UK proposal for a proactive pricing mechanism, 11 July 2002

UK proposal for a proactive pricing mechanism (11 July)

Since December 2000 the Iraq Sanctions Committee has continued to receive information from the Oil Overseers that substantial sums of money have been withheld from the UN/Iraq escrow account due to excessive levels of premia being charged by SOMO contract holders. The committee continues to take note of the information supplied by the Oil Overseers that excessive premia could be realized as a result of extra-contractual arrangements, between SOMO and the contract-holders. The Iraq Sanctions committee has never approved such arrangements. The committee introduced retroactive price setting in October 2001 with the objective of combating these practices, which are detrimental to the OFF program.

The Committee continues to work towards its objective of maximizing the funding base of the OFF humanitarian program in order to meet the basic humanitarian needs of the Iraqi population. In this context it sees it as its responsibility to facilitate the smooth flow of Iraqi oil into the markets at fair market value and in a manner consistent with Security Council resolutions.

To further this objective the committee has decided to increase the attractiveness of Iraqi oil to end-users and established traders by allowing them, provided that certain conditions are satisfied, the choice between purchasing Iraqi oil on a proactive or a retroactive pricing basis. The Committee will also work towards its objective of minimizing the risk of abusive practices that could lead to funds being withheld from the UN-Iraq account.

The Committee would therefore undertake the following:

1. SOMO and Contract Holders
No change will be made to the existing system of registration of national oil purchasers by UN Member States and SOMO’s discretion of awarding contracts to companies of its choice. The Oil Overseers are requested to allow for a contract holder’s commission of five cents per barrel when submitting their price recommendations to the Iraq Sanctions Committee.

2. The “Green List”
Subject to the Sanctions Committee’s approval by way of the no-objection procedure, a company will be allowed on the “Green List”. The Committee will only allow on this list those companies that are either refiners of Iraqi crude oil or established crude oil traders that possess relevant commercial experience in lifting and shipping cargoes of crude oil. A request from a company to be put on the “Green List” should be submitted via the Oil Overseers and should be accompanied with a completed standardized questionnaire (attached). The questionnaire will contain relevant information about the company and its activities. Many of the companies that are currently involved in the physical lifting of Iraqi oil would be expected to qualify for inclusion on the “Green List”. The Committee on a monthly basis would review the “Green List”. The Committee will not allow the continued presence of any companies on the list that have caused damage to the OFF program, eg by failing to lift the oil they have committed themselves to lift during a particular pricing period. The Committee will not accept companies that are affiliated with companies that are already on the list or which were deleted from that list.

3. Pricing Of Iraqi Crude Oil
The Committee will allow two alternative pricing systems: proactive and retroactive.

The proactive system will only be allowed under the following conditions:

SOMO will submit [proactive] prices before a certain date. Such prices will need to be approved by the Iraq Sanctions Committee. The timing of the SOMO submission of oil prices should be in line with existing oil industry practices. Prices would be fixed for a full month and the Committee will not accept any requests for subsequent revisions of these prices.

The company lifting Iraqi crude oil must be on the “Green List”.

The lifting company should open the Letter(s) of Credit for volumes and destinations of their choice within three New York banking days of the Committee’s approval of the crude oil prices. The volume(s) and destination(s) cannot subsequently be changed and the Committee will, for the purpose of deciding whether that company will qualify to retention of the “Green List” in future, consider this as a lifting commitment.

The Letter(s) of Credit should both include the name of the contract holder from which the lifting company has bought the oil and the name of the “Green List” – lifting – company that opened the Letter of Credit on the contract holder’s behalf.

The Letter(s) of Credit should explicitly state the price as previously approved by the Sanctions Committee.

The retroactive system will prevail under the following conditions:

In all cases if SOMO has not submitted (proactive prices) before a certain date or if the Committee has not approved these prices.

If the lifting company is no longer on the “Green List”.

If the lifting company is on the “Green List” but wants to lift an (incremental) volume of oil for which no valid Letter of Credit was opened in time for it to qualify for proactive pricing.

Approval of Letters of Credit, and therefore UN authorization to export the cargo, can only be given if the pricing clause in the Letter of Credit reads:

“The price shall be [proactive cases only – agreed price mentioned] /as will be agreed [retroactive cases only – no prices mentioned] upon between SOMO and the United Nations.”

4. Monthly Reporting
The Oil Overseers will report to the Sanctions Committee on a monthly basis recording any failure by a company on the “Green List” to comply with its lifting commitment(s). In order for the Committee to decide whether such company should remain on the “Green List” the Oil Overseers will submit their report to the Iraq Sanctions Committee as soon as possible after the end of each month. The Sanctions Committee will then, on the basis of the standard 48-hour no-objection procedure, decide whether the company should be retained on the “Green List”.

5. Review
The Sanctions Committee will review the effectiveness of this proposal after six months.

6. Implementation
The Oil Overseers will submit to the Iraq Sanctions Committee a detailed proposal for the implementation of a proactive/retroactive system no later than 1 August 2002.

Questionnaire For Green List Application

1) Full Company Name:
2) Registered business address:
3) Name of contact person, telephone number and fax number:
4) How would you describe the activities of the Company?

– crude oil refining company;
– crude oil trading company;
– crude oil refining/trading company;
– other (please specify).

5) If the Company* is a crude oil refining or refining/trading company, has the company processed any crude oil of Iraqi origin during the past twelve months? If so please supply the following information:

– The location(s) of the refinery which processed the Iraqi crude oil;
– Whether the crude oil was purchased on an fob, C&F or delivered basis;
– The vessel name, bill of lading date, discharge date and discharge location of a recent delivery of Iraqi crude oil for processing in the company’s refining system;

6) If the company is a crude oil refining/trading company that has not refined any crude oil of Iraqi origin during the past twelve months or if the company is a crude oil trading company, please supply the following information for three recent trades:

– Name(s) of vessels, equal or larger than LR2 size, which were chartered by or for account of the Company;
– Bill of lading dates, load ports, types of crude oil and discharge ports for these three vessels;

7) Sign and date the duly filled in questionnaire and forward it to the United Nations Oil Overseers at the following fax number: +1 212 963 1628).

________

* In question 5) and 6) the word “Company” is meant to include all its affiliated companies.

See further:

French proposal for Iraqi oil pricing (21 June 2002).