Module 1Economic rents from oil and gas

Prepared by David Péloquin

Background materials forUN workshop on oil and gas in IraqDead Sea Marriott Resort, Jordan

April 4-6, 2006

Iraq

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UAE

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Abu

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* Includes mining

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Oil & gas GDP as % of total GDP

Oil & gas are often major components of GDP

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Total value of natural resources

production

Total economic rents available for

sharing among stakeholders

Totaleconomic cost of producing natural

resources

That is, their value often greatly exceeds their cost of production

Oil & gas also generate substantial economic rents

Explorationand development costs

Operating costs

Normal return to oil & gas firms

Rents available to be shared among other stakeholders

“Excess” profits captured by firms

3

To the ownersof the resource

•Royalties•Equity stakes•Production sharing•Sale / auction of exploration,

development and production rights

•Black market sales / smuggling

•Taxes on production fromprivately 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

Togovernments

•Above-average wage ratesor 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.)

Toprivate citizens

Oil & gas rents flow to many different stakeholders…

…in a wide variety of ways

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Governments are usually dominant stakeholders…

… whose typically large “take” reflects ownership and tax powers

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Oil & gas revenues as % of oil & gas GDP

Governments are usually dominant stakeholders…

… and who are also dominant producers in many cases

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Legend

dominant rolemajor roleminor role

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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

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Oil & gas revenues as % of total government revenues

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Iraq

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Abu

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Alas

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SA)

Many are also fiscally dependent on oil & gas…

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Oil & gas exports as % of total exports

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Iraq

… and also dependent on them for export earnings

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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)

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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”

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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

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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

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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?

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