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Iraq Amended Draft Law Sets Out New PSA Model

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Jan 16, 2007 (Dow Jones Commodities News)

An amended copy of a draft Iraq hydrocarbon law sets out a new model for production-sharing agreements, or PSAs, with Western companies, a senior Iraqi oil official said Tuesday.

Kurdish and Baghdad officials will meet this week to tackle their dispute over the paper, the official said.

The amended copy of the controversial law dated Dec. 15, seen by Dow Jones Newswires, doesn't refer directly to PSAs, as the first draft did a few months ago.

"We have changed the text of the law from PSA to development and production contract in order to avoid (media) fuss," said the senior official, who is close to the committee entrusted with drafting the law.

The new draft law recommends the Iraqi government sign "development and production contracts," or DPCs, along with service or risk production contracts with foreign companies to upgrade the country's war-ravaged oil industry.

The 38-page document states: "A model contract could be based on service contract, development and production contract or risk contract."

An older copy of the draft from August stated: "A model contract could be based on service contract, buyback or PSA."

Iraq's hydrocarbon law is crucial as a basis for international oil companies to begin discussions on investing in the country's under-exploited and run-down oil sector, and to generate much-needed reconstruction revenues.

U.K. newspaper The Independent reported this month that Iraq's massive oil reserves may be thrown open for large-scale exploitation. Western oil companies "could end up grabbing up to 75% of the beleaguered nation's oil profits under an oil law," the paper reported.

The Iraqi oil official rejected The Independent's report, saying it is baseless. "The law states that the government should make the utmost returns from our oil and gas resources and that Iraq owns all its (oil and gas) resources," he said.

Negotiations with Western companies could start immediately after parliament approves the draft law, which could be in "the first quarter of this year," the official said.

New PSA Model

The official said the draft law doesn't spell out what kind of PSAs Iraq would sign with Western oil companies, but officials have agreed that the Iraqi government should have its own model of PSA. The new model is based on both PSAs and buyback contracts, he said.

The official said the new Iraqi PSA model, or DPC, would state the following terms:

--Companies cannot book crude oil reserves of any given oil field in their own market capitalizations, as is the case with ordinary PSAs.

--Iraq will pay the costs of the contract in cash, rather than paying back the money through produced crude oil or products, he said.

--All equipment brought by the company to carry out the contract is the property of Iraq. The company, however, has the right to use this equipment to carry out work in Iraq.

--Any extension of the contract beyond the original timeframe should be approved by the Iraqi cabinet.

--Profit received by the company is to be agreed on by both sides, for example, one dollar on each barrel produced for a certain period of time, the official said.

The official said the Iraqi government wants to sign DPCs to develop undiscovered oil fields, rather than to discovered oil fields.

The new draft law also recommends signing service and risk production contracts. A risk production contract allows a company to explore and develop a particular location, but doesn't give it the right to claim back expenses from the Iraqi government if it doesn't find oil.

The draft law recommends setting up model, or prototype, contracts after the approval of the law.

It also recommends the establishment of an Iraqi National Oil Company, and a Federal Oil and Gas Council. The latter would approve oil contracts and set the country's petroleum policies, and would include ministers of oil, finance, and planning, plus the governor of the Iraqi Central Bank and a representative from each region or province.

Disputed Points

Officials from Kurdistan Regional Government, or KRG, and the federal government in Baghdad are to meet this week to discuss disputed points in the law, the Iraqi oil official said.

Under the draft law, the Iraqi cabinet would have the final say on contracts signed with companies, he said. "The Kurds want to change that and propose that the law should state instead: 'The Iraqi cabinet can review signed contracts.'"

The other point the Kurdish government disagrees with is that the draft calls for reviewing existing contracts, including some signed by the KRG with Western companies, to bring them in line with the new law.

"The Kurds want to review the contract they have signed themselves, and not a federal council set up by the Iraqi government," the official said.

However, he said he believes these are minor issues and can be settled easily.

The draft law recommends that all contracts signed by the KRG are "valid provide that they are reviewed and made in accordance with the provision of this (oil) law."

The Kurdish authority has already signed agreements with several small oil and gas companies, including U.S.-based Calibre Energy Inc. (CBRE), Canada's Addax Petroleum Corp. (AXC.T), Norway's Det Norske Oljeselskap (DNO.OS) and Turkey's Petoil.

The draft law recommends that all contracts signed under Saddam Hussein's regime should be reviewed and re-negotiated.

They include the $1.2 billion contract signed with China's National Petroleum Corp. in 1997 to develop al-Ahdab oil field in southern Iraq, and a $3 billion contract signed with Russia's OAO Lukoil Holdings (LKOH.RS) to develop the giant Majnoon oil field in the south.

"In order to make it valid, any contract related to exploration and oil production signed in the past should be reviewed, rewritten and renegotiated in a manner that should be in line with the provision of the new Iraqi constitution and this law," the draft says.

Copyright (c) 2007 Dow Jones & Company, Inc.

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