Iraq's Rumaila oilfield
© Atef Hassan/Reuters
Iraq's Rumaila oilfield in 2009, the year BP and Chinese partner CNPC originally clinched a deal to develop the field.
New terms mean company will be paid even when production is disrupted, critics claim

BP has been accused of taking a "stranglehold" on the Iraqi economy after the Baghdad government agreed to pay the British firm even when oil is not being produced by the Rumaila field, confidential documents reveal.

The original deal for operating Iraq's largest field - half as big as the entire North Sea - has been rewritten so that BP will be immediately compensated for civil disruption or government decisions to cut production.

This potentially could influence the policy decisions made by Iraq in relation to the Opec oil cartel, and is a major step away from the original terms of an auction deal signed in the summer of 2009, critics claim.

"Iraq's oil auctions were portrayed as a model of transparency and a negotiating victory for the Iraqi government," said Greg Muttitt, author of Fuel on the Fire: Oil and Politics in Occupied Iraq. "Now we see the reality was the opposite: a backroom deal that gave BP a stranglehold on the Iraqi economy, and even influence over the decisions of Opec."

The concerns are shared by the Platform campaign group, which has obtained copies of the original and amended contracts and on Sunday will publish them on its website.

The oil industry provides 95% of Iraq's foreign earnings and there are plans to lift Rumaila's production almost threefold within the next three years from its existing level of 1m barrels a day.

Rumaila, which is 20 miles from the Kuwaiti border, already accounts for 40% of Iraq's total output and even before expansion produces almost half the total output of the UK North Sea fields. Growth to 3m barrels a day would make it 50% bigger.

The Iraq government argued in 2009, when the agreement was signed, that the country had got a superb deal, and this was endorsed by western oil analysts surprised that BP agreed to such terms.

The documents seen by the Observer show that the terms of the original agreement proposed by the Iraqi oil ministry, under which BP comes in as a contractor and operator rather than owner, have been amended to put the British-based company and its Chinese partner in a far more advantageous position.

Section 12.5 of this revised technical service contract shows that BP and its Chinese partner CNPC can obtain payments for "government imposed curtailment" - which could cover quota demands made on Iraq by Opec. This also applies to disruption to the transport of oil - "curtailments of transporter to receive net production at the transfer point through no fault of the contractor or operator".

The section goes on to say that in the event of such disruptions "the parties shall agree in good faith a mechanism to fully compensate [the] contractor as soon as practicable, which may include, among other things, a revised field production schedule or an extension to the term or payment of lost income in respect of the estimated volumes not produced during the period".

The original draft makes no reference to any "payment of lost income"; it merely suggests that BP and the government should share the cost by increasing the lifetime of the production agreement. There are other significant changes to the original contract, including one to raise the threshold at which project cost payments must be approved by the government from $50m to $100m (£61m) - something that Platform believes could open the door to abuse.

The changes are likely to anger internal critics of the Baghdad regime, many of whom were suspicious of the original deal. It will also increase the prejudice of those who saw the UK's involvement in toppling Saddam as part of a "war for oil".

Samuel Ciszuk, Middle East analyst with IHS Global Insight consultancy, said the details contained in the document "fitted with a notion" that something had been done to deal with a situation where quotas might be reduced in line with Opec policies.

The enormous concessions have been obtained in behind-the-scenes negotiations over terms for the Rumaila field since the deal was originally signed. Industry analysts believe the Iraqi project is more important than ever to BP at a time when investors are accusing it of lacking any vision for growth. BP declined to comment on the grounds that the contract was confidential, but industry sources said the oil company had always insisted any changes in the contract conditions were for "clarification purposes" only.

Alex Munton, an analyst at Wood Mackenzie, remarked in 2009 that Iraq got a great, if not spectacular, deal. Baghdad secured the services of BP and CNPC for $2 a barrel plus a $500m signing bonus, it was believed.

The Iraqi oil ministry last year published details of technical service agreements that would apply to foreign oil companies on its website, where they could still be seen last week. It did not specifically publish the BP service contract and could not be reached for comment.

Source: The Observer