Oil production 1,000 b/d Oil exports 1,000 b/d Value of oil exports ($millions) (OPEC reporting) OPEC Reference Basket (ORB) and corresponding spot components prices ($/b) Basra light My calculation (export and price) $million Crude oil exports – DFI (before 5% Kuwait deduction)* $million Crude oil exports- DFI (5% Kuwait deductions included) $million IEITI (SOMO reporting) $million Crude oil exports after deducting Kuwait 5% (my calculation) $million 2003 1,377 388 7,990 26.60 3,777 - 3,726 - 3,588 2004 2,107 1,450 18,490 34.60 18,362 - 16,491 - 17,444 2005 1,853 1,472 19,773 48.33 26,038 - 21,914 - 24,736 2006 1,957 1,450 29,500 57.97 30,765 - 28,312 - 29,226 2007 2,035 1,460 37,300 66.40 35,481 - 35,883 - 33,707 2008 2,280 1,855 63,726 92.08 62,519 - 58,790 - 59,390 2009 2,336 1,906 39,430 60.50 42,204 41,329 37,016 41,329 40,094 2010 2,358 1,890 51,764 76.79 53,119 52,202 48,825 52,202 50,463 2011 2,652 2,166 83,253 106.17 84,167 80,796 75,416 82,986 79,958 2012 2,942 2,423 94,311 107.96 95,741 - 89,154 - 90,954 Table 6.5: Iraqi oil export revenues according to OPEC, Iraqi Extractive Industries Transparency initiative (IEITI) and Development Fund for Iraq (DFI) (2003-2012) *: 5% compensation for Kuwait invasion in 1990 (for more details, see Chapter Three) Sources: OPEC (2008; 2013), IEITI (2009; 2010; 2011)
Type of Contract: Bid Round 1 (BR1) Producing Field Technical Services Contract (PFTSC). Contract length 20 yrs + 5. Note: There are a number of inconsistencies between the descriptions of the West Qurna1 version of the contract in Jiyad, Wells and other sources. The parameters given below are therefore something of a compromise between the different versions. Table 6.6: Physical parameters Parameter Value Acronyms Document Source Notes Reserves in place 25 billion barrels Wells (November 2009:2) Recoverable reserves 12.163 billion barrels (48.6%) Estimate based on Jiyad production schedule (December 2010:6) and decline rate in Wells (2009:3) Jiyad (December 2010:19) states 8.6 billion but this is not consistent with his own production schedule Initial production rate in 2010/ baseline production 0.544 mbd BLP Contract p.6 Jiyad (December 2010:6,19) 0.544 mbd = 198,696 000’s barrels per year (1 yr = 365.25 days) Baseline production rate BLP declining at 5% per annum BLP rate Contract p.3 Jiyad (September 2010:8) Incremental production Actual production in excess of BLP Contract p.6 Plateau production 2.325 mbd PPP Contract p.8 Wells (2009:3) Mousa (2010:10) 2.350 mbd according to Jiyad (December 2010:6,19) Plateau start year 2017 Wells (2009:3) 2016 according to Jiyad (December 2010:6) Estimated decline rate after PPP 13% per annum Wells (2009:3) Inconsistent with Jiyad (December
2010:6) (approx. 5%) Source: West Qurna1: Exxon-Shell Model (based mainly on Jiyad, September and December 2010; Wells, 2009; and Technical Services Contract for Brown Fields) Table 6.7A: Financial parameters Parameter Value Acronym Document Source Notes Oil price $60 per barrel SEE NOTE BELOW Wells (2009:7) For simplicity, all prices and costs in model are assumed to be “real” (i.e. after allowing for inflation) Capital expenditure $25 billion CAPEX Wells (November 2009:7) Distributed similar to Wells p.7 Operating expenditure $24.13 billion ($2/barrel) OPEX Wells (November 2009:7) Actual figure is $25 billion in Wells (2009:7) No breakdown between fixed and variable OPEX available so all OPEX is variable Signature bonus $100 million SB Jiyad (September 2010:3) Jiyad (December 2010:19) Original $400 million SB (loan) recoverable as supplementary cost now abandoned Minimum expenditure obligation $200 million MEO Jiyad (December 2010:16) Early recovery payment cap 50% of “deemed revenues” of incremental production ERPC Jiyad (December 2010:15,16) Basic remuneration fee $1.9 per barrel RF Jiyad (December 2010:19)
Difficult to conclude formula because every region wants most of the pie Formula decided by the government can be changed frequently The formula has little relation to actual sub-national expenditures Misspending on non-economic projects may rise Revenue-based collection by governments More attractive than revenue sharing as long as only part of resource taxation accrues to e.g. specific production excise duties More likely to diffuse separatist movements than revenue sharing If all the resources are collected by sub-nationals then much more revenue will be decentralised Inequality will exceed the revenue sharing if all resources are decentralised The fiscal gap is bigger under this system; equalisation cannot eliminate it if all resources are decentralised Direct revenue distribution Easy and all citizens receive equal share Reduces poverty It takes some money away from government, Difficult to implement in developing countries; these countries are less bound by rules and more susceptible to corruption It can encourage
2011 191 6,019 185 5,686 180 5,419 2012 215 6,215 216 6,410 208 6,079 2013 222 6,676 229 6,594 229 - Sources: The World Bank IMF estimates – World Economic Outlook database April (2013) Central Bank of Iraq – Statistics (Various Years) Government budget revenues are normally estimated on the basis of expected average oil price and production for the next year; for example, 2009 budget revenues were estimated based on an assumed average export of 2 mb/d and a price of $50/b. According to government calculations, total oil export revenues for that year were $36 billion. If the 5% for Kuwait debt is subtracted, $34 billion is left. The actual revenues deposited in the DFI account for 2009 were $37 billion (see Table 8.1). Thus, in 2009, Iraq was still left with some surplus in oil exports (the calculated difference between the government assumptions of price and average export and the actual price and export). However, expenditure greatly exceeded revenue, leading to a budget deficit of 19 trillion Iraqi Dinars (ID). This is equivalent to $15 billion – or 13% of GDP (see Tables 8.3 and 8.4).
Table 8.4: Total government revenue and expenditures, 2008-2013 2008 ID trillion 2008 $billion % of GDP 2009 ID trillion 2009 $billion % of GDP 2010 ID trillion 2010 $ billion % of GDP 2011 ID trillion 2011 $ billion % of GDP 2012 ID trillion 2012 $ billion % of GDP 2013 ID trillion 2013 $ billion % of GDP Total Revenues 80 69 53 50 43 37 62 52 36 81 69 38 102 87 42 119 100 44 Total Expenditures 92 79 61 69 58 50 85 72 50 97 82 46 117 99 48 138 117 52 Deficit - 12 -10 8 -19 -15 13 -23 -20 14 -16 -13 8 -15 -12 6 -19 -17 -8 Source: Iraq Ministry of Finance – Budget Law for Federal Iraq 2008- 2013 , Note: for GDP see Table 8.3 (all GDP are in $billions) Table 8.5: Government revenues, 2008-2013 Revenues 2008 ID trillion 2008 $ billion *% of GDP 2009 ID trillion 2009 $billion % of GDP 2010 ID trillion 2010 $ billion % of GDP 2011 ID trillion 2011 $ billion % of GDP 2012 ID trillion 2012 $ billion % of GDP 2013 ID trillion 2013 $billion % of GDP Oil export revenues 73 61 47 43 36 31 56 48 33 76 65 36 94 80 38 111 94 41 Other revenues 7.5 6 5 7 6 5 6 5 3 5 4 2 8 7 3 8 7 3 Total 80.5 67 54 50 42 36 61 52 36 81 69 38 102 87 41 119 101 45 Source: Iraq Ministry of Finance – Federal Budget – Budget Archives, http://www.mof.gov.iq/ *Author calculation based on GDP (see Table 8.3)
The total budget has risen steadily since 2007, with just one drop in 2009 (because of the decline in oil prices that year) (see Table 8.4). In 2013, the budget increased by 18% compared to 2012. Kurdistan’s share also increased in this year – but by just 14%, from ID12.6 trillion ($10.6 billion) to ID14.6 trillion ($12 billion). The fact that Kurdistan’s share is not rising at the same pace as sovereign expenditure means that in real terms, it is declining. The law stipulates that sovereign expenditure should be agreed with regions and provinces, but this was not the case with the 2013 budget, which was passed without KRG agreement (MEES, 2013A). The KRG boycotted the budget in protest at the fact that the federal government had paid only ID750 billion ($645 million) towards oil investors’ costs, less than a fifth of the ID4 trillion ($3.5 billion) the KRG had demanded (MEES, 2013A). The central government in turn defended its refusal to pay, arguing that by reducing its oil exports and keeping the oil for domestic consumption (see section 8.9.3), the KRG had breached its budget conditions. Table 8.6: Calculation of Kurdistan’s share of the budget 2012 ID billions 2013 ID billions Total budget less sovereign expenditures: Council of Representatives 117,123 283 138,424 228 Human Rights Committee - 20 Commission of Integrity 62 80 Presidency 113 95 Council of Ministers 81 95 Prime Minister 418 396 Deputy Prime Minister’s Office for Energy Affairs - 4 Deputy Prime Minister’s Office for Economic Affairs - 8 Deputy Prime Minister’s Office for Social Affairs - 8 National Security Council 11 19 Iraqi Council for Radioactive Sources 3 4 General President’s Office 63 65 Iraqi National Intelligence Service 223 274 General Inspector Intelligence Service 4 - Foreign Ministry 451 604 Border and Nationality 938 1,259 Defence 7,061 9,206 Interest due to World Bank 10 8 Interest due to Arab banks 12 8 Interest due to other foreign agencies 6 25 Interest on bonds for private sector debts 189 189
Interest on Treasury Bond transfers 374 271 Debt payments 3,421 2,923 Financial Experts Council 6 6 Payment towards production cost of crude oil exports, including Kurdistan oil contracts 2,950 2,400 Foreign oil company projects for federal government - 13,600 Foreign company projects for Kurdistan - 750 Cost to transport oil via Turkey 300 300 Contributions to Arabic and world events 145 108 Kuwait debt 4,719 5,553 Foreign oil companies’ projects 7,500 Joint funding expenses 100 100 Debts of old Treasury Bonds 578 400 Debts owed to private sector in foreign countries 58 42 Debt payments to World Bank - 239 Debts settlement for Iraqi airlines - 233 Weather forecast projects - 1,400 Cost of constructing Council of Representatives building and housing for its members 21 Dam projects 360 250 Marine projects 285 163 Rail infrastructure 247 388 Airline management 2 - Minus total of sovereign expenditures (30, 997) (40,382) 86,126 98,042 Minus total of ruling expenditures (8,952) (10,101) 77,174 87,941 Minus reconstruction projects for provinces and Kurdistan (6,184) (7,256) 70,990 80,685 Minus petrodollars to provinces and regions (1,676) (1,317) 69,314 79,368 Kurdistan’s share (17% *69,314) 11,783 (17%*79,368) 13,492 Plus Kurdistan’s share of petrodollars and reconstruction fund 821 914 Total share of Kurdistan 12,605 14,406 Source: Iraq Ministry of Finance – Financial Statements – Kurdistan share, Figure 8.4 Federal budget transfers to KRG and other provinces in 2013
experiences of Colombia, Indonesia and Canada demonstrate the difficulty of addressing unequal revenue distribution among sub-nationals, even with an equalisation system. The problem is likely to be even worse in Iraq, which has no such system. The asymmetric nature of the revenue sharing system means that only 6.8% of the total budget is transferred to provinces (this includes petrodollar payments). This is less than their real expenditures. Oil price volatility also affects the amount that they receive, especially as there are no short-term funds to protect the money transferred. The volatility of prices affects the other provinces more than Kurdistan because, unlike Kurdistan, there is no binding formula protecting their transfer. The literature indicates that the revenue sharing system is designed to match revenue to expenditure needs (Seale, 2007; Boadway and Shah, 2009), but this is not happening in Iraq. Transfers to the provinces are not being made according to the needs criterion, which one assumes should be based on the number of people living in poverty or the fiscal gap. Poorer areas do not receive larger transfers, especially if they are not resource-rich. Chapter Nine: Conclusions 9.1 Introduction This chapter presents the main conclusions and implications of this study. It begins with an overview of the study’s main purpose and the research questions, before examining the contribution it makes to the literature and policy analysis. The final sections consider the limitations of the study and offer recommendations for future research. 9.2 Overview of the study This study aims to characterise Iraqi oil governance since the 2003 invasion and the toppling of Saddam Hussein, focusing mainly on the distribution of oil revenues among regions. To fully understand Iraq’s current regional distribution model, it is necessary to first understand its revenue collection policy. Accordingly, the thesis examines Iraq’s petroleum fiscal regime, comparing the collection policies of the central government and the KRG, before moving on to the main research question of the regional distribution of oil revenues.
Appendix 1 Table A1.1: List of Interviews and data code Date Location Function Length Status Notes INTER1 01.12.2010 Iraq Petroleum Conference- CWC Energy consultant to the Iraqi prime minister, ex minister of oil, one of the authors of Hydrocarbon law, he was working during Saddam regime as well 30 minutes Recorded INTER2 30.11.2010 Iraq Petroleum Conference- CWC one of the authors of the current draft of Iraq’s Hydrocarbon law and one of the establisher of INOC in 1964 30 minutes Recorded INTER3 29.11.2010 Iraq Petroleum Conference- CWC Iraqi government Spokesman 20 minutes Recorded INTER4 30.11.2010 Iraq Petroleum Conference- CWC Iraqi Member of Parliament 15 minutes Recorded INTER5 29.11.2010 Iraq Petroleum Conference- CWC Iraqi Member of Parliament 10 minutes - 30.11.2010 Iraq Petroleum Conference- CWC Kurdistan Energy Minister Questions to Energy minister during his presentation in Iraq Petroleum conference- London