This document discusses economic rents from oil and gas resources. It notes that: - Oil and gas often account for a large percentage of GDP and exports in many countries. They also generate substantial economic rents above production costs. - Governments usually capture the largest share of oil and gas rents through taxes, royalties and ownership stakes. Some rents also flow to private citizens and firms. - Iraq has some of the world's largest oil reserves but faces security, infrastructure and corruption issues that limit benefits for its citizens from these resources. The division of powers over oil and gas across Iraqi governments may also lead to ongoing bargaining over revenues.

1. Module 1
Economic rents from oil and gas
Prepared by David Péloquin
Background materials for
UN workshop on oil and gas in Iraq
Dead Sea Marriott Resort, Jordan
April 4-6, 2006

2. Iraq
Nigeria
SaudiArabia
UAE
Norway
Russia
Venezuela
Indonesia
Malaysia
Mexico
Bolivia
Canada
USA
Australia*
AbuDhabi(UAE)
Alberta(Canada)
Alaska(USA)
* Includes mining
0%
20%
40%
60%
80%
100%
Oil & gas GDP as % of total GDP
Oil & gas are often major components of GDP
2

3. Total value of
natural resources
production
Total economic
rents available for
sharing among
stakeholders
Total
economic cost of
producing natural
resources
That is, their value often greatly exceeds their cost of production
Oil & gas also generate substantial economic rents
Exploration
and development costs
Operating costs
Normal return to oil & gas firms
Rents available to be shared
among other stakeholders
“Excess” profits captured by firms
3

4. To the owners
of the resource
• Royalties
• Equity stakes
• Production sharing
• Sale / auction of exploration,
development and production
rights
• Black market sales /
smuggling
• Taxes on production from
privately owned oil & gas
• Revenues devolved/shared by
other levels of government
• Export taxes
• “Excess profit” taxes
• Specific targeting of resource
sector by corporate, property,
sales or other general taxes
• Sale/auction of pollution permits
• Carbon tax
To
governments
• Above-average wage rates
or corporate profits in
resource sector
• Subsidized prices for end
use of oil & gas (e.g. as fuel)
by residents
• Theft / black market sales
• Graft and corruption of public
officials (regulatory officials,
managers of state assets,
etc.)
To
private citizens
Oil & gas rents flow to many different stakeholders…
…in a wide variety of ways
4

5. Governments are usually dominant stakeholders…
… whose typically large “take” reflects ownership and tax powers
5
0%
20%
40%
60%
80%
100%
Nigeria
Saudi
Arabia
UAE
Norway
Venezuela
Canada
USA
AbuDhabi
(UAE)
Alberta
(Canada)
Alaska
(USA)
Oil & gas revenues as % of oil & gas GDP

6. Governments are usually dominant stakeholders…
… and who are also dominant producers in many cases
6
Legend
dominant role
major role
minor role
+ + + =
+ + =
+ =
Overall role of state oil companies (SOC)
State / SOC role in exploration
State / SOC role in development
State / SOC role in production
State / SOC equity in (or joint ventures / production
sharing with) private sector oil & gas firms
+ + +
+ + +
+ + +
+ + +
+
Brazil
+
Canada
+ +
+
+
+ +
+ +
Indonesia
+ +
+
+
+ +
+ +
Malaysia
+ + +
+ + +
+ + +
+ + +
Mexico
+ +
+
+ +
+ +
Nigeria
+ + +
+ +
+ +
+ +
+ +
Norway
+ + +
+ + +
+ + +
+ + +
+
SaudiArabia
+ + +
+ + +
+ + +
+ + +
+ + +
UAE
+
USA
+ + +
+ + +
+ + +
+ + +
+
Venezuela

7. Oil & gas revenues as % of total government revenues
0%
20%
40%
60%
80%
100%
Iraq
Nigeria
SaudiArabia
UAE
Norway
Russia
Venezuela
Indonesia
Malaysia
Mexico
Bolivia
Canada
USA
AbuDhabi(UAE)
Alberta(Canada)
Alaska(USA)
Many are also fiscally dependent on oil & gas…
7

8. Oil & gas exports as % of total exports
0%
20%
40%
60%
80%
100%
Nigeria
SaudiArabia
UAE
Norway
Russia
Venezuela
Indonesia
Malaysia
Mexico
Iraq
… and also dependent on them for export earnings
8

9. Oil & gas rents in a federal context
• In federal countries, ownership of oil & gas usually falls
clearly to one or the other level of government:
– in most cases, this is the federal government (e.g. Nigeria,
Mexico, Venezuela, Russia, etc.)
– sub-national governments (SNGs) own all oil & gas resources in
a few cases (e.g. UAE)
– in others, ownership is divided, with federal ownership of oil & gas
on federal lands (and, typically, the offshore), SNG ownership on
SNG lands (e.g. U.S., Canada, Australia)
9

10. Oil & gas rents in a federal context
• But: oil & gas revenues often remain the subject of intense
bargaining between governments…
… even when ownership and constitutional authority clearly
fall to one or the other level of government
• In practice, governments that do not “own” the resource
often have significant leverage over their development:
– they may wield taxation, regulatory or other powers to stand in the
way of oil & gas projects
– they may insist on compensation for costs (e.g. environmental
damage) associated with oil & gas or to address “special needs”
10

11. Oil & gas rents in the Iraqi context
• Oil & gas rents are particularly significant in Iraq:
– world’s second largest reserves of oil (with many parts of Iraq still
not fully explored for additional reserves)
– highly favourable geology translates into very low extraction costs
and large rents
• Oil and gas rents are also particularly important to Iraq:
– oil & gas account for about two-thirds of GDP
– oil & gas generate 98% of public revenues
– provide 97% of export earnings
11

12. Oil & gas rents in the Iraqi context
• But: Iraq also faces significant impediments to maximizing
benefits to the Iraqi public from their ownership of oil & gas:
– ongoing security issues and constitutional uncertainties (including
the precise division of governmental powers over oil and gas)
– legacy of destroyed / damaged oil & gas infrastructure (including
some damage to oil reservoirs in the ground)
– significant ongoing “leakages” of oil & gas (and related revenues)
to theft, black market sales and corruption
– general lack of transparency in the oil & gas sector
12

13. Key issues for discussion
• To what extent can / should Iraq base its economy (and
public finances) largely on oil & gas rents?
• Which are the most significant impediments preventing
Iraq’s citizens from benefiting from its oil & gas wealth?
• Will the constitutional division of powers and ownership of
oil & gas prevent (or generate) ongoing bargaining among
governments over Iraq’s oil revenues?
13