Small international Oil Companies may have no desire to invest in oil and gas of me

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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 and will have long-term destructive fighting
for not establishing any Kurdistan State and will lead those neighboring
States to be available martially or as Sectarian Malitias 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

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

DRAFT
Page 12 of 20
of 2007
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

DRAFT
Page 13 of 20
of 2007
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

DRAFT
Page 14 of 20
of 2007
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

DRAFT
Page 15 of 20
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.

DRAFT
Page 16 of 20
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.

DRAFT
Page 17 of 20
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, financial 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 very longer time because the
Kurds’ ambitions which conflict with neighboring governments and regional powers
will make the security position in this area unsettled for very long 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

DRAFT
Page 18 of 20
more attractive for oil investments than Saudi Arabia and some Arabian Gulf States.
Also, Yemen is very important pass point for international oil trade
(https://wikileaks.org/yemen-files/), it is still a 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, whereas,
Saudi’s 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 States may look more settled now
days and in near future but Regional Leading States might not be in future. 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.

DRAFT
Page 19 of 20
Start planning for End of Business
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 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 1) 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 2) 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. Otherwise, the small IOC will die gradually until find itself out
of the market, and will create critical inquiry on its economical or business purpose
for staying non-profitable for long time which may open hell doors for its
stakeholders. Therefore, the best way is to plan to end its business.
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
Amount
of Cash
Receipts
in million

DRAFT
Page 20 of 20
million
2013 $82 $30
2014 $89 $70
2015 $57 $55
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%-45%
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.

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