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Iraq in contextAn overview of the oil and gas industry

Caron Howard, Deloitte Petroleum Services

Image for illustrative

purposes only

© 2010 Deloitte Touche Tohmatsu

Iraq Taxation for Oil & Gas Companies

John Belsey & Alex Law26 May 2010


Agenda

Introduction

Structuring investments into Iraq

Business taxation

Individual taxation



Representative / Branch Office Subsidiary

Registration procedure and timing

• Branch registration less onerous than LLC• Typically 2 – 3 months

• LLC registration process more complex than for a branch

• Potentially can take up to 6 months (or longer)

Ownership requirements • N/A • No ownership / local shareholder restrictions, therefore 100% foreign ownership possible

Corporate governance and management

• Chief management official responsible for local management of the branch, and must reside in Iraq

• CMO must have power of attorney to make decisions on behalf of the parent

• Annual reporting on execution of annual plan

• Iraqi LLC is governed by Iraqi Companies Law and by regulations issued by the Companies Registry

Permitted activities • Only limited by the memorandum of association of the parent entity

• More flexible than an LLC

• Limited to those activities listed in the LLC’s company contract as part of the incorporation procedure – must be approved by relevant Ministry

Financial statements and reporting requirements

• Both a Branch and an LLC must prepare and submit annual audited financial statements to the Companies Registry and to the General Commission for Taxes (GCT)

• Financial statements must be prepared under Iraq Uniform Accounting Principles and must be prepared in Arabic.

• Representative / Branch Office or a Limited Liability Company are typically the most attractive legal forms for foreign investors into Iraq

• Very few double taxation treaties in force with Iraq, therefore direct investment or investment through an offshore holding country is common

Business taxation

Business Taxation - OverviewThe Iraqi government is focusing on building new tax reforms to encourage both domestic and foreign investments

Iraq adopted the first income tax law no.52 in 1927 after establishment of the modern Iraqi state in 1921.

No significant changes occurred in tax legislation until the adoption of the Current income tax law No.113 of 1982

1927

The law was influenced by an income tax law written in 1922 for British colonies.

1982CPA issued order no. 37 to suspend the tax system from April 16, 2003 until the end of that year

2003

No major amendments to law no.113 except for some with no apparent impact on the tax system in general

The tax system was reinstalled on April 1, 2004.The CPA issued order No. 49 reducing the tax rates and increased the legal allowances

2004

Governmental employees become liable to pay income tax like the employees of the private sector.

An income tax of 35% introduced in respect of foreign oil companies contracted to work in Iraq and subcontractors

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Paying Taxes in Iraq – Global Rank

New law passed for imposing Income Tax onForeign Oil Companies Contracted to work in Iraq

2010

• Federal Iraq vs. Kurdistan Region

• The Kurdistan Regional Government (“KRG”) introduced its own Oil & Gas Law (No.28) in 2007, which provides that a Petroleum Contract may exempt a Contractor from tax by law

• Model Kurdistan PSC provides that corporate income tax on income from Petroleum Operations should be the general corporate income tax rate as set out in the Law of Taxation, currently 15%, and in no event should exceed 40%.

• Income tax is generally paid as part of the Government's profit oil take

• No plans to implement new Federal tax rate of 35% in Kurdistan

• Iraqi tax system is complex due to lack of a logical structure and inadequate supporting laws.

• It provides tax administration officers a wide discretion, leading to inconsistency in implementation.

Business Taxes

• Permanent establishment

• There is no definition of “permanent establishment” set out in the current Iraq tax law.

• Foreign companies that are centrally managed and controlled in Iraq are considered to be Iraq tax resident.

• General rule - any non-Iraqi company which is “carrying on business” in Iraq is required to establish an Iraqi legal presence (e.g. company, branch office).

• No specific definition of what constitutes “carrying on business” in Iraq, but typically an obligation would arise when the company obtains premises (including rented premises) in Iraq, or retains personnel on a more than temporary basis.

• Corporate Tax • Flat rate of 15% on branch and companies• Oil and gas companies (including subcontractors and supporting industries) to be taxed at a rate

of 35% under new laws (expected to be implemented imminently)

• Corporate Tax Filing Deadline

• 31 May following the tax year (unless otherwise specified in PSC)

• Withholding taxes • No WHTs in Iraq with the exception of:• Interest – 15% on payments made to non residents• Dividends – 15% (non compulsory)• 3% retention on contract payments until can demonstrate tax compliance (rarely applied to

contracts between private companies)

• Capital gains • Included in profits and subject to corporate tax

• VAT/Indirect taxes • Currently no Indirect taxes in Iraq (with exception Goods and Services Supplied by Deluxe and First Class Hotels and Restaurants )

Key business tax features in Iraq:

Employment taxes


Employment Taxes

Non Resident

• Individuals who are not resident in Iraq for tax purposes will be liable to tax on “income which arises in Iraq”, regardless of where the income is received, in accordance with Article 5, paragraph 2, of the Iraq Income Tax Law

• A non-resident individual is an individual who does not meet the definition of a resident, as defined on the following slide, even if income has arisen to such individual in Iraq from any source

Resident

• Individuals who are resident in Iraq for tax purposes in Iraq will be liable to income tax in Iraq on their worldwide income.

• Broadly, a resident individual is defined as:

An Iraqi individual who is physically present in Iraq for at least four months during a tax year;

An Arab country national who is working in Iraq, regardless of the period of time he actually spends in Iraq;

A non-Iraqi individual (who is not an Arab country national) residing in Iraq

for at least four months consecutively, or six months cumulatively during the tax year or,

who is employed by an entity in Iraq, regardless of the duration of their stay


Employment TaxesAt a glance…

An unmarried taxpayer, or a married taxpayer whose spouse is filing separately

ID 2,500,000

(ID 208,333 per month)

A married man, whose wife is a housewife. The same allowance applies when the spouses are filing jointly

ID 4,500,000


A married woman with a taxable income, whose husband is disabled, unable to work, and has no source of income

ID 5,000,000


An independent widow or divorced woman ID 3,200,000


Income tax rates Up to ID 500,000 3%

Between ID 500,000 and 1,000,000 5%

Between ID 1,000,000 and 2,000,000 10%

Amounts in excess of ID 2,000,000 15%

Personal allowances for income tax purposes

Income tax filing deadlines Submission of monthly wage withholding tax form

Payment of income tax in respect of employees

15 days following month end

Submission of Annual Tax Deduction Schedule 31 May following the year end

Social security contributions Employees’ contributions 5%

Employers contributions 12%

Social security filing deadlines Monthly payments and tax filing By the end of the month following the month in which deductions are made.

Questions

© 2010 Deloitte LLP. Private and confidential

Contents

Introduction to the Country

Country Facts Proven Oil and Gas Reserves Historical Brief Main Hydrocarbon Areas

The Oil and Gas Industry Today

Industry Structure Today’s Map & Licensing Iraq Licensing Rounds Licensing Evolution in Kurdistan

Downstream Sector

Current and Future Plans

The Future

Challenges & Ambitions

Conclusions

Introduction to the country


Country Facts

• Full name: Republic of Iraq

• Area: 438,317 sqkm

• Population: 30.7 million (UN, 2009)

• Capital: Baghdad

• President: Jalal Talabani

• Major language(s): Arabic, Kurdish

• Major religion: Islam

• Monetary unit: Iraqi Dinar

• Main exports: Petroleum, Natural Gas, Phosphates, Sulphur


Iraq’s Proven Oil Reserves and Production

• At the end of 2008 Iraq’s share of the Middle Eastern oil reserves was reported at 115 billion barrels, or 9.1% of the total for the Middle East.

• Iraq’s oil production is 2.45 mmbbls/d of which 2.07 mmbbls/d is exported.

• Buyers include BP, Chevron, ENI, Exxon, Repsol and Total.

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Oil Production (mmbpd)

Source: BP Statistical Review, 2009


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Iraq

Gas Reserves (Tcf)

• At the end of 2008 Iraq’s share of Middle Eastern natural gas reserves was reported at 112 Tcf or 4.2% of the total for the Middle East.

• Iraq’s gas production is 124 Bcf, about 60% of this is flared due to lack of infrastructure to utilize it for consumption and export.

• Significant amounts of gas is re-injected to enhance recovery from the major oil fields.

Iraq’s Proven Gas Reserves and Production

Source: BP Statistical Review, 2009


Iraqi Oil and Gas Industry – Notable Events

1902

1927

1938

1948

1953

1961

2008/9

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1979

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80s90s

1927

First oil exploration well (drilled in Chia Surkh)

Iraq National Oil Company (INOC) established

Many new fields discovered (including Majnoon and West Qurna)

Iraq oil production peaks

Decline in activity due to sanctions, Iran – Iraq war and Gulf war

Exploration terminated due to war preparation

Rumaila field is discovered

Exploration re-started, discovery of Zubair and Nahr Umr fields

Giant discovery of the Kirkuk field

Termination of activities by IOC’s according to law No.80

First and Second licensing rounds announced and awarded


Historical Production Profile

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CRUDE OIL PRODUCTION IN IRAQ (1960-2008)

Peak output 1979at 3.352 mmbpd

Iran Iraq War 1980-1988

First Gulf War, 1991.UN Sanctions 1990-1996

Oil for food programme1996-2003

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Source: PetroView®


Main Hydrocarbon Areas: Southern Iraq

• Oil production from Mesopotamian basin.

• Many giant and super giant fields e.g. Rumaila, Zubair, West Qurna.

• Production is led by the South Oil Company.

• Variety of players entered through the bidding rounds; BP, CNPC, ENI, Occidental etc.

• Exported via the ports of Basra and Khor Al-Amaya.

Source: PetroView®


Main Hydrocarbon Areas: Northern Iraq

• Oil production from Zagros Foldbelt and Arabian Platform.

• Many giant and super giant fields e.g. Kirkuk, Bai Hassan, Jambur, East Baghdad.

• Production is led by the North Oil Company.

• Sonangol entered in the second bid round.

• Exported via the ports of Basra, Khor Al-Amaya and the Kirkuk – Ceyhan Pipeline.

Source: PetroView®


Main Hydrocarbon Areas: Kurdistan Region

• Semi autonomous region in Federal Iraq.

• Oil reserves 40-45 billion barrels, Gas reserves 100-200 Tcf.

• Ministry of Natural Resources is part of the Kurdistan Regional Government (KRG).

• Two producing fields; Taq Taq and Tawke.

• Oil production from 1st June 2009 into Ceyhan pipeline and for domestic market.

• Variety of players including Heritage, Gulf Keystone, Oil Search, DNO and OMV.

Source: PetroView®

The oil & gas industry today


Industry Structure – Iraq

Ministry of Oil (MoO)

North Oil Co

UPSTREAM DOWNSTREAM

South Oil Co

Missan Oil Co

Midland Oil Co

Oil Project Co

Iraq Drilling Co

Oil Exploration Co

North Gas Co

South Gas Co

North Refinery Co

South Refinery Co

Midland Refinery Co

Oil Pipelines Co

Oil Tanker Co

Oil Marketing Co

Oil Products Distribution Co

Gas Filling Co

Baghdad Oil Training Institute

Kirkuk Oil Training Institute

Basra Oil Training Institute

Baiji Oil Training Institute

Petroleum Research and Development

Centre

INSTITUTES


Industry Structure – Kurdistan Region

Kurdistan Regional Government (KRG)

Ministry of Natural Resources

Kurdistan Oil Trust

Organisation (KOTO)

Kurdistan Exploration

and Production Company (KEPCO)

Kurdistan Organisation

for Downstream Operations

(KODO)

Kurdistan National Oil Company (KNOC)

Kurdistan Oil Marketing

Organisation (KOMO)


Today’s Map & Foreign Players

Company Licences Company Licences

Petronas 4 Exxon 1

CNPC 3 GazProm 1

Korea Gas 2 Japex 1

Shell 2 Lukoil 1

Sonangol 2 Occidental 1

TPAO 2 Sinochem 1

BP 1 Statoil 1

CNOOC 1 Total 1

ENI 1

Company Licences Company Licences

Genel 7 Groundstar 1

KNOC 5 GS Holding 1

Gulf Keystone

4 Heritage 1

Mol 4 Hillwood 1

Petoil 4 Hunt Oil 1

OMV 4 Impulse 1

DNO 3 Le Meilleur 1

Shamaran 3 Longford 1

Sinopec 3 Majuko 1

Crescent 2 Niko 1

Dana Gas 2 Norbest 1

Dogan 2 Perenco 1

Koment 2 Samchully 1

Oil Search 2 SK Corp 1

Prime 2 Sterling 1

Reliance 2 Texas Keystone

1

Talisman 2 UI Energy 1

Daesung 1 Vast 1

First Reserve

1 Western Zagros

1

Companies in the Kurdistan Region Companies in Southern and Northern Iraq

Source: PetroView®


Licensing Rounds - Introduction

Southern and Northern Iraq

Aims:

•To achieve optimal development of petroleum resources in a contract area by offering technical service contracts through licensing rounds.

•To rehabilitate, further appraise and re-develop the fields for improved production and to carry out enhanced recovery of petroleum from the fields to achieve production targets.

Kurdistan Region

•Licences awarded on an ad-hoc basis.•Established oil and gas law in 2007.•Production sharing contracts offered (initial exploration period of 5 years with development periods of 20 years).


1st Petroleum Licensing Round

• Hosted on June 30th 2009.

• 8 technical service contracts on offer for 10 fields.

• 35 pre-approved companies, mix of supermajors, majors and NOCs.

• One permit awarded, Rumaila to BP and CNPC.

• Post bid round contracts awarded for West Qurna (Phase 1), Zubair, and the Missan Fields.

Source: PetroView®


• Hosted in December 2009.

• 10 technical service contracts on offer.

• 45 pre-approved companies.

• 7 contracts awarded.

• East Baghdad, Eastern Fields and Middle Furat received no bids.

2nd Petroleum Licensing Round

Source: PetroView®

Awarded contracts

CONTRACT PARTNERS

MAJNOON Shell (60%), Petronas (40%

HALFAYA CNPC (50%), Petronas (25%), Total (25%)

QAIYARAH Sonangol (100%)

GARRAF Petronas (60%), Japex (40%)

BADRA Gazprom (40%), TPAO (10%), Kogas (20%), Petronas (30%)

WEST QURNA (2) Lukoil (85%), Statoil (15%)

NAJMAH Sonangol (100%)


• Hosted in December 2009.

• 10 technical service contracts on offer.

• 45 pre-approved companies.

• 7 contracts awarded.

• East Baghdad, Eastern Fields and Middle Furat received no bids.

2nd Petroleum Licensing Round

Source: PetroView®

CONTRACT PARTNERS

MAJNOON Shell (60%), Petronas (40%

HALFAYA CNPC (50%), Petronas (25%), Total (25%)

QAIYARAH Sonangol (100%)

GARRAF Petronas (60%), Japex (40%)

BADRA Gazprom (40%), TPAO (10%), Kogas (20%), Petronas (30%)

WEST QURNA (2) Lukoil (85%), Statoil (15%)

NAJMAH Sonangol (100%)

Awarded contracts


3rd Licensing Round - Future

• Anticipated for early September 2010.

• Will focus on underdeveloped natural gas reserves.

• 3 gas fields on offer, Akkas (2.2 Tcf), Mansuriya (2.6 Tcf) and Siba (50 Bcf).

• 15 companies invited to bid, including Shell, Kogas and Total.

• Aiming to develop the gas industry and to provide domestic gas.

Source: PetroView®


Licensing in the Kurdistan Region - Prior to the 2005 Iraq constitution

8 licences awarded

LICENCE PARTNERS

BINA BAWI Petoil, Hawler Energy, Prime Natural Resources

DOHUK DNO, Genel

ERBIL DNO, Dogan

KALAR BAWANOOR Western Zagros, Talisman

KEWA CHIRMILA Genel, Addax

SHAKAL Prime Natural Resources, Petoil, Oil Search

TAQ TAQ Genel, Addax

TAWKE DNO, Genel

Source: PetroView® © 2010 Deloitte LLP. Private and confidential


Licensing in the Kurdistan Region – After September 2007

10 new licences awarded (18 in total)

LICENCE PARTNERS

AIN SIFNI Hunt*, Impulse*

AKRI-BIJEEL MOL*, Gulf Keystone*

HAWLER Norbest*, KNOC*

MIRAN Heritage, Genel

MALA OMAR OMV*

ROVI Reliance*

SANGAW SOUTHSterling*, KNOC, Addax

SARTA Reliance

SHAIKANGulf Keystone, Texas* Keystone, MOL

SHORISH OMV

* New entrants Source: PetroView® © 2010 Deloitte LLP. Private and confidential


Licensing in the Kurdistan Region – November 2007

7 new licences awarded (25 in total)

LICENCE PARTNERS

ATRUSH Aspect Energy*

BAZIAN

KNOC, GS Holdings*, Samchully*, Daesang*, UI Energy Corp*, Le Meilleur,* Majuko*, SK Corp*

BLOCK 39 Talisman*

CHEMCHEMAL Crescent*, Dana Gas*

KHOR MOR Crescent, Dana Gas

SARSANG Hillwood Energy*

SINDI-AMEDI Perenco*

* New Entrants Source: PetroView® © 2010 Deloitte LLP. Private and confidential


Licensing in the Kurdistan Region – November 2007 to Present

12 more licences awarded (37 in total)

LICENCE PARTNERS

ARBAT Shamaran*

BARDA RASH Koment*

BER BAHR Genel, Gulf Keystone

BLOCK 9 Talisman

BLOCK K 10 Shamaran, Petoil*

BLOCK 42 Oil Search*

CHIA SURKHPetoil, Genel, Longford*

KHALAKAN Dogan

QARA DAGHNiko*, Vast,*Groundstar*

QUSH TAPPA KNOC

SANGAW SOUTH KNOC

SHEIKH ADI Gulf Keystone*New entrants

Source: PetroView® © 2010 Deloitte LLP. Private and confidential

Downstream sector


Downstream Sector: current

• First crude oil pipeline completed in 1927, 4inch line from Naft Khaneh to Alwand refinery.

• NOC’s oil exported via Kirkuk to Ceyhan. Current capacity is around 1 mmbbls/d.

• Strategic Pipeline (reversible) to export Kirkuk crude south to the Gulf or Rumaila crude north to Turkey.

• Three tanker terminals in the Gulf (Mina al-Bakr, Khor Al-Amaya and Khor al-Zubair).

• Need for investment and modernisation.

• Current capacity needs to be raised in conjunction with Technical Service Contracts.

Source: PetroView®


Downstream Sector: future plans

• Existing infrastructure requires a major overhaul. In the meantime production may be capped if production capacity is found to be greater than the capacity of the regional export infrastructure.

• Investment in storage and transportation capacity is also required, with new pipelines and increased capacity of existing lines.

• Expansion of current loading capacity of terminals and further marine pipelines are required.

Planned pipelines:

• Haditha in Iraq to Al Zarqa refinery in Jordan, with plans to extend to the Red Sea and use Aqaba as a port.

• Second strategic line requiring some 230km of 42 inch pipe and four new pump stations.

• Taq Taq to Silopi line in Turkey.

The future


Challenges

• Still no resolution between Iraq Ministry of Oil and KRG.

• Security concerns.

• Legacy of war: unexploded munitions and mines from the Iraq-Iran war and Gulf wars need to be removed before fields can be accessed and exploration begun.

• Lack of skilled workers due to the series of conflicts.

• Lack of appraisal data: reserves estimates based on limited data, leaving much room for interpretation and change.

• Damaged reservoirs: previous production methods may have damaged reservoirs leading to bypassed reserves and uncertain operational problems. This was highlighted by a 2000 UN report on the Kirkuk field as re-injection was implemented regardless of the consequences.

• Lack of well services, equipment, communications, heavy transport, logistics.


Ambitions

• Plans to revise oil and gas reserves based on modern technology.

• Evaluate and explore some 395 undrilled prospects and appraise and produce 15 discovered fields.

• Plans to increase production capacity to 8 million bop/d by 2011 and then to 12 million bop/d by 2015, through technical service contracts.

• Plans to boost actual oil production to 3.2 million bop/d by end of 2011.

• KRG are hoping to produce 450,000 bop/d by 2011 and then 1 million bop/d by the end of 2012.

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Remaining Capacity Iraq Production Kurdistan Production Source: PetroView®, KRG and IOC


Conclusions

• Iraq has opened up to foreign investment, with the recent Iraqi licensing rounds and accessibility of licences in the Kurdistan region.

• In many parts Iraq remains underexplored.

• Many challenges to be faced, but there are many new entrants attracted by its prospects.

• Substantial plans to redevelop the countries industry.

• Iraq has the potential to be one of the most attractive oil development regions in the world.

• Actions could reshape the global industry.


This document is confidential and prepared solely for your information. Therefore you should not, without our prior written consent, refer to or use our name or this document for any other purpose, disclose them or refer to them in any prospectus or other document, or make them available or communicate them to any other party. No other party is entitled to rely on our document for any purpose whatsoever and thus we accept no liability to any other party who is shown or gains access to this document.

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