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Simon Watkins

Simon Watkins

Simon Watkins is a former senior FX trader and salesman, financial journalist, and best-selling author. He was Head of Forex Institutional Sales and Trading for…

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Endemic Corruption Could Crush Iraq’s New National Oil Company

  • Iraq's newly founded Iraq National Oil Company was created to fairly distribute they nation’s oil wealth to its citizens.
  • Having a national oil company is a good idea in that it can coordinate otherwise disparate and sometimes counter-productive development initiatives by a range of state entities.
  • In Iraq, it remains a truism that the greater the concentration of power over oil and money in one place, the more monumental the scale of corruption becomes. 

The last few days saw the first meeting of the new iteration of the Iraq National Oil Company (INOC), with the agenda being ‘the five-year plan for the oil exploration sector, and interim and future production and export plans’, according to the official notes of proceedings. In theory, having a national oil company is a good idea in that it can coordinate otherwise disparate and sometimes counter-productive development initiatives by a range of state entities. In practice, in Iraq, it remains a truism that the greater the concentration of power over oil and money in one place, the more monumental the scale of corruption becomes. 

This is not the first time that Iraq has created the National Oil Company, with the first iteration being in 1966 before it was incorporated into the Ministry of Oil (MoO) in 1987. In 2018, moves were afoot to re-establish the entity, with the legislation required to do so voted into the statute books on 5 March of that year until a legal challenge derailed the plan. The key reason for this legal challenge was the wide-ranging powers of the proposed INOC allied to the moral ambiguity apparently encouraged in the wording of the law that brought it into being. 

The powers under the law relating to the creation of the new INOC in 2018 – and there is little difference to the law bringing the new 2021 version into being – included: controlling all hydrocarbon revenues and determining what is passed to the national treasury; owning all upstream, midstream, downstream, marketing and tanker interests and the associated pipeline and export infrastructure; and being the only authority allowed to sign contracts with international companies investing in oil and gas and other parts of the energy sector. It further included: having the power to create a fund to distribute the profits to every citizen; controlling a new ‘next generations’, or sovereign wealth fund, and being able to control investments in strategic projects in areas of the country in which it operates and in industrial and agriculture projects on any land it owns. In this context, the language of the new law passed is highly concerning, given Iraq’s history of endemic corruption in business, especially in that part of the business that accounts for around 90 percent of all of state revenues – the oil sector. 

As highlighted back in 2018 by a former senior economist with Iraq’s MoO, and now head of the Oslo-based Development Consultancy & Research, Ahmed Mousa Jiyad, Article 12 of the law relating to the establishment of INOC contained: “The most ridiculous, disintegrative, destructive and unconstitutional aspects of this law […providing[ the legal cover for formalized corruption and kleptocracy by assigning the three funds [‘Citizens Fund’, ‘Generations Fund’, ‘Reconstruction Fund’] at least 10 percent of the revenues of the oil exports at the discretion of the INOC’s board of directors.”  The power of the INOC board of directors, though, could extend further, he added at the time, as under the 2018 version of the law, revenues generated from the export and sale of oil and gas ‘will be considered as financial revenues for INOC’. “This is a flagrant violation of the Constitution, which states that oil and gas belong to the Iraqi people and not a financial return to one public company,” said Jiyad. Again, the full scope of the powers of the new iteration of the INOC has not yet been formalized, which means in Iraq, that no constraints are in place.

The sheer scale of theft of public money that can result from such structures in Iraq, based on previously recorded events, is in the truest sense of the word, mind-boggling. Even without an essentially organized graft mechanism such as the INOC actively in place, according to a statement made in 2015 by then Oil Minister – and later Prime Minister of Iraq – Adil Abdul Mahdi, Iraq “lost US$14,448,146,000” (that is over 14 ‘billion’, not ‘million’) from the beginning of 2011 up to the end of 2014 as cash “compensation” payments to international oil companies and to other entities. 

To put this ‘cash compensation’ into its mind-bending perspective: if this amount in single dollar bills was laid end to end then it would stretch from Earth to the Moon nearly six times over. The precise way in which such a staggering sum was ‘lost’ is fully analyzed by OilPrice.com here, but in basic terms, it related to the way in which gross remuneration fees, income tax and the share of the State partner was deducted and accounted for in the compensation paid out relating to reduced oil production levels. This ‘accounting factor used in calculations’ is solely related to ‘expenses of various kinds’ that have never been disclosed or in any way clarified by the MoO but is key to the merging of public funds with private ones. It saw its true genesis in 2009 when IOCs in many cases were asked to make large upfront payments as part of their bid, which would supposedly be repaid at a later date.

It is not for no reason that many of the world’s top oil companies from the West have pulled out of Iraq, despite the country still being awash in oil and with even much greater potential still to be discovered. As highlighted many times by OilPrice.com – most recently here - news that U.K. oil super-major, BP, is working on a plan to spin off its operations in Iraq’s supergiant Rumaila oil field into a stand-alone company was exceptionally reminiscent of the withdrawal of the U.K.-Dutch oil super-major, Royal Dutch Shell, from Iraq’s supergiant Majnoon oil field in 2017 and also of its withdrawal from Iraq’s supergiant West Qurna 1 oil field in 2018. Each of these announcements also bore a startling similarity to U.S. super-major ExxonMobil’s recent announcement that it too wants to get out of West Qurna 1 and to its withdrawal from Iraq’s crucial Common Seawater Supply Project (CSSP) some time ago. 

Related: WTI Crude Oil Price Hits 7-Year High

“Established major oil companies from the West basically just cannot afford the potentially massive reputational damage that could be done to them if they enter into some of these deals and the details come out,” a senior oil industry source who works closely with the MoO told OilPrice.com last week. “Even if a company is assured that everything is above-board and that the deal is fully approved by the government, there is still the deal is rotten and that any future government in Iraq will seek to embarrass its predecessor by exposing it,” he added. Even on the crucial issue of its own security, Iraq is still unable to function as it should, as highlighted by local news reports. This resulted in a situation that hundreds of millions of dollars over the years given to Iraq by the West specifically to maintain its F-16 fighter plane fleet instead ended up in the bank accounts of all layers of management involved in the program locally. So much money was stolen that by the middle of 2020 only seven jets out of the fleet – just 20 percent of the total – were still able to fly without serious risk of crashing. 

As highlighted by the independent risk analysis firm, Transparency International in its ‘Corruption Perceptions Index’, in which Iraq is always ranked at or near the bottom, the country demonstrates: “Massive embezzlement, procurement scams, money laundering, oil smuggling and widespread bureaucratic bribery have led the country to the bottom of international corruption rankings…and political interference in anti-corruption bodies and politicization of corruption issues, weak civil society, insecurity, lack of resources and incomplete legal provisions severely limit the government’s capacity to efficiently curb soaring corruption.” 

By Simon Watkins for Oilprice.com

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Leave a comment
  • Kenneth Paxton on October 09 2021 said:
    Another outstanding article by Simon Watkins. While the world sleeps, Iraq is on its way to becoming a super state. A global leader. It will take time. I'm confident that was once corruption is dealt with, Iraq will gain the trust of major integrated oil companies.

    What's fascinating is the potential that Mesopotamia, the land between the rivers, will resurrect
    Babylon. A resurrected Babylon would fascinate the world. It would become a hotbed of tourism.

    A peak at Iraq ten years into the future might interesting.

    I hope the articles related to Iraq continue. Especially the interrelations of Iraq's oil revenue, the dinar and US dollar. And the prospects for a future listing of the dinar on the Forex.
    Don't laugh. The Forex listing is not an impossibility! It will take time.

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