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Small International Oil Companies may have no economical

intention to stay investing in Some Middle East Areas

such as Kurdistan-Iraq due to high uncertainty of cash flow-in

Hamdy A. Rashed, CMA.

April 26, 2017

rashed.hamdy@gmail.com

Abstract

I preferred to cover status of Oil investment in Yemen which is my homeland but it is

not the appropriate time to go through. This paper does not provide an absolute

accounting view but it provides full picture of uncertainty of cash flow from proceeds

of Kurdistan Iraq oil export and how long does it take this uncertainty which lead

International Oil Companies (IOCs) to follow conservatism principle in recognizing

the revenue and disable them to recognize and record the revenue of their share of

oil export when it is sold. Also, we are not supporting party's attitude against another

in the political view, we are just showing the facts as they are but in full picture as

much as we can because it is somewhere complicated. Sometimes we may need to

re-read constitutions of the area, International decisions, browsing history and see

facts in several angles to understand the organizational behaviors of International Oil

Companies (IOCs) in upper level and to know what is the right path that should be

taken or prevent from going through one-way dark tunnel that its end may not meet

the expectations or desire.

Key words: Kurdistan; Kurdistan Regional Government; Iraq Oil; United Nations

Security Council Resolutions against Iraq; SOMO; UNSCR 1483; Federal

Constitution of Iraq, self-determination; Uncertainty of Cash flow

CONTENTS

INTRODUCTION ........................................................................................................ 2

WHY IRAQI OIL EXPORT IS CONTROLLED AND MONOPOLIZED BY IRAQI GOVERNMENT

AND HOW INTERNATIONAL ORGANIZATION PARTICIPATE IN SUCH CONTROL .................. 3

WHAT ARE THE CONFLICTS BETWEEN KURDISTAN REGION GOVERNMENT AND FEDERAL

GOVERNMENT OF IRAQ ............................................................................................ 4

Constitutional and Legal Views .......................................................................... 5

History and Geopolitical Disputes ....................................................................... 7

Securities and Econo-political View .................................................................... 9

WHY DO NOT SOME IOCS RECEIVE THEIR RECEIPTS OF THEIR CRUDE OIL SALE EXPORT

ON TIMELY MANNER? AND WHAT ARE THE CONSEQUENCES? .................................... 14

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IS THERE ANY WAY TO PAY IOCS THEIR OIL REVENUE TIMELY BASED ON CURRENT

SYSTEM AS TEMPORARILY SITUATION? .................................................................... 16

IS THERE ANY WAY TO LET IOCS TO EXPORT AND RECEIVED THEIR SHARE OF PROCEEDS

OF THEIR OIL EXPORT SALES SEPARATELY FROM CONTROL OF FEDERAL GOVERNMENT

OR REGIONAL GOVERNMENT? ................................................................................ 16

WHAT SHOULD IOCS FOLLOW STRATEGY TO AVOID ITS CAPITAL MARKET DECLINE OR

BUSINESS DETERIORATION? IS THERE WAY TO MAKE IOC HAVE HEALTHY FINANCIAL

POSITION AND GOOD ACTIVITIES' RESULTS? ............................................................. 17

HOW TO MEASURE THE UNCERTAINTY OF CASH RECEIPTS FROM OIL SALES? ............ 19

Introduction

We all know if there is no economical purpose to work or do a business, we don't do

it. Suppose that you got an offer to have high position such as a minister in

governmental sector or CEO in private sector, and your compensation is high but

20% of your compensation will be paid this year over 12 months and the remaining

will be paid within 4 years, and your compensation of next year will be started paying

after 4 years and so on. Of course you will say impossible how I will live and to pay

my obligations, save money and invest by 20% of my compensation unless I have

another income that enable me to survive until the difficulties of this offer is removed.

Otherwise, the offer will not be worthy and decide to leave it. Imagine this issue is

slightly like what International Oil Companies (IOCs) face in Kurdistan-Iraq which

they produce large quantities of crude oil that export major part of it abroad Iraq but

they got peanuts, they export about 500,000 bbl/day since 2014 till today by total

revenue may exceed $1.5 billion and they received about $500 million till today. The

IOCs depend on Kurdistan oil field to generate profit may be withdrawn or sell its

assets in Iraq or try to find financial resourcing such as issuing shares, convertible

bonds or having direct loan to survive.

Kurdistan Production Sharing Contract (PSC) and Kurdistan Oil and Gas Law

allow the International Oil Company (IOC) to export and sell their share of oil at the

delivery point, but on the other hand State Organization for Marketing of Oil (SOMO)

does not allow IOCs to export petroleum, SOMO monopolizes the oil export abroad

Iraq, SOMO receives all the crude oil revenue and it pays the oil cost/Service Cost

and oil profit/Remuneration fees to IOCs per concessionary contracts and distribute

oil revenue of the government among regions and governorates based on Federal

and regional constitutions, Iraqi Federal Oil and gas law, Technical Service Contract

(TSC), Crude Oil Sale Export Agreement and budget law.

These Iraqi Federal and Kurdistan Regional systems and the behavior in delaying

payment to IOCs lead IOCs to decrease their investment, discourage them to have

new license and discourage new IOCs to invest in this area. Not merely, the financial

statement (FS) of current IOCs that depend mainly to generate revenue from this

area will show disability in producing profit and huge accumulated losses will be

shown in FS and lead Stock investors to sell Company's stock and as result of that,

Company's stock price will be declined continuously and lead the company to sell its

assets or finding finance sources.

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Kurdistan Regional Government (KRG) and Federal Government of Iraq (FGI) need

to find mechanism to allow IOC to got most of their receipts of oil export with

appropriate time. IOCs should have effective regular meeting with related officials in

both KRG and Federal government to solve such issues safely and appropriately with

assisting all parties to have win-win discussion.

Why Iraqi Oil export is Controlled and monopolized by Iraqi

Government and How international organization participate in such

control

During Saddam regime, the oil and gas investment sector was public sector, National

Oil Companies explore, produce and market the crude oil. And after Saddam

occupied Kuwait, the Coalition Forces interfered and get Saddam forces back to Iraq.

Then United Nations Security Council (UNSC) imposed some of several resolutions

UNSCR# 705 (1991) – 1483 (2003) and include 986 (1995) regarding to oil-for-food

program (http://www.casi.org.uk/info/scriraq.html) that are to lead to :-

- punishing Iraqi government which require Iraq to pay compensations by 30%

of Iraqi oil per paragraph 2 of UNSCR 705 (1991) then it was gradually

reduced to 5% per paragraph 12 of UNSCR 1330 (2000) and paragraph 21 of

UNSCR 1483 (2003) and Kuwait and other countries agreed to extend Iraq

war compensation payment until early 2017 per paragraph 1 of UNCC

Decision no. S/AC.26/Dec.274 (2016)

- All payments to purchase oil of Iraq shall be assigned to purchase food (par 6

& 10 of UNSCR 986 (1995), par 3 & 5 of UNSCR 1111 (1997), also this

program is passed through many phrases and extension and was ended after

ending Saddam’s regime.

- Coalition Provisional Authority (CPA) administrator request to create

Development Fund for Iraq (DFI) account at U.S Federal Reserve Bank of

New York (FRBNY) which part of fund transfer to Baghdad and the DFI

account is opened in Central Bank of Iraq (CBI) for cash payment

requirement. The DFI should be used for humanitarian needs of Iraqi people,

economic reconstruction, repair Iraq's infrastructure, covering costs of Iraqi

civilian administration and other purposes benefiting Iraqi people.

- When there was a rumor that Alliance Forces occupied Iraq for its Oil

(http://edition.cnn.com/2013/03/19/opinion/iraq-war-oil-juhasz/),

(https://www.theguardian.com/uk-news/2016/jul/07/us-and-britain-wrangled-

over-iraqs-oil-in-aftermath-of-war-chilcot-shows),

(https://www.wsws.org/en/articles/2011/04/iraq-a21.html), the major powers

who participate in occupation of Iraq push some UNSCRs that show they are

not greedy for Iraqi petroleum at the same time they need to monitor the

proceeds of oil export as well, therefore, they decided that 95% of revenue of

Iraqi oil must be assigned for Development Fund of Iraq.

- And per cent of the compensation fund, development Fund of Iraq (DFI) and

payments for oil-for-food should be through escrow accounts. And all the

proceeds of sale of Iraqi oil must be deposited into an account in Federal

Reserve Bank of New York (FRBNY) first (paragraph 18 of UNSCR 687

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(1991), paragraph 1 (b) of UNSCR 706 (1991) and paragraph 1, 2, 3 of

UNSCR 778 (1992) )

- International Advisory and Monitoring Board (IAMB) is established per the

requirements of paragraph 12 and 20 of UNSCR 1483 (2003) to monitor

Iraq's cash flow received from export sales of hydrocarbon of Iraq.

- Escrow account and Development Fund or Iraq account shall be audited by

independent public accountants approved by International Advisory and

Monitoring Board (IAMB) (paragraph 12 of UNSCR 1483 (2003))

(http://www.iamb.info/) which was finally extended for 6 months per UNSCR

1956 (2010) superseded by Iraqi Committee of Financial Experts (COFE)

which is established per UNSCR 1790 (2007) and the COFE is appointed by

Iraqi Prime Ministry and the DFI is controlled by Central Bank of Iraq (CBI).

All those facts were occurred during and after Saddam regime which lead the Iraqi oil

to be exported by Iraqi government, Therefore, State Organization for Marketing of

Oil (SOMO) is a governmental party which controls Iraqi oil for marketing, selling

procedures such as determining the oil purchasers and set high criteria and

standards for petroleum investors and it controls over exporting oil process through

main piplines and export facilities that is owned by public sector, then collecting the

proceeds of oil export to be deposited into Iraq escrow accounts at FRBNY to take off

the following:

- 5% of revenue goes to compensation fund for Kuwait reparation payment

- And remaining of revenue which is 95% goes to DFI which transferred to Iraqi

Ministry of Finance account at CBI for revenue distribution to Federal

government ministries, regions and governorates.

What are the conflicts between Kurdistan Region Government and

Federal Government of Iraq

However, The production cost in the middle east is low and production of Kurdistan

Oil costs about $5 a barrel and due to oil prices decline and it is below US$60 per

barrel and no enough receipts of crude oil export from KRG, logically the IOCs that

its profit and cash flowin mainly depend on Kurdistan Region area will face financial

difficulties in paying their obligations and may need to refinance its debts or to find

new resources either by issuing new stocks, convertible bonds and bonds or taking

direct loans or reducing its working interests to current or new joint venture partners.

When oil revenue has not been received by IOC adequately and on timely manner, it

will create and increase the uncertainty of cash flow-in from proceeds of oil sales and

due to the conservatism principle of generally accepted accounting principles (GAAP)

and International Accounting Standard No. 18 (IAS18) for revenue recognition the

proceeds of Oil export sales should meet requirements of; a) the future economic

benefit associated sales of item will flow probably. Means the probability of cash

flowin needs to be more than 50% per IFRS and 75% per US GAAP (IFRS and US

GAAP: Similarities and differences, PWC, Oct 2014, page25) and; b) amount of

revenue can be measured reliability. The revenue cannot be recognized until it is

associated with certain cash flow, and most IOCs who invest in Kurdistan Region

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(KR) delay their recognition for revenue until they received the batch of their revenue

from KRG and they recognize each lot they received which present the low income

and high cost in the yearly financial statements since their initial investment occurred

till today.

Due to

1) political disputes between the Kurdistan Regional Government (KRG) and Bagdad

government;

2) the desirability of Kurdistan Government to establish completely separated State

from Iraq which was ambitions of Kurds for more than 40 years ago;

3) the political purpose and may be corruption as well that lead to delay in KRG’s

payments for operating and developments expenditures and paying IOCs’ oil cost

and oil profit; and

4) constitutional and legal reasons,

the KRG behaves more independently and signed Production Sharing Contracts

(PSCs) with International Oil Companies (IOCs) in new fields to attract the investors

directly which Bagdad government considers the PSCs illegal and out of framework

of Federal Concessionary contracts and the PSC does not achieve the best interest

to Iraqi people as per Federal Constitution, therefore, both Federal Government and

Kurdistan Region Government issue more regulations which decrease the authority

of each other and increase the disputes between them.

To understand more about the attitudes of both KRG and FGI, we like to re-read the

Constitutions, UNSC's resolutions, Charter of United Nations, historical treaties and

agreement and put ourselves in parties’ place ,and browse the following:

Constitutional and Legal Views

Simply the Technical Service Contract (TSC) that is signed between IOC and Federal

government considers the IOC as a service provider receives the payment for its

supplementary fees and service fees which include the Petroleum costs and

remuneration fees in amount of USD from Federal government and IOC has no

authority to export oil (Paragraphs 19.3, 19.5 (b),19.6 (a), of article 19 of Model

Producing Oil Field Technical Service Contract (MPFTSC)).

However, KRG Production Sharing Contract (PSC) allows IOC to produce, sell,

export their share of oil and it pays IOC's cost and profit in dollars or in barrels as per

the IOC's option (par 25.3-6 of article 25 and paragraph 26.9-11 of article 26 of Model

of Production Sharing Contract (MPSC)) and make IOC bear high risk of upfront

investment in KRG but with no authority to export the oil separately except through

SOMO or KOMO which manages sales of crude oil outside Iraq through their export

facilities and received the revenue of all oil export (government's share + Contractor's

share) and by pushing IOC to sign Sale and Export Oil Agreement as well. We were

not able to get a copy or even a draft of Kurdistan Sale and Export Oil Agreement to

re-read it and analyze it.

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Due to political issues and legal issues and other disputes between Federal

Government of Iraq (FGI) and Kurdistan Regional Government (KRG), the FGI insists

to monitor and controls all the Iraq revenue through the Federal governmental bodies

which the proceeds of sales of oil and gas of Iraq should be received centrally to

ensure that it is take off the payments to Compensation Fund account and the

payment to Development Fund of Iraq account and to ensure if it is properly spent for

its purpose as per UNSCR 1483 (2003). Also, the KRG PSC does not achieve the

constitutional best benefit to Iraqi people in comparison to TSC as per article no 112

of Federal Constitution, and the resources of hydrocarbon is owned by all Iraqi

people in all region and governorates per article no. 111 of Federal Constitution, as a

result of that the FGI is stand against the KRG PSC because it believes that all the

IOCs should sign Technical Service Contract (TSC) with Federal Government of Iraq

(FGI), also, KRG was not in compliance with Federal Standards and Criteria for

determining petroleum purchasers and investors and KRG determine small and

unknown oil Companies to invest which some parties stand beyond those IOCs and

may have political purpose or long-term economical and security purposes.

Therefore, FGI would not adequately reimburse the IOCs which are investing ,

developing and producing in Kurdistan Region under region's oil and gas law and

KRG PSC as long as it has not signed TSC with FGI and its crude oil is not exported

through SOMO. Not merely, FGI announced to all Oil transporters that FGI would sue

any companies that are involved in transporting Kurdistan Oil without its permission.

And FGI sue Marine Management Services to compensate Iraq hundreds millions of

dollars which lead Marine Management Service to subject to FGI and agreed to have

amicable settlement with it to stop ship any Kurdistan Oil without FGI's permission

and buy Iraq oil through SOMO (https://www.thenationalherald.com/58065/iraq-sue-

greek-co-kurdish-oil-export/)

Both FGI and KRG disagree about the ownership of crude oil, priorities to who

receive the oil revenue and how much each party are supposed to take and each

government accused other that their concessionary contracts and regulations and the

management of crude oil is not inconsistent with Federal Constitution.

However, Federal government arranges Technical Service Contract with oil and gas

companies which give more benefits to Iraqi people and more appliance to second

paragraph of article 112 of Federal constitution than Production Sharing Contracts

which is arranged by Kurdistan Regional Government, the Production Sharing

Contract (PSC) is more attractive to Oil Companies than TSC and it encourages the

private investment which is more appliance to article 25 and second paragraph of

112 of Federal constitution. Also, KRG has equal authority with Federal government

in managing the present oil and gas field as per article 112 of Federal Constitution

but KRG has more authority to manage the future oil and gas field as per article 121

of Federal Constitution and the article 115 of Federal Constitutions grant the regional

governments more authority and powers than Federal Government and the priority

should be given to regional legislations as long as it is not under exclusive authority

of Federal government but which Kurdistan oil field are considered present fields and

which are future fields? And What are the general framework of exclusive authority of

Federal Government? How Kurdistan Constitution determined Aug 2005 as the cutoff

date for present and future fields? And why not cutoff date be the date of referendum

or announcing the results of Federal Constitution polls? The exclusive authority of

Federal government is within the framework of foreign policies which include but not

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limited enhance the peace and promoting human rights, diplomatic representation

which include but not limited opening embassies or consulars, negotiating; signing

and ratifying international treaties and agreements and debt policies which include

but not limited agreement for banning specific weapons, to cease war and

determining the usage purpose of proceeds of foreign debts and the type and source

of such debt and debt issuance process and responsibility; formulating foreign

sovereign economic and trade policy which include but not limited imposing customs

tarrifs/taxes on import or export, having international or regional trade agreements

with other States. How Kurdistan determined the cutoff date for present and future

fields, it takes the deadline of drafting Federal constitution which was on August 15,

2005 where all political parties were agreed about the draft of Constitution which is

the cutoff date, and the draft of Federal Constitution submitted for referendum in

October 15, 2005 and in October 25, 2005 the results of polls was announced

(https://en.wikipedia.org/wiki/Constitution_of_Iraq) and In our viewpoint, the most

proper cutoff date for the present and future fields is when the Federal Constitution is

effective such as October 15, 2005. Anyway, the fields explored and developed

before Aug 15, 2005 is present field and after this cutoff date is future fields as per

Kurdistan Regional Constitution.

And regarding to the criteria and standard that KRG follows for selecting or inviting

IOCs to invest in Kurdistan area, KRG needs to attract as much as investors who are

ready to invest and produce oil which enable the region to collect more cash for

covering Kurdistan needs and especially to cover Kurdistan fighting cost against ISIS

and It is not logic and fair to tell those investors leave Kurdistan-Iraq after they have

spent a billion of dollars. Federal Government needs to deal with this issue as In-fact

investment. Otherwise, All the such actions will lead FGI and KRG to have deep

disputes and may lead to separation of Kurdistan from Iraq.

History and Geopolitics

To understand more about the attitudes of both KRG and FGI, we like to go back

long time of years and understand the geopolitical map of the area.

- Kurdish province during Ottoman Empire was called vilayet-Kurdistan and

was loyal and part of Ottoman Empire.

(https://en.wikipedia.org/wiki/Turkish_Kurdistan) When Ottoman Empire was

divided, Kurds settled in regions were divided into three Countries (Turkey,

Iraq and Syria) but the Kurds in Iran was a part of Persia in treaty of Zuhab

while Iraq and Iran borders were initially designated.

- Iraqi borders was initially created by old treaties such as treaty of Zuhab

which was a commencement for ending the disputes between Persia and

Ottman Empire and draw the map between two empires, Saic-Pico

Agreement in 1916 which was between French and British Empire divided

their illegitimate control over large area of Middle East but the modern Iraqi

border lines (which include Kurdistan Iraq area) was established when

Ottman Empire who occupied large area of Middle East without legitimacy

was broken up by treaty of Sevres that was chosen as one of the five peace

treaties by participants of Paris Peace Conference hold in 1919 and

participants of this Conference decided to establish the League of Nations

(https://en.wikipedia.org/wiki/Paris_Peace_Conference,_1919). The League

of Nations was established in 1920 as per Paris Peace Conference and it was

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replaced by United Nations in 1946 and some organizations founded by

League of Nations transferred to UN

(https://en.wikipedia.org/wiki/League_of_Nations).

- After that, Iraqi government entered into 1975 Algiers agreement which

enhanced Iraqi borders and solve the disputed border area between Iran and

Iraq and

- all those treaties and the agreement include Kurdistan Iraq territory as part of

Iraq State, Therefore, Oil produced from Kurdistan is considered Iraqi Oil

which is subject to UNSC's resolution no 1483 (2003) and should participate

in compensating Kuwait and participate in paying for Development Fund of

Iraq but those political border lines are not holy constant forever, it is subject

to law of nature for change because the continuous conflicts and specially

armed conflicts have not been stopped, they will lead to change the political

map to new map and enable the nations to live peacefully and enable them to

control themselves and their natural resources

(http://www.nytimes.com/2013/09/29/opinion/sunday/imagining-a-remapped-

middle-east.html).

- The preamble of UNSC's resolution no1483 of 2003 stresses the right of Iraq

people to determine their political and economical forms and the rights to find

their way to manage their natural resources. And paragraph 2 of Article I of

United Nations Charter adopts the right of self-determination for any nation or

region which encouraged Kurdistan Region Government to perform

referendum in 2005 for determining their destiny which 98% of Kurdistan

Region inhabitants voted yes for independence.

- Kurdistan Iraq referendum for 2005 reflects the will of Kurdistan inhabitants

for independence and the destiny determination can be implemented through

holding negotiation, dialogue or having new agreements between Iraq State

and Kurdistan Region or re-read treaties neutrally to know how the society or

tribes of Kurdistan are managed. Also, other countries can be involved either

to assist Kurdistan to be separated from Iraq or work against separation. or as

final stage, Kurdistan Region can file its claims into the International Court of

Justice for obtaining judgment about its claims that henceforth be supported

by UNSC’s decision.

- Also, the destiny determination for Kurdistan Region will face political

pressures from other neighboring states such as (Turkey, Syria, Iran) where

Turkish, Iranian and Syrian governments do not want Kurdistan people to be

separated from Iraq because it will lead Kurds in Turkey, Syria and Iran to

seek for separation from them as well. Those neighboring States (especially

Turkey and Iran) are seeking hard for not establishing Kurdistan State and will

lead those neighboring States to be available martially in Kurdish area in Iraq

and Syria. Also, in our opinion, the petroleum export facilities which the

pipelines passed through Turkey, Syria and Iran has two dimensions, the first

one is it enhance the mutual benefit between Kurdistan Region Government

and the governments of Turkey, Syria and Iran and enable the oil of this area

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to be exported more easily and cheaper to Europe and to east of Asia and the

long-term dimensions which provide a good chance to Kurds in Turkey, Syria

and Iran to be separated and save all the facility usage costs to themselves

as long as most of pipelines facility goes through the governorates which

majority of its habitants are Kurds

Any deep disagreement between FGI and KRG may lead to armed conflict as it

was happened between Kurds and Iraq government during Saddam regime

whereas its continuity may lead the later to be separated from Federal Iraq State

but now as long as UNSCR 1483 impose Iraq Oil (Include Kurdistan Oil) for

payment to Compensation Fund and Kuwait asked to extend their compensation

to Kuwait till early 2017 and may be next few years, the separation may take

longer time until this punishment time is ended and if United Nations Security

Council replace the resolution of 1483 by new resolution to end such punishing

payment, provide more authority to Iraqi people in each governorate and regions

to determine their political and economical future and have the right to manage

their natural resources through their elected government and within their

Constitution.

Securities and Econo-political View

To make KRG able to meet their minimum requirements of cash, KRG was exported

their oil by Trucks through Turkey coast then they built over 900 km pipeline facilities

which its capacity may exceed 1,500,000 bpd from Kirkuk to Ceyhan

(https://en.wikipedia.org/wiki/Kirkuk%E2%80%93Ceyhan_Oil_Pipeline) which

provides European refineries with cheap oil gas. Also, the Turkey-Kurdistan pipeline

provides Kurds more independence to export their oil from their facilities but Turkey-

Kurdistan Iraq pipeline was exposed to risk of explosion and Turkey government

accused Kurdistan Workers' Party (http://oilprice.com/Latest-Energy-News/World-

News/PKK-Attacks-Turkey-KRG-Oil-Pipeline.html) and Turkey government make it

an excuse to make its military existed in Kurdistan Region but after long time of

period Federal Government may accept and allow KRG to export part of their Oil

through Ceyhan in Turkey Also, FGI recently signed Memorandum of Understanding

(MoU) with Iran to build pipeline facilities from Kirkuk to Iran (http://www.iran-

daily.com/News/188044.html) to enhance the relationships between Federal

government and Iran and to reduce Kurdistan oil export through Turkey.

However, Kirkuk-Banias pipeline is about 800 km and its capacity is upto 300,000

bpd, and it is reconstructed by Russian Oil Company which its contract for

rehabilitation was nullified in 2009 but Syria and Iraqi Federal governments agreed in

2010 to build new pipelines to Banias with Capacity of 2.7 million bpd and these

pipelines almost are not passed over the major Kurdish population area in Iraq and

Syria, therefore, KRG preferred to export its oil through Kirkuk-Ceyhan (Turkey)

pipelines which passed on major Kurdish population areas.

Also, there might be hidden fair from some major powers and regional States

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- if Kurdistan Region of Iraq is separated and Kurds in Syria create region

which may outlook over Mediterranean Sea and this region can be separated

as well,

- Kurds will unify and Kurdistan (in Iraq) will establish facilities to export the oil

through pipelines that will go through Kurdistan (in Syria) to Mediterranean

Sea,

- also those Kurds will encourage Kurdistan Workers' Party to fight and

escalate the armed conflicts with Turkish army till they get their independence

and Turkish Kurdistan will try to get border to Mediterranean Sea to export the

oil to Europe if Syrian Kurdistan Region has no Sea entrance.

- Kurds in Iran will follow them and

- Greater Kurdistan State will be established which will impact on Russian

petroleum to Europe negatively. Therefore, if even Russia will support Kurds

of Syria to have their region, Russia will not accept to make Surian-Kurdistan

region be bordered by Mediterranean Sea. Therefore, Kurds in Turkey will

seek to get the independence from Turkey and create their State which will

start from Hakari, Agri, Sivas, Adana and Hatay governorates and all

governorates down to Iraq and Syria borders where Ceyhan is in Adana

governorate that is oil export port for Kurdistan to Europe and this is what will

not be accepted by Turkish government and make the Turkish army fight

against Malitias of Kurdistan Workers' Party (PKK).

Anyway, Kurdistan will continue face economical and political barriers that disable

them to establish their own State and they will continue having conflicts with many

parties. Therefore, the uncertainty of cash flow-in from proceeds of oil export might

take longer time Unless both KRG and Federal Government of Iraq find effective and

efficient solutions.

As a result of the disputes and issues between two governments which we indicated

some of them above, the IOCs faced problems and they will not have received

adequate oil revenue in comparison to their oil export which create uncertainty of

revenue cash flow-in and as long as all the political leaders of all parties have not find

peaceful and effective resolutions through quick negotiation and dialogue to close all

the issues between them or not providing priority for solving the issues soon between

KRG and FGI about the IOCs which signed PSCs, the uncertainty will take longer

time.

What are the main differences between Technical Service Contract

(TSC) and Production Sharing Contract (PSC)

There are differences in the elements for computing how much contractor take and

government take and what are the required reports that should be provided to the

government and how the data should be reported based on the model of Kurdistan

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Production Sharing Contract http://mnr.krg.org/index.php/en/the-

ministry/contracts/new-psc and Kurdistan Regional Oil and Gas Law (28) of 2007 and

the model of Iraq Technical Service Contract

http://platformlondon.org/documents/PFTSC-23-Apr-09.pdf And the draft Iraq Oil and

Gas Law of 2007. We can make the following simple comparison between two types

of contracts

TSC/Draft Iraq Oil and Gas law of 2007

PSC/KRG Oil and Gas Law of 2007

Audit

Non-Recoverable Cost Items

Costs incurred as result of any proven gross negligence or willful misconduct of contractor/operator Replacement cost and repair costs of assets which is uninsured or agreed with government to insure against loss but failed to do so Direct and indirect Expendures in connection with raising money to finance petroleum operations (Finance cost) such as interest, commission, fees, brokerage Costs or charges of donations relating to public relations Costs of charges enhance Contractor's corporate images and interests Any expenditures incurred and not related to petroleum operations or activities beyond the delivery point Corporate Income Tax Training, Technology and Scholarship Fund /Training budget

Signature Bonus Production Bonus Capacity Building Bonus Community Development

Auditor should ensure if all petroleum recoverable costs are correctly and completely occurred and accurately recorded and allocated and should compute the difference between the amount of non-recoverable costs per TSC and PSC

Overhead Contribution of head office and affiliates to petroleum operations of an intangible nature and any overhead and indirect costs incurred by them is compensated by 1% of total expenditures precalculation of overhead

The rent and other operating costs of affiliate and head office is included in the rate of foreign employee who works for Kurdistan license and it is considered as direct costs. Therefore, the indirect costs and overhead of affiliate and Corporate headquarter should be divided into exploration and development overhead, the exploration overhead is regressive brackets from 4% to 2%

Auditor should ensure whether Contractor record the overhead correctly per contracts and should compute the difference between the allowable amount of overhead per TSC and PSC

How Contractor Contractor will qualify for two Contractor will take Auditor should

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TSC/Draft Iraq Oil and Gas law of 2007

PSC/KRG Oil and Gas Law of 2007

Audit

takes remuneration fees Maintenance Remuneration fees at fixed unit rate in value per dollar Incremental Remuneration fees at maximum unit rate in value per barrel and this shall be determined on basis of R-factor

Petroleum Recoverable costs and take share of the Petroleum Profit which is determined by basis of R-factor

ensure whether Contractor record the actual revenue and compute and received its entitlement of Oil Sale completely and accurately, valued the oil price correctly and compute the correct contractor take. Then auditor should compute the difference between contractor's take and contractor's share of profit oil per PSC and remuneration fees per TSC.

How government takes

Training, Technology and Scholarship Fund Royalties per Oil and gas law The remaining oil after paying the supplementary and service fees and remuneration fees to contractor.

Signature Bonus Production Bonus Surface Rental Capacity Building Bonus Development Fund Environmental Fund/Decommissioning Reserve Fund Royalties Supplementary percentage of profit oil

Taxation Each partner shall be individually liable for and pay Corporate Income Tax as per Iraqi tax law which is 35% of annual aggregate of remuneration fee actually received and after deduction 25% carry

10% of gross revenue and it is paid from Region Profit Oil

Royalties 12.5% of gross petroleum Paid in kind or in cash Contractor shall pay the Royalties at prevailing market price

10% of gross petroleum and it might be increased or decreased in return for vitality the commercial risk Paid in kind or in cash Paid quarterly or monthly Contractor shall pay the Royalties on int'l market price

Ceiling of Recovery and recoverability time & Cost Recovery period and method

Supplementary Fees Signature bonus considered supplementary costs shall be amortized and recovered over 20 equal quarters

Exploration and Development and operating Costs are petroleum costs should be recovered in barrel

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TSC/Draft Iraq Oil and Gas law of 2007

PSC/KRG Oil and Gas Law of 2007

Audit

De-mining cost is considered supplementary costs that shall be amortized and recovered over 8 equal quarters Outstanding balances of all supplementary costs bear interest at LIBOR rate + 1% Government shall pay the supplementary costs as supplementary fees in cash or in barrel to Contractor at ROC's option. Supplementary fees is 10% of revenues of baseline production. It is recoverable and should be amortized over number of quarters Outstanding balance of supplementary fees Service Fees Government shall pay the Petroleum Costs as Service fees to contractor Shall be paid in cash or in barrel at Contractor's option. Service fees shall be paid by 50% of revenues of incremental production. It has priority over remuneration fees Outstanding balance of Service Fees shall bear interest Remuneration Fees Remuneration Fees shall be determined by basis of calculating R-factor

The un-recovered costs shall be carried forward to indefinitely to subsequent years till fully recovered. And all the recoverable costs (Oil Cost) must not exceeding 45% of gross Crude Oil produced and 60% of natural gas produced and it might be decreased or increased in return for vitality the commercial risk

Authority of Exporting and Selling petroleum abroad and collecting the proceeds of oil export sales

Iraqi Oil Marketing Company (SOMO) which is considered as seller and contractor is buyer. All the Oil Export should be sell in the name of SOMO and collect the cash received from oil export.

Contractor shall have the right and obligation to take in kind and separately sell. Contractor is entitled to receive, take in kind and to export freely its share of profit oil and to retain abroad any proceeds from the sale of all profit petroleum

Interest on unrecovered amount or overdue payment

Outstanding balances of all supplementary costs bear interest at LIBOR rate + 1%

Any Overdue payment to Contractor after 30 days of date of invoice, Interest should be compounded monthly at LIBOR rate + 2% on unpaid amount.

Ownership of the reserves

IOC has no right to claim on reserves and don't share the

Marketable title cost oil and profit oil are

IOC could not disclose their share

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TSC/Draft Iraq Oil and Gas law of 2007

PSC/KRG Oil and Gas Law of 2007

Audit

increases in oil prices CAPEX and OPEX and Remuneration fees are donated in dollars not barrels

donated in barrels of reserves in the Financial Statements per TSC

Language Arabic and English have equal force If there is conflicts between two languages, English version shall prevail Records shall be kept in English

The PSC is written in English All communications and Arbitration shall be in English All the accounts should be prepared in English

Currency USD is reporting currency USD is functional and reporting currency and for Corporate Tax Declaration, the Iraqi Dinar is reported.

Required Reports Quarterly Statements of Petroleum Cost and operating account within 45 days from end of each quarter. Quarterly Service Fees Report, Forward Quarter Statement and Lifting Statement Yearly Statement of Petroleum Cost and operating account within 3 month from end of each year and statement of expenditure that show the excess and deficit development expenditures and work program and the expenditures should be categorized for cost recovery, minimum work obligation and capital and operating cost

Production Statement Value of Production and Pricing Statement Cost Recovery and Share Account Statement Statement of Expenditures and Receipts Final End-of-Year Statement Budget Statement

how much the differences that government and contractor take per TSC and PSC, In

our view point and preliminary calculation the discrepancy between two types of

contracts is 10%, 25% and will not exceed 30% which TSC is more favor to

government. Means, e.g. if the total gross revenue is 100 million of dollars and 35

million given to contractor for covering cost and profit and 65 million given to

government per PSC, in TSC the contractor will take 28 million and government will

take 72 million. And it is not fair to pay the IOCs in Kurdistan area less than 70% of

what they deserve.

Why do not some IOCs receive their receipts of their Crude Oil sale

export on timely manner? And What are the consequences?

In 2016, FGI tries to pass Federal Budget Law which article no 9 and 20 of Federal

Budget Law makes the KRG entitled to 17% of Federal Government's (FG) revenues

for its budget and this percentage include the reimbursement and remuneration to

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IOCs and KRG expenses of salaries and others which KRG considered it low

percentage because if KRG pay IOCs' oil cost and its share of oil profit per PSCs

from the KRG's share of FG revenue of the budget, almost nothing will be left to KRG

to adequately cover its expenses of staff costs, development and other operating

costs and to cover the costs of fighting against ISIS. KRG stopped paying IOCs any

amount from September 2014 till August 2015 and started paying IOCs' shares since

September 2015 by few amounts in several lots to enable KRG to cover its other

liabilities, therefore KRG owes IOCs a billion of dollars and KRG should clear the

arrears.

Interest on amounts in arrears

As per the TSC, Interest on remaining unrecovered supplementary cost should be

computed but not on remaining unrecovered service cost which represents the

exploration, development and operating costs and this for the normal and business

delay and due to contractual terms for recovery ceiling but if it exceeds the normal

business reasons and become abnormal should Iraqi government be responsible for

such delay and compensate the IOC to cover their damages that caused by such

delay?

As per the PSC, any payments between parties (KRG and Contractor) shall be paid

within 30 days following the end of the month which the obligation is occurred and for

each day such sums are overdue bear interest compounded monthly at LIBOR rate

plus 2%.

Therefore, we believe that KRG and FGI will be liable to pay the interest on amount

in arrears to Contractor

KRG and FGI may accuse each other and each pass the responsibility for not paying

to other, Or there is hidden economical support that enhance the politics of power

centers in Kurdistan?

Results of long-term cash-strapped

Current IOCs investing in Kurdistan-Iraq other than Oil Giants could not stay in cash-

strapped for longer time without going to bankruptcy. Therefore, they may find Oil

Giants or Finance Giants to support them in guarantee of its share of Kurdistan Oil

reserves because Kurdistan PSC provide marketable title for reserves to Contractor.

Also, those Giants will not finance this investment for long time without getting

enough cash on time or providing oil pledge. Those Giants have powers and can play

political and economical role and know how to make major things move towards their

benefit.

The current IOCs that may go to bankruptcy have the right to sue KRG or FGI for the

consequent events resulted from amount in arrears. Or all parties (KRG, FGI and

IOCs) must have a serious meeting to solve this issue temporarily and in satisfying

method till they get final and agreed resolution.

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Is there any way to pay IOCs their Oil revenue timely based on

current system as temporarily situation?

Yes, there is always solution, it may not be final one but it can be good alternative for

time being.

Step 1: FGI may need to pay the IOC directly not through regional government based

on the average TSC granted to other companies and based on best available data of

service and supplementary cost of IOC and estimated and preliminary average

remuneration fees

Step 2: allow the Cost Recovery Audit to find the discrepancies between PSC and

average TSC and pay the IOCs based on the above basis and any discrepancies

need to be more categorized and the remaining unpaid entitlement to IOCs which

resulted between PSC and average TSC should be reserved in an account in

Federal government's records and Central Bank.

Step 3: After solving the issues between KRG and FGI and find agreed points, the

unpaid entitlement will be settled between IOCs, KRG and FGI

Is there any way to let IOCs to export and received their share of

proceeds of their Oil export sales separately from control of

Federal Government or Regional Government?

We think "Yes", KRG PSC allow the IOC to receive their share of oil in barrels at

delivery point and to receive the proceeds of their oil sales separately in opposition of

TSC, therefore, the PSC is more favor to IOC and Oil Giants, and the oil and gas

which are after delivery point should be under responsibility of IOCs and can collect

their cash proceeds from purchasers but after ending the international punishment on

Iraqi oil. And IOC need to prepare monthly, quarterly and annual report of Production,

Oil Export Sale and Oil domestic sale.

Cost recovery auditor should preliminary consider the geological formation of the

nearest produced field to estimate the cost recovery of exploration, development and

appraisal wells and the characteristics of crude oil produced (heavy or light) and if it

contains toxic and flammable hydrogen sulfide gas that needs to be splitted off from

crude oil. All those preliminary assumptions can help the cost recovery auditors or

Federal Ministry of Oil to have preliminary estimate for the recoverable costs of IOC

in KRG.

If the international punishments is ended over Iraq and include Kurdistan-Iraq area

and new UNSCR replaced 1483 to enable the nations of the area to determine and

control their natural resources and to manage it freely, they will need to allow the

IOCs to export their oil and collect their revenue separately and all regional

governments and Federal government should find more flexible and effective

mechanism to settle any discrepancies between two contractual records or approve

only one type of concessionary contract which the regional governments determine.

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Means, FGI should understand that Regional governments must have more authority

and control over their resources otherwise, Kurdistan Iraq and other region can be

separated and they may have support from other powers and international public

opinion.

What should IOCs follow strategy to avoid its capital market

decline or business deterioration? Is there way to make IOC have

healthy financial position and good activities' results?

Small IOCs in Kurdistan Iraq need not to build and grow its business on luck because

it is more likely that they depend on gamble, IOCs need to know what to do by finding

and following good strategies and quickly take the chances to go up. We have seen

critical decline of stock price of some IOCs, however, IOCs produce large quantities

of hydrocarbon and it is attractive for investors but the uncertainty of cash collection

of their revenue is high which decrease their assets value and become less attractive

for stock investors. Therefore, IOCs need to find ways to increase its value in right

manner. There many strategies and ways that can help IOCs and appropriate for

them and we like to mention few of them;

Searching very good stakeholders (Common Stockholders and Bondholders)

If anybody wants to know what you want and what is your power, he/she needs to

know who stand beyond you. Therefore, The stakeholders stand beyond the

Companies which seek to create very good profit for long-term and seek to affect the

political events to change some facts to bring them toward its favor.

The more powerful Stakeholders, the stronger the Company will be. If the

stakeholders are finance or oil giants, small IOC can still running business, though,

its cumulative loss because the IOCs will get good finance method at lower costs

until either it will be sold to other Company or to success and become Middle-sized

Company. Also, those Oil Giants and those especially Finance Giants will not lead its

investment Fund to be lost and they know how they increase the value of their

investment, they have good relationships in their home country government and host

country government and other third parties which enable them to play very good role

in several political, economical and security positions. Therefore, small or unknown

IOCs in Kurdistan must find very known stakeholders to enable them to be survive

and healthy in doing business in Kurdistan for longer time.

Geographical expansion in Middle East or other Area

Most of Oil and Gas States in the Middle East are hot spot zones such as Libya, Iraq,

Yemen. However, Iraqi proven oil reserves represent the second largest reserves in

the world and there are areas in Iraq that has not been discovered yet which will

probably increase the proven reserves

(https://www.globalpolicy.org/component/content/article/185/40471.html) and be

more attractive for oil investments than Saudi Arabia. Also, Yemen is very important

pass point for international oil trade (https://wikileaks.org/yemen-files/), it is still a

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virgin State and there are wide range of areas have not been discovered and there

are governorates in Yemen which have high potential for very large of gas reserves

as well (https://sputniknews.com/politics/201604061037584835-saudi-arabia-yemen-

gas-oil/). Yemen may become more attractive for IOCs than Saudi Arabia which its

reserves was overestimated by 40%

(http://edition.cnn.com/2011/WORLD/meast/02/09/saudi.arabia.wikileaks/) and

become less attractive but Arabian or Persian Gulf Countries may look more settled

now days and in near future but Regional Leading States might not be. At present,

Iran, Kuwait, Qatar, Emirates, Oman and Saudi are considered the most attractive for

IOCs but obtaining concessionary contracts may costs them a lot and the Oil Basin

may not be adequate for new IOCs in those States

(https://www.theguardian.com/business/2011/feb/08/saudi-oil-reserves-overstated-

wikileaks). Therefore, the IOCs may need to obtain licenses in other States such as

Yemen but how IOCs can obtain permit and from which governments because there

are two governments in Yemen and the future geopolitics and econopolitics of

Yemen still unclear, Yemen might be divided and might not be and Yemen crisis will

continue until the previous local powers are removed from involvement in future of

Yemen and replaced by new local powers that take some time to be balanced, this

may take long time but may not longer than the destination of Kurdistan Region.

IOCs which face difficulties in running and developing its business in Kurdistan-Iraq,

it is preferred to look for new license in Libya and Yemen. If IOC prefers to obtain

permit in Yemen, at least they need to sign preliminary agreement with any

government or with both governments for open block and suspend its activities till the

license area in Yemen be more settled and safe and till Yemen crisis is ended to get

rectified Production Sharing Agreement or to buy productive/development/almost

development permit from other Companies and try to get the approval of Yemeni

Ministry of Mineral and Oil for such Purchase and Sale Agreement for

productive/Development/exploration permit. The crisis in Yemen is different in Iraq, in

Yemen is simply referring to Regional States try to be involved in Yemen's destiny

and continue controlling its strategic decisions by supporting previous local powers

against other new local powers and to talk about Yemeni political, economical, social

and legal environments, it will need separate paper and it is not appropriate time to

cover this issue.

Regular Meeting with KRG and FGI officials to find mechanism

IOCs in Kurdistan which have negatively effect, they need to have regular effective

and efficient meeting with decision makers in KRG and FGI and play good and

effective role to change or find new mechanism of exporting and collecting the

revenue of proceeds of oil export sales. Also, those IOCs need to raise the issue

internationally, positively and legally to their home countries powers, therefore, the

deep relationships between their home countries governments and Iraqi and KRG's

governments assist to solve the issues of high and long-period uncertainties of cash

flow-in faced by IOCs.

Start planning for End of Business

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However, Saudi Arabia become more involved in investing Oil Company's stocks and

be one of the major owners which encourages and pushes Saudi Arabia to increase

its profit per share by increasing its production of oil (http://www.msn.com/en-

us/money/markets/opinion-saudi-arabian-king-has-power-over-the-us-stock-market-

rally/ar-AAolVbp?li=BBnbfcN&ocid=SK216DHP), in our view point, it will not increase

the wealth for Saudi Arabia, it will transfer it abroad its border. Also, the increasing

production of Saudi, Iranian and non-OPEC oil and additionally, US is encouraging

the source rock oil to be produced, all those will make lead oil price to be dropped

down below $65 per barrel for long time.

And because the small IOC could not impact on its revenue due to the uncertainty of

cash flow-in of proceeds from Kurdistan oil export sales which it is not on IOC's

disposal/hand and it is handled by political powers explained above and small IOC

could not impact on Oil Price because oil price is mainly affected by politics and

major oil players. Therefore, IOC should increase the value of its business by

- increasing the prospects and productive fields

- decreasing the costs

- working hard to find way with KRG and FGI to decrease the uncertainty of

cash flow-in

When the small IOC can increase the value of its business , it can sell its business at

good price to oil giant.

How to measure the uncertainty of cash receipts from Oil Sales?

Measuring the probability of cash receipts from proceeds of Kurdistan oil export sales

is subject to quantitative and qualitative factors. By recording the historical data of

payments received by Contractor from KRG and total proceeds they are entitled, the

probabilities of cash collection can be computed but the political factors is very

important qualitative measurements that my decrease the probability of cash

collection by 50% more which will increase the uncertainty.

Objective/Quantitative Probability Measurements

If we assumed that Contractor’s share of Oil Export and cash receipts in USD for four

years as follow

Value

of Oil

Export

in

million

Amount

of Cash

Receipts

in million

2013 $82 $30

2014 $89 $70

2015 $57 $55

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2016 $60 $13

The percentage of cash collection for oil export sales in the same year of sales, in

year 2, 3 and 4 are as follow

% of Collection

in the same

period

%Collection in

Year2

%Collectio

n in Year3

%Collection

in Year 4

2013 37% 63% 0% 0%

2014 20% 62% 18% 0%

2015 0% 35% 63% 2%

And based on the above assumption, the credit sales of oil will not converted into

cash within normal operating business cycle. Means, the cash will not fully collected

within 12 months after sales occurred and there is no certainty for collecting it in next

year, not only, the probability to collect the 75% of credit sales within a years is less

than 20% and to be collected within 2 years is less than 55% but every year the

certainty of collecting the cash is decreased that may lead to not receiving any cent

of credit sales in the same year at specific coming years or receiving less than 35%

of sales within 2 years which it will increase the receivable age and increase the

allowance of doubtful debts and increase the bad debts.

Subjective/Qualitative Probability Measurements

Even if most of factors make the probability of cash receipts within normal operating

business cycle is 75% but the political factors has an joint impact which reduce the

probability, therefore, if we assumed the political factor will impact the cash receipt by

40%, it will decrease the probability of cash receipts from 75% to 30%

Because of that the probability of economic benefit to be flow is weak which does not

meet the revenue recognition criteria per IFRS and US GAAP and delay the

recognition until the IOCs has adequate assurance that they will receive it.