production right under Article 18A with respect to Field Pipelines have the obligation to

transport, without any discrimination and on reasonable commercial terms, the Petroleum of

third parties, provided in general that:

1- capacity is available in the Field Pipeline;

2- there are no insurmountable technical problems that prevent such utilisation of the Field

Pipeline.

C- Details shall be provided for the modalities of the system of access by third parties to

Field Pipelines in regulations to be made by the Ministry in coordination with the Regions

and Producing Governorates.

D- Whenever there is a dispute concerning the commercially reasonable terms for the

transport of Petroleum in a Main Pipeline or a Field Pipeline for Crude Oil or for Natural

Gas, the availability of uncommitted capacity in the pipeline in question or a proposed

increase of its capacity, the dispute shall be first referred to the Ministry for resolution, the

Ministry must work in coordination with Regions and Producing Governorates. Thereafter,


81

resolution shall be sought according to the procedures set out in Article 30 of this Law.

Article 19: Ownership of Data

A- All data obtained pursuant to any Contract provided for under this Law is the property of

the Iraqi Government, and shall not be published, reproduced or exported without the prior

approval of the Ministry.

B- The terms and conditions for the exercise of rights in respect of primary, differentiated,

processes, interpreted and analysed data related to Oil and Gas in Iraq including but not

limited to geological and geophysical reports, engineering data, samples, logs and well

surveys, shall be established in data supply obligations in the relevant contract and by

regulations.

C- The Ministry submits copies of the current available Petroleum data to the INOC and to

the Regions, and the INOC and Regions must take the responsibility of supplying the

Ministry with new data and updates resulted from the Petroleum Operations implemented by

them in a continues and periodic fashion.

D- Anyone who has the information in his possession or sells, buys, transfers, receives, deals

with any of the information or data mentioned in this article shall be considered in violation,

unless the contract terms states otherwise, and shall be prosecuted under the Iraqi criminal

and civil law. No one has the right to own such data and information.

E- Without prejudice to section D of this Article, it is allowed for someone to have a

permission from the Designated Authorities to own, buy, sell, transfer, or receive data and

information indicated in section F of this Article under the condition of supplying the

Designated Authorities with copies of the data, and his permission should not be revoked


82

without logical reasons.

F- Old Data, for the purposes of this law, mean all primary, differentiated, processes,

interpreted and analysed data and information related to Oil and Gas in the Republic of Iraq

indicated in section B of this Article.

Article 20: Restrictions on Production Levels

In the event that, for national policy considerations, there is a need to introduce limitations on

the national level of Petroleum Production, such limitations shall be applied in a fair and

equitable manner and on a pro-rata basis for each Contract Area on the basis of approved

Field Development Plans.

CHAPTER IV: TRANSPORTATION

Article 21: Main Pipelines

A- INOC, or the specialized company created by the Ministry, shall own all Main Pipelines.

Such Pipelines shall be constructed and operated by the INOC subsidiary representing

Transporter for the purpose of transporting Crude Oil or Natural Gas to specified Delivery

Points for Crude Oil and Natural Gas respectively. The Ministry in co-ordination with INOC

and in consultation with Operators shall ensure that the Main Pipeline network is optimally

designed, operated and maintained so as to serve the overall requirement for Petroleum

transportation in the Republic of Iraq.

B- The construction and operation of Main Pipeline or any major modification thereof shall

be subject to approval by the Ministry on the basis of a Main Pipeline Development Plan

outlining the proposed work. If the proposed work is undertaken by the INOC subsidiary


83

company specialized company representing Transporter in association with Iraqi or Foreign

Persons, the agreement between' the parties shall accompany the Main Pipeline Development

Plan. Such agreement shall outline the terms of financing, implementation, and the modalities

of utilisation and operation of the new or modified Main Pipeline.

C- INOC and other holders of Exploration and Production right shall deliver Crude Oil and

Natural Gas to the Main Pipeline at appropriate Transfer Point(s) In accordance with Article

13A. The transportation of Crude Oil or Natural Gas beyond the Transfer Point shall be

carried out by the Designated Authority representing Transporter on the basis of a contract.

D- All the above activities shall be carried out in accordance with Good Pipeline Practices.

E- The co-ordination of tasks related to the transport of Crude Oil through new Pipelines

outside the Iraqi territories is the responsibility of the Ministry. The follow up of operations

subsequent to the approval of the necessary bilateral agreements shall be the responsibility of

INOC in accordance with the said bilateral agreements and any specific instructions from the

Ministry.

Article 22: Rights and Obligations Regarding Pipelines

A- The Exploration and Production Contract shall provide a non-exclusive right to access

Main Pipelines on reasonable commercial terms. It shall also confer the right to construct and

operate Field Pipelines to deliver Crude Oil or Natural Gas from the Contract Area to the

Transfer Point, for further transportation through the Main Pipeline to the Delivery Point.

B- INOC and of her holders of Exploration and Production right shall implement the Field

Development Plan and construct Field Pipelines connected to the Main Pipeline or the

modifications thereto following approval of such plans have been approved by the Ministry.


84

C- INOC and other holders of Exploration and Production right shall prepare and submit a

revised Field Pipeline Development Plan for any material amendment to the original Plan for

approval by the Ministry.

D- INOC and other holders of Exploration and Production right shall negotiate with INOC or

the specialized company as the Transporter for the right to use the Main Pipeline. The

Ministry Is to be kept informed on the progress of these negotiations.

E- INOC and other holders of Exploration and Production right shall submit a

Decommissioning Plan to the Ministry, not later than two (2) years before the planned

termination of Production.

CHAPTER V: GAS

Article 23: Exploitation of Gas

A- Natural Gas is a valuable Petroleum resource of increasing importance in the economic

development of the Republic of Iraq and the Middle East. It shall be utilised to generate

additional revenues through optimal utilisation partly through improving oil recoveries by gas

injection into suitable Reservoirs; through utilisation for power generation, utilisation in

petrochemical and chemical industries, utilisation for domestic purposes, utilisation in

Industrial processes, utilisation for export and/or through the replacement of fluid fuels. The

latter will have the additional benefit of reducing the impact on the environment while at the

same time maximising revenue by freeing more crude and fuel oil for export.

B- INOC and other holders of Exploration and Production rights shall diligently pursue all

alternatives for optimal utilisation of surplus volumes of produced gases in accordance with

the objectives of Article 23A above. Should they fail to identify commercial utilisation, the


85

volumes of surplus Natural Gas shall be offered after treatment to Government at no cost at

the Field's outlet. The cost incurred by the holder of Exploration and Production rights shall

be recoverable under the respective contract.

Article 24: Associated Gas

A- INOC and other holders of Exploration and Production right are entitled to use, free of

charge, the quantity of Associated Natural Gas necessary for Petroleum Operations.

B- INOC and other holders of Exploration and Production rights shall in the Field

Development Plan propose optimal plans for the utilization or disposal of Associated Natural

Gas.

C- All Associated Natural Gas produced from a Reservoir which is neither used in Petroleum

Operations, utilised or re-injected in the Field, shall be offered for delivery free of charge to

the Ministry in accordance with Article 23B above.

Article 25: Flaring of Gas

A- Flaring of Natural Gas is only permitted for the purposes of commissioning, testing of

installations, safety precautions or while awaiting the completion of transportation facilities

provided the flared volumes are strictly kept to a minimum and the Ministry is promptly

notified.

B- The flaring of Associated Natural Gas shall be kept to a minimum. It shall not be

permitted beyond a maximum period of one (1) year during which measures shall be

completed to utilise the gas or deliver it to a nominated government entity in accordance with

Article 23B above.


86

Article 26: Non-associated Gas

A- The Development and Production of Natural Gas or liquid components thereof from a

Non-associated Natural Gas Discovery shall be subject to the approval of the Ministry of a

Field Development Plan supported by signed agreement(s) for the sale of Natural Gas from

the Discovery and approved by the Council of Ministers. In the event that only liquid

Petroleum is to be produced, a scheme for the re-injection of Natural Gas or other acceptable

schemes for its disposal shall be presented in the Field Development Plan.

B- The flaring of Non-associated Natural Gas may only be permitted in accordance with

Article 25B.

CHAPTER VI: REGULATORY MATTERS

Article 27: Regulations for Petroleum Operations

The Ministry, in coordination and collaboration with the INOC, Regions, and Producing

Governorates, shall approve regulations for Petroleum Operations and submit them to the

Federal Oil and Gas Council to be approved.

Article 28: Use and Benefit of Land and Rights of Way

A- Land use and benefit for the purpose of conducting Petroleum Operations is regulated by

the legislation on land use and benefit, without prejudice to the following provisions.

B- For the purpose of conducting Petroleum Operations, the duration of the right of use and

benefit of the land shall be the same as the duration of the Contract.

C- The land where installations are located, and a strip of land, to be defined by regulation,

surrounding those Installations, are considered to be a zone of partial protection in


87

accordance with the legislation on land use and benefit.

D- INOC and other holders of a right to conduct Petroleum Operations who, by virtue of the

exercise of Petroleum Operation rights in the Contract Area, causes damage to crops, soils,

building and improvements or requires the relocation of the legal users or occupants of the

land within the respective Contract Area, has the obligation to compensate the holders of title

to the assets and the persons relocated.

E- Subject to the payment of the compensation that are due, the holder of the right to conduct

Petroleum Operations may require the right of way in accordance with the legislation in

force, in order to have access to the locations where Petroleum Operations are conducted.

F- In cases where lands and rights of way are owned by an Iraqi Person, the land shall be

either rented or bought by the relevant state owned company, according to the applicable

laws and regulations.

Article 29: Access to Zones Subject to Maritime Jurisdiction

The access to Petroleum Operations sites located in interior waters, the territorial waters, and

other zones subject to maritime jurisdiction is regulated by law, and any relevant

international agreements.

Article 30: Inspection

A- The Designated Authority, or its authorized representatives, has the right to inspect sites,

including buildings and installations, where Petroleum Operations are being conducted, as

well as all assets, records and data kept by INOC and other holders of Exploration and

Production right relating to Petroleum Operations.


88

B- The Designated Authority may designate an independent entity or a commission created

for this purpose, to any out the inspection.

C- The terms and conditions pursuant to which the Inspection is carried out shall be

established by regulations.

D- In carrying out its inspections, the Designated Authority shall not unreasonably interfere

with the Petroleum Operations.

Article 31: Environmental Protection and Safety

In addition to carrying out their Operations in accordance with Good Oil Field Practices,

INOC and other holders of Exploration and Production rights shall conduct Petroleum

Operations in accordance with environmental and other applicable legislation of the Republic

of Iraq to prevent pollution of air, lands and waters. They shall also conduct Petroleum

Operations so as to comply with the environmental management standards of the ISO 14000

series, as amended. In general, they shall carry out Petroleum Operations in order to:

1- Ensure that there is no ecological damage or destruction caused by Petroleum Operations,

but where unavoidable, ensure that measures for protection of the environment are in

accordance with internationally acceptable standards. For this purpose, INOC and other

holders of a right shall prepare and submit to the relevant authorities for approval an

environmental impact assessment, including environmental impact mitigation measures, for

each major operation in the Contract Area;

2- Notify the Ministry and other specified authorities immediately in the event of an

emergency or accident affecting the environment;

3- Control the flow and prevent the escape or loss of Petroleum discovered or produced


89

within the Contract Area;

4- Avoid damage to Petroleum Reservoirs;

5- Avoid destruction to land, the water table, trees, crops, buildings or other Infrastructure

and goods;

6- Clean up the sites after the closure of Petroleum Operations and comply with the

environmental resolution requirements;

7- Ensure the health and safety of personnel in the planning and conduct of Petroleum

Operations, and take preventive measures if their physical safety would be at risk;

8- Report to the competent entity within the government on the amounts of operational and

accidental discharge, leakage and waste resulting from Petroleum Operations, and

9- Provide compensation for damages to State and private property in accordance with the

applicable laws and regulations.

B- INOC and other holders of a right under this Law shall act in a secure and effective

manner when conducting Petroleum Operations. In order to guarantee the disposal of polluted

water and waste oil in accordance with approved methods, as well as the safe plugging of all

boreholes and wells before these are abandoned.

Article 32: Transfer of Ownership and Decommissioning

A- On completion of the Exploration and Production Contract or Main Pipeline Contract the

ownership of all works and facilities shall be transferred to the Designated Entity. The

properties shall be transferred to the relevant federal state enterprise or to the Ministry in

actual operating condition and in a satisfactory state of work at the time of the transfer.

B- All site relinquishment and related costs that become due at the time of transfer with


90

regards to any works and facilities shall be payable by INOC and other holders of

Exploration and Production right according to a Decommissioning Plan, submitted in

accordance with Article 9F [sic] of this Law.

C- An outline Decommissioning Plan shall be included in the Field Development Plan

submitted by the Contractor to the Council of Ministers.

CHAPTER VII: FISCAL REGIME

Article 33: Taxation

A- INOC and its subsidiary companies as well as other Individual and collective persons who

are holders of a right to conduct Petroleum Operations are, subject to the payment of the

following fiscal impositions:

1- Royalty;

2- Property Contribution and the Property Transfer Tax (SISA) as established in accordance

with the law;

3- municipal and local taxes due; and

4- the taxes provided for in the Income Tax Code.

B- The appropriate monitoring authority is authorised to establish a law regulating methods

of taxation, the rates, tax exemptions applicable to Petroleum Exploration, Development and

Production activities.

C- The Commission of Financial Audit has the authority to audit the income derived from

Petroleum Operations.

D- A Foreign Person may repatriate its exports proceeds in accordance with the foreign

exchange regulations in force at the time. It may freely transfer shares in accordance with


91

Article 5C Seven.

Article 34 - Royalty

A- INOC and other holders of an Exploration and Production right shall pay a royalty on

Petroleum produced from the Development and Production Area, at the rate of twelve point

five percent (12.5%) of Gross Production measured at the entry flange to the Main Pipeline.

B- The collection of Royalty shall be in kind or in cash at the option of the Ministry.

C- Where the royalty is paid in cash, it shall be calculated according to the prevailing Market

Price in accordance with Petroleum Regulations.

Article 35: Maintaining Records

A- Holders of Exploration and Production right can transfer any net profits from Petroleum

Operations to outside Iraq after paying taxes and fees owed.

B- INOC and other holders of Exploration and Production right shall maintain proper records

and books in both Arabic and English of accounts in accordance with the provisions of the

Contract enabling the relevant calculations to be performed, and in compliance with the

requirements of the laws relevant to the taxes referred to in Article 33. INOC and other

holders shall prepare and submit to the specialised entity annually, or quarterly, a statement

of accounts.

CHAPTER VIII: MISCELLANEOUS PROVISIONS

Article 36: Transparency

A- All activities related to Oil and Gas, while occurring, have to be transparent and


92

responsible. To ensure this transparency and give the Iraqi people the chance to hold

governmental entities responsible for their activities and actions, different sorts of

information must be published. This information includes but is not limited to the following:

1- All the revenues, payments and receipts that are delivered to any governmental unit, or

entity run by the government, from activities related to Oil or Gas. This includes but is not

limited to the income of selling Oil, Gas and their products, signing and production rewards,

royalties, revenue of selling assets, taxes, fees, customs and taxes, public services fees, share

of profits from oil and gas cartels, commercial activates related to Oil and Gas (and their

products) contracts, oil and gas revenue investment yield, and any other payments resulted

from or related to commercial Production of hydrocarbons;

2- The revenues of oil and gas usage and distribution, including distribution among

governmental entities;

3- All of the financially significant contracts related to Exploration, Development, processing

and marketing of oil and gas resources in Iraq;

4- All of the financially significant contracts related to importing or exporting services and

goods for the Oil and Gas industry or by any governmental unit or entity controlled by the

government;

5- The annual report of the Federal Oil and Gas Council;

6-The annual and quarterly reports of the INOC, the subsidiary companies, and the entities

controlled by the government including the budgets audited according to international

accounting standards;

7- All other information necessary for understanding the operations and activities carried out

by any governmental unit or entities controlled by the government related to oil and gas;


93

8- Any information that must be declared in accordance to laws and regulations;

9- Any condition or secret agreement aimed at blocking or trying to block access to

documents and information that must be made public in accordance to this Article in

considered in violation of the law and is considered void.

B- Publicizing the information stated in Section A of this Article does not extend to and has

no effect on the Oil and Gas industry royalties that must be kept secret in accordance to the

national or international laws except for financial information.

C- Any person or governmental entity obligated to publish information mentioned in Section

A of this Article shall publish it in publicly accessible media.

D- The Ministry shall issue the regulations needed for implementing the laws of this Section

including the legal basis covering what should be included and an exempted as mentioned in

Section B of this Article.

Article 37: Implementing Anti-corruption Laws

A- Any contractual right shall be considered void if it is in violation of any of the laws of the

Republic of Iraq, particularly the Iraqi anti-corruption laws.

B- The authorized person’s violation of the Iraqi anti-corruption may lead to the cancellation

of his rights contract, in whole or in part. Each rights contract shall include terms indicating

these conditions.

C- Any person who violates the Iraqi anti-corruption laws may be prosecuted under the

criminal law active in Iraq.


94

Article 38: Competitive Public Bidding

A- All oil companies working in the Republic of Iraq shall submit public bids on a

competitive basis in order to offer any goods or services, and this should occur in accordance

to the general bidding laws and the Federal Oil and Gas Council shall determine the

maximum amount that can be excluded from the bidding process.

B- Bidding by the holders of Petroleum Operations rights stated in this Law shall be

competitive and in accordance with the Petroleum laws and with the special terms of the

related contracts.

C- All public bidding must be allowed to the public within a reasonable timeframe, must

declare thereafter the reasons for selecting the chosen bid, the complete results of the bidding

call must also be published, and competitors must be given the opportunity to raise

objections.

D- Any contract that is signed in violation of the regulations set by this Article shall be

considered void and inactive.

Article 39: Resolution of Disputes

A- Any disputes arising from the interpretation and application of this Law, the Regulations

for Petroleum Operations and the terms and conditions of contracts shall in the first instance

be attempted to be resolved in good faith by means of negotiation among the parties.

B- If the dispute cannot be resolved by agreement, the matter shall be referred to the Minister

to resolve through discussions with senior officers of the holders of rights concerned. Failing

resolution through these discussions the matter of dispute may be submitted to arbitration or

to the competent judicial authority.


95

C- If the dispute relates to a technical, engineering, operational or accounting matter relative

to Petroleum Operations and is of a kind that is readily subject to resolution by an expert in

the relevant field, the parties may refer the dispute to an independent technical expert for a

recommendation as to the resolution of the dispute. If a party does not accept the

recommendation of the expert, it may initiate arbitration proceedings according to Article

39D below.

D- Arbitration between the State of Iraq and foreign investors shall be conducted as follows:

1. In accordance with the Rules of Procedure for Arbitration Proceedings of Paris, Geneva or

Cairo for the Settlement of Disputes between States and Nationals of other States and based

on the Iraqi law.

2. The rules of such other international instances of recognised standing as agreed by the

parties to the contracts referred to in this law, provided that the parties have expressly defined

in the contract the conditions for Implementation including the method for the designation of

the arbitrators and the time limit within which the decision must be made.

Article 40: Existing Contracts

A. The Designated Authority in the Kurdistan Region will take responsibility to review all

existing Exploration and Production contracts with any entity before this law enters into force

to ensure harmony with the objectives and general provisions of this law to obtain maximum

economic returns to the people of Iraq, taking into consideration the prevailing circumstances

at the time at which those contracts were agreed, and in a period not exceeding three (3)

months from the date of entry into force of this law. The Panel of Independent Advisors will

take responsibility to assess the contracts referred to in this Article, and their opinion shall be


96

binding in relation to these contracts.

B. Except for the provision of paragraph A above, the Ministry shall review all the existing

Exploration and Production contracts with any entity before this law enters into force to

ensure harmony with the objectives and general provisions of this Law. These contracts must

then be submitted to the Federal Oil and Gas Council, to ensure and to validate the maximum

economic return for the people of Iraq, in a period not exceeding three (3) months from the

time the Federal Oil and Gas Council issues model contracts and related regulations. The

Federal Oil and Gas Council shall take a decision on the accuracy of the review and validity

of the contracts.

Article 41: Changes in Administrative Borders

In the case of changes in borders of Regions or Producing Governorates, or in the case of

establishing new Regions, the new affected places shall be dealt with in accordance to the

provisions of this Law regarding to granting rights and Petroleum Operations.

Article 42: Relationship to Existing Legislation

Any Article in prejudice to this Law shall cease to be effective on adoption of this Law.

Article 43: Entry into Force

This Law enters into force thirty (30) days after publication in the Official Gazette.

Council of Ministers: Oil and Energy Committee. 2007. Draft Iraq Oil and Gas Law. Baghdad, Iraq.


97

Appendix 3: Eller, Hartley, Medlock DEA and SFA Revenue Efficiency Measures

Eller, Stacy L., Peter Hartley, and Kenneth B. Medlock III. 2007. “Empirical Evidence on the Operational

Efficiency of National Oil Companies,” James A. Baker III Institute for Public Policy, Rice University.


98

Appendix 4: Government Net Revenues From Nationalized Majnoon

Yea

rT

ime

t=P

rod

uct

ion

(b

bl/

yr)

Rev

enu

e ($

)F

easi

bil

ity

Co

sts

($)

Dev

elo

pm

ent

Co

sts

($)

Fix

ed O

p.

Co

sts

($)

Va

ria

ble

Op

. C

ost

s ($

)N

et R

even

ue

($)

PV

Net

Rev

enu

e ($

)

2009

10

0-10,000,000

-2,000,000,000

-200,000,000

0-2,210,000,000

-1,990,990,991

2010

20

0-10,000,000

-1,000,000,000

00

-1,010,000,000

-819,738,658

2011

30

0-10,000,000

-37,037,037

00

-47,037,037

-34,393,076

2012

465,700,000

4,020,361,178

0-37,037,037

0-65,700,000

3,917,624,141

2,580,660,367

2013

5131,400,000

8,281,944,028

0-37,037,037

0-131,400,000

8,113,506,990

4,814,971,499

2014

6197,100,000

12,795,603,522

0-37,037,037

0-197,100,000

12,561,466,485

6,715,872,944

2015

7219,000,000

14,643,857,365

0-37,037,037

0-219,000,000

14,387,820,328

6,930,014,675

2016

8219,000,000

15,083,173,086

0-37,037,037

0-219,000,000

14,827,136,049

6,433,887,196

2017

9219,000,000

15,535,668,278

0-37,037,037

0-219,000,000

15,279,631,241

5,973,186,351

2018

10

219,000,000

16,001,738,326

0-37,037,037

0-219,000,000

15,745,701,289

5,545,391,602

2019

11

219,000,000

16,481,790,476

0-37,037,037

0-219,000,000

16,225,753,439

5,148,160,827

2020

12

219,000,000

16,976,244,191

0-37,037,037

0-219,000,000

16,720,207,154

4,779,317,784

2021

13

219,000,000

17,485,531,516

0-37,037,037

0-219,000,000

17,229,494,479

4,436,840,444

2022

14

219,000,000

18,010,097,462

0-37,037,037

0-219,000,000

17,754,060,425

4,118,850,137

2023

15

219,000,000

18,550,400,386

0-37,037,037

0-219,000,000

18,294,363,349

3,823,601,459

2024

16

219,000,000

19,106,912,397

0-37,037,037

0-219,000,000

18,850,875,360

3,549,472,872

2025

17

219,000,000

19,680,119,769

0-37,037,037

0-219,000,000

19,424,082,732

3,294,957,975

2026

18

219,000,000

20,270,523,362

0-37,037,037

0-219,000,000

20,014,486,325

3,058,657,370

2027

19

219,000,000

20,878,639,063

0-37,037,037

0-219,000,000

20,622,602,026

2,839,271,113

2028

20

219,000,000

21,504,998,235

0-37,037,037

0-219,000,000

21,248,961,198

2,635,591,679

2029

21

219,000,000

22,150,148,182

0-37,037,037

0-219,000,000

21,894,111,145

2,446,497,430

2030

22

219,000,000

22,814,652,627

0-37,037,037

0-219,000,000

22,558,615,590

2,270,946,539

2031

23

219,000,000

23,499,092,206

0-37,037,037

0-219,000,000

23,243,055,169

2,107,971,335

2032

24

219,000,000

24,204,064,972

0-37,037,037

0-219,000,000

23,948,027,935

1,956,673,058

2033

25

219,000,000

24,930,186,922

0-37,037,037

0-219,000,000

24,674,149,885

1,816,216,969

2034

26

219,000,000

25,678,092,529

0-37,037,037

0-219,000,000

25,422,055,492

1,685,827,810

2035

27

219,000,000

26,448,435,305

0-37,037,037

0-219,000,000

26,192,398,268

1,564,785,592

2036

28

212,430,000

26,424,631,713

0-37,037,037

0-318,645,000

26,068,949,676

1,403,072,549

2037

29

206,057,100

26,400,849,545

0-37,037,037

0-309,085,650

26,054,726,858

1,263,339,688

2038

30

199,875,387

26,377,088,780

00

0-299,813,081

26,077,275,700

1,139,128,860

2039

31

193,879,125

26,353,349,400

00

0-290,818,688

26,062,530,712

1,025,661,944

2040

32

188,062,752

26,329,631,386

00

0-282,094,127

26,047,537,258

923,488,192

2041

33

182,420,869

26,305,934,718

00

0-273,631,304

26,032,303,414

831,484,767

2042

34

176,948,243

26,282,259,376

00

0-265,422,365

26,016,837,012

748,640,327

2043

35

171,639,796

26,258,605,343

00

0-257,459,694

26,001,145,649

674,043,968

2044

36

166,490,602

26,234,972,598

00

0-249,735,903

25,985,236,695

606,875,270

2045

37

161,495,884

26,211,361,123

00

0-242,243,826

25,969,117,297

546,395,323

2046

38

156,651,007

26,187,770,898

00

0-234,976,511

25,952,794,387

491,938,635

2047

39

151,951,477

26,164,201,904

00

0-227,927,216

25,936,274,688

442,905,858

2048

40

147,392,933

26,140,654,122

00

0-221,089,399

25,919,564,723

398,757,214

2049

41

142,971,145

26,117,127,534

00

0-214,456,717

25,902,670,816

359,006,586

To

tals

7,4

51

,46

6,3

19

81

2,8

20

,71

3,8

25

-30

,00

0,0

00

-4,0

00

,00

0,0

00

-20

0,0

00

,00

0-8

,68

0,5

99

,47

97

99

,91

0,1

14

,34

69

8,5

37

,24

1,4

83


99

Appendix 5: Government Net Revenues Under PSA

Yea

rT

ime

t=P

rod

uct

ion

(b

bl/

yea

r)R

even

ue

($)

Cost

Oil

($)

Net

Rev

enu

e B

efore

80:2

0 S

pli

t ($

)N

et R

even

ue

Aft

er 8

0:2

0 S

pli

t ($

)P

rod

uct

ion

Bon

us

($)

Net

Rev

enu

e ($

)P

V N

et R

even

ue

($)

2009

10

25,000,000

025,000,000

25,000,000

025,000,000

25,000,000

2010

20

00

00

00

0

2011

30

00

00

00

0

2012

465,700,000

4,020,361,178-1,608,144,471

2,412,216,707

1,929,773,366

-2,000,000

1,927,773,366

1,269,884,027

2013

5131,400,000

8,281,944,028-1,761,592,566

6,520,351,462

5,216,281,169

-3,000,000

5,213,281,169

3,093,828,633

2014

6197,100,000

12,795,603,522

-204,572,037

12,591,031,485

10,072,825,188

-1,000,000

10,071,825,188

5,384,809,040

2015

7219,000,000

14,643,857,365

-223,187,037

14,420,670,328

11,536,536,262

011,536,536,262

5,556,669,723

2016

8219,000,000

15,083,173,086

-223,187,037

14,859,986,049

11,887,988,839

011,887,988,839

5,158,513,345

2017

9219,000,000

15,535,668,278

-223,187,037

15,312,481,241

12,249,984,993

012,249,984,993

4,788,822,583

2018

10

219,000,000

16,001,738,326

-223,187,037

15,778,551,289

12,622,841,032

012,622,841,032

4,445,568,689

2019

11

219,000,000

16,481,790,476

-223,187,037

16,258,603,439

13,006,882,751

013,006,882,751

4,126,866,867

2020

12

219,000,000

16,976,244,191

-223,187,037

16,753,057,154

13,402,445,723

013,402,445,723

3,830,966,124

2021

13

219,000,000

17,485,531,516

-223,187,037

17,262,344,479

13,809,875,583

013,809,875,583

3,556,239,830

2022

14

219,000,000

18,010,097,462

-223,187,037

17,786,910,425

14,229,528,340

014,229,528,340

3,301,176,934

2023

15

219,000,000

18,550,400,386

-223,187,037

18,327,213,349

14,661,770,679

014,661,770,679

3,064,373,801

2024

16

219,000,000

19,106,912,397

-223,187,037

18,883,725,360

15,106,980,288

015,106,980,288

2,844,526,617

2025

17

219,000,000

19,680,119,769

-223,187,037

19,456,932,732

15,565,546,186

015,565,546,186

2,640,424,325

2026

18

219,000,000

20,270,523,362

-223,187,037

20,047,336,325

16,037,869,060

016,037,869,060

2,450,942,063

2027

19

219,000,000

20,878,639,063

-223,187,037

20,655,452,026

16,524,361,621

016,524,361,621

2,275,035,059

2028

20

219,000,000

21,504,998,235

-223,187,037

21,281,811,198

17,025,448,958

017,025,448,958

2,111,732,954

2029

21

219,000,000

22,150,148,182

-223,187,037

21,926,961,145

17,541,568,916

017,541,568,916

1,960,134,531

2030

22

219,000,000

22,814,652,627

-223,187,037

22,591,465,590

18,073,172,472

018,073,172,472

1,819,402,804

2031

23

219,000,000

23,499,092,206

-223,187,037

23,275,905,169

18,620,724,135

018,620,724,135

1,688,760,468

2032

24

219,000,000

24,204,064,972

-223,187,037

23,980,877,935

19,184,702,348

019,184,702,348

1,567,485,653

2033

25

219,000,000

24,930,186,922

-223,187,037

24,706,999,885

19,765,599,908

019,765,599,908

1,454,907,995

2034

26

219,000,000

25,678,092,529

-223,187,037

25,454,905,492

20,363,924,394

020,363,924,394

1,350,404,969

2035

27

219,000,000

26,448,435,305

-223,187,037

26,225,248,268

20,980,198,614

020,980,198,614

1,253,398,492

2036

28

212,430,000

26,424,631,713

-307,885,287

26,116,746,426

20,893,397,141

020,893,397,141

1,124,516,037

2037

29

206,057,100

26,400,849,545

-260,351,419

26,140,498,126

20,912,398,501

020,912,398,501

1,013,998,847

2038

30

199,875,387

26,377,088,780

-270,848,250

26,106,240,530

20,884,992,424

020,884,992,424

912,315,300

2039

31

193,879,125

26,353,349,400

-223,314,382

26,130,035,018

20,904,028,015

020,904,028,015

822,654,801

2040

32

188,062,752

26,329,631,386

-270,848,250

26,058,783,136

20,847,026,509

020,847,026,509

739,109,522

2041

33

182,420,869

26,305,934,718

-223,314,382

26,082,620,336

20,866,096,268

020,866,096,268

666,473,532

2042

34

176,948,243

26,282,259,376

-270,848,250

26,011,411,126

20,809,128,901

020,809,128,901

598,787,357

2043

35

171,639,796

26,258,605,343

-223,314,382

26,035,290,961

20,828,232,769

020,828,232,769

539,943,311

2044

36

166,490,602

26,234,972,598

-270,848,250

25,964,124,348

20,771,299,479

020,771,299,479

485,105,760

2045

37

161,495,884

26,211,361,123

-223,314,382

25,988,046,741

20,790,437,393

020,790,437,393

437,434,881

2046

38

156,651,007

26,187,770,898

-270,848,250

25,916,922,648

20,733,538,118

020,733,538,118

393,006,946

2047

39

151,951,477

26,164,201,904

-223,314,382

25,940,887,522

20,752,710,017

020,752,710,017

354,387,704

2048

40

147,392,933

26,140,654,122

-270,848,250

25,869,805,872

20,695,844,698

020,695,844,698

318,393,362

2049

41

142,971,145

26,117,127,534

-223,314,382

25,893,813,151

20,715,050,521

020,715,050,521

287,107,056

Tota

ls7,4

51,4

66,3

19

812,8

45,7

13,8

25

801,0

51,2

64,4

74

640,8

46,0

11,5

79

-6,0

00,0

00

640,8

40,0

11,5

79

79,7

13,1

09,9

44


100

Appendix 6: Nationalized Majnoon at 81.5% Efficiency

Yea

rT

ime

t=81.5

% P

rod

uct

ion

(b

bl/

yr)

Rev

enu

e ($

)F

easi

bil

ity C

ost

s ($

)D

evel

op

men

t C

ost

s ($

)F

ixed

Op

. C

ost

s ($

)V

ari

ab

le O

p. C

ost

s ($

)N

et R

even

ue

($)

PV

Net

Rev

enu

e ($

)

2009

10

0-10,000,000

-2,000,000,000

-200,000,000

0-2,210,000,000

-1,990,990,991

2010

20

0-10,000,000

-1,000,000,000

00

-1,010,000,000

-819,738,658

2011

30

0-10,000,000

-37,037,037

00

-47,037,037

-34,393,076

2012

453,545,500

3,276,594,360

0-37,037,037

0-53,545,500

3,186,011,823

2,098,724,672

2013

5107,091,000

6,749,784,382

0-37,037,037

0-107,091,000

6,605,656,345

3,920,135,531

2014

6160,636,500

10,428,416,871

0-37,037,037

0-160,636,500

10,230,743,334

5,469,773,170

2015

7178,485,000

11,934,743,752

0-37,037,037

0-178,485,000

11,719,221,715

5,644,661,708

2016

8178,485,000

12,292,786,065

0-37,037,037

0-178,485,000

12,077,264,028

5,240,644,864

2017

9178,485,000

12,661,569,647

0-37,037,037

0-178,485,000

12,446,047,610

4,865,468,317

2018

10

178,485,000

13,041,416,736

0-37,037,037

0-178,485,000

12,825,894,699

4,517,081,039

2019

11

178,485,000

13,432,659,238

0-37,037,037

0-178,485,000

13,217,137,201

4,193,577,096

2020

12

178,485,000

13,835,639,015

0-37,037,037

0-178,485,000

13,620,116,978

3,893,185,455

2021

13

178,485,000

14,250,708,186

0-37,037,037

0-178,485,000

14,035,186,149

3,614,260,512

2022

14

178,485,000

14,678,229,431

0-37,037,037

0-178,485,000

14,462,707,394

3,355,273,268

2023

15

178,485,000

15,118,576,314

0-37,037,037

0-178,485,000

14,903,054,277

3,114,803,122

2024

16

178,485,000

15,572,133,604

0-37,037,037

0-178,485,000

15,356,611,567

2,891,530,241

2025

17

178,485,000

16,039,297,612

0-37,037,037

0-178,485,000

15,823,775,575

2,684,228,452

2026

18

178,485,000

16,520,476,540

0-37,037,037

0-178,485,000

16,304,954,503

2,491,758,642

2027

19

178,485,000

17,016,090,836

0-37,037,037

0-178,485,000

16,800,568,799

2,313,062,610

2028

20

178,485,000

17,526,573,561

0-37,037,037

0-178,485,000

17,311,051,524

2,147,157,356

2029

21

178,485,000

18,052,370,768

0-37,037,037

0-178,485,000

17,836,848,731

1,993,129,764

2030

22

178,485,000

18,593,941,891

0-37,037,037

0-178,485,000

18,378,419,854

1,850,131,662

2031

23

178,485,000

19,151,760,148

0-37,037,037

0-178,485,000

18,936,238,111

1,717,375,227

2032

24

178,485,000

19,726,312,953

0-37,037,037

0-178,485,000

19,510,790,916

1,594,128,712

2033

25

178,485,000

20,318,102,341

0-37,037,037

0-178,485,000

20,102,580,304

1,479,712,478

2034

26

178,485,000

20,927,645,411

0-37,037,037

0-178,485,000

20,712,123,374

1,373,495,295

2035

27

178,485,000

21,555,474,774

0-37,037,037

0-178,485,000

21,339,952,737

1,274,890,914

2036

28

173,130,450

21,536,074,846

0-37,037,037

0-259,695,675

21,239,342,134

1,143,135,350

2037

29

167,936,537

21,516,692,379

0-37,037,037

0-251,904,805

21,227,750,537

1,029,289,614

2038

30

162,898,440

21,497,327,356

00

0-244,347,661

21,252,979,695

928,390,021

2039

31

158,011,487

21,477,979,761

00

0-237,017,231

21,240,962,530

835,914,484

2040

32

153,271,143

21,458,649,579

00

0-229,906,714

21,228,742,866

752,642,876

2041

33

148,673,008

21,439,336,795

00

0-223,009,512

21,216,327,282

677,660,085

2042

34

144,212,818

21,420,041,392

00

0-216,319,227

21,203,722,165

610,141,866

2043

35

139,886,434

21,400,763,355

00

0-209,829,650

21,190,933,704

549,345,834

2044

36

135,689,841

21,381,502,667

00

0-203,534,761

21,177,967,907

494,603,345

2045

37

131,619,145

21,362,259,315

00

0-197,428,718

21,164,830,597

445,312,188

2046

38

127,670,571

21,343,033,282

00

0-191,505,856

21,151,527,425

400,929,988

2047

39

123,840,454

21,323,824,552

00

0-185,760,681

21,138,063,871

360,968,274

2048

40

120,125,240

21,304,633,110

00

0-180,187,860

21,124,445,249

324,987,129

2049

41

116,521,483

21,285,458,940

00

0-174,782,224

21,110,676,715

292,590,368

Tota

ls6,0

72,9

45,0

50

662,4

48,8

81,7

67

-30,0

00,0

00

-4,0

00,0

00,0

00

-200,0

00,0

00

-7,0

74,6

88,5

75

651,1

44,1

93,1

92

79,7

38,9

78,8

05


101

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