March 25, 2015 / 5:01 PM / 4 years ago

Iraq plans oil sales from reserves and new production contracts

BAGHDAD (Reuters) - Iraq is planning to raise emergency funds by pre-selling oil reserves for the first time and will kick off economic reforms by revising its oil contracts with major Western companies, Finance Minister Hoshyar Zebari said on Wednesday.

Iraq's Deputy Prime Minister Hoshyar Zebari speaks to Reuters in Baghdad September 11, 2014. REUTERS/Ahmed Saad

Details of the volumes and value of the sales, known in the industry as pre-financing, are still to be finalised, but Iraq needs cash to fund its military campaign against Islamic State and to compensate for revenue lost to the slump in world oil prices, Zebari told Reuters in an interview.

Baghdad also planned to change the way it operates exploration and production contracts with oil companies such as Royal Dutch Shell, BP and Exxon, Zebari said.

The switch will move Iraq for the first time to production- sharing contracts, where revenues are divided in a percentage split, from service contracts where oil companies are paid a set fee.

Iraq’s service contracts were struck when oil prices were far higher. The fall in world oil prices means Baghdad is now paying companies much more than it would be under production-sharing contracts. Zebari said the revised deals would be known in Iraq as revenue-sharing contracts.

Such contracts are taboo in many oil producing countries because nationalists see them as conceding sovereign wealth to foreign companies. But Zebari said Iraq needed to take the opportunity created by the Islamic State crisis to reform.

“Now it is better for us to have production-sharing contracts. We are in the process of negotiating with all the IOCs (international oil companies),” he said. “The federal government has come to reconsider through actual circumstances that revenue-sharing is best.”

Since becoming finance minister in October under Prime Minister Haidar Abadi’s new government, Zebari has pushed through a national budget and struck a deal with the semi-autonomous Kurdish region on oil revenues after years of wrangling, which he called a “win-win” for both sides.

OLD LAWS

“The ISIS crisis has really given us an opportunity to open our eyes to the state of ... the country,” he said. “You cannot build the private sector, bring foreign investment while you are following old authoritarian, socialist laws.”

Earlier this month, Zebari also said Iraq is considering issuing a $5 billion U.S. dollar bond via Citibank and Deutsche Bank to help cover the budget deficit.

He cited the $3 billion monthly bill that the Iraqi government faces for its 32 million population as evidence of over-centralization and lack of private investment.

“This crisis ... despite the difficulties we are struggling with on security and finances, has really led us to many new ideas. Basically the motto is, you have to reform or you will fail economically.”

Corruption, unchecked spending during times of high oil prices and poor financial management had all contributed to the economic crisis triggered by the invasion by Islamic State and the oil price collapse.

Zebari said Baghdad would not press Gulf Arab OPEC countries like Saudi Arabia to cut production to lift oil prices.

“We need to do a better job ourselves,” he said. “We cannot rely on the good will of others in the Arab world. It doesn’t work like that.”

Additional reporting Samia Nakhoul; Editing by David Holmes

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