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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 Is Suffocating Iraq’s Oil Boom

Last week’s agreement by the London-based oil and gas company TechnipFMC to pay US$5.1 million to settle an Iraq-related corruption case with the U.S. Securities and Exchange Commission (SEC) again highlights the endemic corruption that has crippled Iraq over the years. However, it is just a drop in an ocean of dirty money that flows from Baghdad in the south and Erbil in the north and then out to a variety of secret bank accounts held by senior politicians and their cronies (see).

TechnipFMC is the product of a 2017 merger between Technip and FMC Technologies but the company has now announced plans to split itself again into two companies, as so often happens when historical obfuscation of previous misdemeanours is the true objective. This case revolves around alleged bribery to have taken place between 2008 and 2013. The documents presented in court sufficiently established that over that period, the company conspired to violate the U.S.’s ‘Foreign Corrupt Practices Act (FCPA)’ by paying bribes to secure business from Iraqi state-owned oil companies.

More specifically, according to the court, FMC Technologies paid US$794,000 to a Monaco-based intermediary company “in order to secure improper business advantages and to influence those foreign officials to obtain and retain business for FMC Technologies in Iraq.” Those at the receiving end of the illegal payments included at least seven government officials in Iraq, including at the Oil Ministry, the South Oil Company (SOC), and the Missan Oil Company (MOC). TechnipFMC had already agreed around three months ago to pay US$296 million to resolve joint bribery probes from prosecutors in the U.S. and Brazil, and the new fine – a paltry US$5.1 million – is to be paid on top of that.

The systematic bribery is detailed in lengthy court documents obtained by OilPrice.com, but one relatively small – but early - example is instructive as to the general operational method involved. In or about early 2009, for instance, the MOC invited FMC Technologies to bid on a contract to provide metering technologies for oil and gas production in Iraq in connection with two projects (‘MOC 4046’), and FMC Technologies duly submitted its technical proposal. On or about 1 April 2009, FMC Technologies through its Monaco-based agent  entered into a ‘system sales consultant agreement’ in connection with FMC’s efforts to win the contract.

This agreement provided that the intermediary company (administered by the Monaco-based agent) would receive a nine percent commission after FMC Technologies received “full customer payment” from the Iraqi government for work on MOC 4046. In or about October 2009, MOC awarded the MOC Projects 58-09-4046 contract to FMC, subject to approval from the Oil Ministry. Related: This Could End The World's Dependence On Oil 

In an internal-use only intermediary company email dated 8 December 2009, the MOC 4046 was discussed. In it, one of the executives working for the intermediary company of FMC Technologies noted that the MOC Projects contract was valued at approximately US$3.5 million and that he needed: “US$20K because the [t]otal sub-agents fee here is US$35K, of which I need US$20 [k] now and carry US$15 [k] for later date.”

On or about April 1, 2010, the intermediary company emailed a sub-agent, stating that the MOC had decided to retender MOC 4046, and that the intermediary company is “willing to give US$40k on opening the [letter of credit] if [the Sub-Agent] can persuade our friend [an Iraqi official] to talk to [a high-level MOC official] to see what the hell he is doing and to award to FMC Technologies as per the recommendation of his own people and committee members.”

Around 11 October 2010, the intermediary company sent an email to the same sub-agent requesting assistance with FMC Technologies’ bid on the MOC 4046 contract, and stating: “As you can see the job is small and the commission is not great but you can have most of it if you help us out. I have allocated US$60,000 for your friend [an Iraqi official] . . .” Shortly after, the Oil Ministry approved MOC’s award of the MOC 4046 contract to FMC Technologies. FMC Technologies then used the same methods to gain four major contracts from the SOC and further major contracts after that.

This, though, is nothing compared to the wholesale rape of Iraq’s finances by its own government and foreign entities that has been a key cause of the country’s problems for many years. According to a statement made in 2015 by then Oil Minister – and now Prime Minister - Adil Abdul Mahdi, Iraq “lost US$14,448,146,000” from the beginning of 2011 up to the end of 2014 as cash “compensation” payment to international oil companies (IOCs). To put this into some sort of understandable perspective: if you were to lay out this amount in dollar bills end to end then it would stretch from Earth to the Moon nearly six times over.

And this is how it was done, according to various figures and documents obtained by OilPrice.com. At the time (from around 2002, in fact), the key clause of Iraq’s standard long-term service contract (LTSC) that related to compensation payments – both when they should be paid and how much – was Article 12.5. This asserted that compensation related to reduced oil production levels were allowed for three reasons. First, to minimise associated gas wastage, second, due to the failure of oil and gas transporters to receive net production at the transfer point through no fault of the contractor or operator, and/or third because the government itself had imposed such a reduction. In turn, according to Article 12.5, compensation payments could be made in three ways: a revised field production schedule, extension of the duration of the contract, and/or actual cash payments to IOCs.

However, from the basis of the standard LTSC contracts, according to a senior oil and gas industry figure who works closely with Iraq’s Oil Ministry spoken to by OilPrice.com, there are two additional factors have to be considered in assessing and estimating the US$14 billion-plus of lost income. First, the incremental production above the base-line production, and second the ‘net’ remuneration fee.

In the case of the former, 10 oilfields were covered by the LTSCs awarded in the first round of bidding: Zubair, West Qurna 1, Rumaila, Missan, Majnoon, Halfaya, Garraf, Badra and Al-Ahdab. These had a combined base-line production in 2011 of around 1.6 million barrels per day (bpd). The theoretical total baseline production for these fields from the end of 2011 to the end of 2014 (total three whole years), therefore, is just over 1.75 billion barrels. Subtract a natural rate of production decline of 5 per cent for each year (totaling just under 263 million barrels), and the figure is now nearly 1.5 billion barrels. Related: Vietnam Tests China’s Patience In The South China Sea

On the second matter of compensation for these barrels: according to the concluded contracts, the remuneration fees would give a simple average of around US$2.5 per barrel for the 10 oilfields covered. However, the weighted average (by plateau production of related fields) of the remuneration fees was around US$1.90 per barrel.

From these gross remuneration fees, income tax and the share of the State partner would be deductible. And so, crucially, underlined the Iraq source, would be ‘the accounting factor used in calculations’. This factor – which ‘solely relates to expenses of various kinds’ has never been disclosed by the Oil Ministry 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.

These dates were broadly understood by the IOCs to be once the initial production thresholds were reached, but there were no regular payment schedules incorporated into many of these contracts by the Iraqi authorities, which instead viewed them as being payable on an ad hoc basis, as and when it could meet them. “Some of these sums related to ‘infrastructure support payments’ on a per barrel basis of output relating not just to general field maintenance but also incorporating the ‘development costs and security of the fields’,” said the Iraq source.

“All of these were billed separately from the remuneration per barrel fee, all of them were liable for payment by the Iraqi government, and all of them were highly opaque in their terms of reference,” he added. In practical terms, the scale of these payments was often at least as great as the headline per barrel remuneration fee itself and - according to the Iraqi source – “ended up – presumably unwittingly by the IOCs – as being just massive bribery payments.”

By Simon Watkins for Oilprice.com

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