Iraq’s Oil Ministry asked the partners developing the Rumaila oilfield to convert a $500m soft loan into a $100m unrecoverable payment on 21 July.

The decision allows Baghdad to avoid the lengthy process of seeking parliamentary approval for the Rumaila deal. The ministry and international oil companies (IOCs) working in Iraq has become increasingly concerned over legal and political challenges to the 11 oilfield licenses awarded in 2009.

UK oil major BP and China National Petroleum Corporation (CNPC) paid the $500m loan in January this year for the 17 billion barrel oilfield in the south of Iraq as a signing on fee. Soft loans do not have the conditions normally attached to commercial loans that have covenants and bear interest.

The revision of the Rumaila deal will bring it in line with two other fields. US energy giant ExxonMobil was the first to renegotiate its deal for the 8.7 billion barrel West Qurna-1 field, says Thomas Donovan, an Erbil-based partner with Iraq Law Alliance.

The ExxonMobil consortium with UK-Dutch Shell Group saw its signature bonus payment slashed to $100m from $400m in April. In the same month payments for the 4 billion barrel Zubair field, won by Italy’s Eni, the US’ Occidental Petroleum and South Korea’s Kogas were cut to $100m from $300m. Both were converted from soft loans to irrecoverable payments.

According to the oil ministry, the loans would require parliamentary approval, which will take some considerable time in Iraq’s current political stalemate, with no functioning parliament in place. Iraq’s government has been effectively paralysed since Iraq’s 7 March general election, which failed to produce an outright winner.

There is also residual concern from the recent failed case brought by Sheda Musawi, a former parliamentarian who challenged the award of the Rumaila field on the basis that the oil ministry had not consulted the regional government in Basra, which she claims is required by Iraq’s constitution (MEED 1:7:10).

“It [the revised signature payment] stems directly from the arguments in the Musawi case and it appears the lawyers involved saw this as a more advantageous way of ensuring these cases do not get wrapped up in an unenforceable and worse, illegal, category”, says Donovan.

One of her central arguments was that the $400m signing-on bonus would be a loan to the government, which would circumvent the legal and constitutional safeguards.  “This fact, among all others, seemed to resonate with the Ministry of Oil and the IOCs involved”.

That is why they were adjusted so quickly and so steeply.The reduced size of the payments is also a reflection that the costs of development will be significantly higher than the IOCs expected. 

“It seems to be a working relationship between the IOCs and the Ministry of Oil”, says Donovan. “Perhaps the Ministry of Oil knew that they would have to cut the amount if these IOCs were going to have such a large expenditure in the immediate term with no return”.

IOCs for their part do not appear to have pushed for the deal. According to one source close to an IOC the decision was made internally by the Oil Ministry. “I don’t see the IOCs out there circling the wagons in such a way so as they would all get the same deal,” says the source.

Baghdad has sought to increase oil output, signing 11 production licensing agreements with IOCs as part of its plan to lift output from the current level of 2 million barrels a day (b/d) to 6 million b/d by 2016.