At 6:30 pm on a Saturday evening, the media released details on Iraqi production sharing agreements with foreign oil companies. As no domestic companies exist to make a bid, the newest democracy will soon outsource its oil production. What can foreign companies expect?
Published reports in the Middle East said the proposal would provide for so-called product sharing agreements that would give international oil firms 70 percent of the oil revenues to recover their initial investments and subsequently allow them 20 percent of the profits without any tax or restrictions on transferring funds abroad.
Several aspects of this agreement favor big oil. One, the percent of oil revenues at 70% is beyond the more common 40-60% rate seen around the world, especially for relatively easy to access oil. And two, the tax free nature of the company’s profits is not standard practice. Corporate profits in other countries are taxed.
This does seem to be a gravy train for the President’s favorite industry. How does it play out at the current price of $55 a barrel with production at prewar levels of 3 million barrels of oil a day? Seventy percent equates to $115 million a day or $42 billion a year until their initial investments after operating costs are recovered. After that most of the revenue would flow to the bottom line.
Another key is how cost over-runs are handled. Shell and BP stuck it to Russia & Georgia in this area requiring all cost overruns be deducted from the country’s share. While this was not mentioned in the news piece, the U.S. experienced huge cost over-runs in Iraqi reconstruction. The Center for Global Energy Studies estimated Iraq needs investment of $2.5 billion a year to achieve production of 6 million barrels per day by 2010.
While this date may have slipped back, it is instructive that Iraq needs about $10-12 billion in infrastructure development. Over those 5-6 years foreign oil company investment, big oil stands to pull out $210 to $252 billion just from their 70% revenue arrangement.
Once the investment is paid off, foreign firms will take 20% of the profits tax free. Under 6 million barrels a day at $55 a barrel, gross revenues would be $330 million a day or $120 billion a year. Should operating expenses be minimal, some $20 billion, big oil stands to clear that same amount, $20 billion tax free with their initial investment already covered.
Sweet for big oil! Bad for the Iraqi citizen who believes George Bush when he says, “Iraq’s oil belongs to the Iraqi people”. Did he ever follow that up with “and they should give it away”? After all from those who have much, much is required…