Royal Dutch Shell Plc  .com Rotating Header Image

Sunday Telegraph: Where Majors Fear To Tread

Iraq

Last Updated: 12:09am GMT 07/01/2007Page 1 of 3

Iraq has the world’s second largest oil reserves but it is the minnows that are leading the way to unlock the war-torn country’s much-needed riches. Sylvia Pfeifer reports

New Year’s Day was like any ordinary day in Iraq: 15 bullet-riddled bodies were found behind a mosque in Baghdad, a roadside bomb exploded in the capital and the toll of US soldiers killed passed 3,000.
 
In the flurry of headlines and stories detailing the carnage, another development went almost unnoticed. A small Norwegian company announced that an exploration well in northern Iraq had produced several thousand barrels of oil. The company, DNO, is the first Western group drilling for oil in post-war Iraq under a deal struck two years ago with the Kurdistan regional authorities.

DNO is among a handful of companies risking capital – both financial and, in some cases, human – to help rebuild and develop Iraq’s oil industry.

The sector has been devastated by years of violence, a lack of investment and chronic corruption. Three years after the official end of hostilities, production – at around 2.2m barrels per day – is still below pre-war levels. Since 2003, there have been more than 380 attacks on Iraq’s oil assets: pipelines blown up, terminals set on fire and key personnel killed.

While the world’s oil majors have so far shied away from investing, minnows such as DNO and Petrel Resources, an Aim-listed Irish explorer, have taken the plunge. State-owned oil companies from resource-hungry countries such as China, India and even Russia have recently started dipping in their toes.

For these companies, the obvious risks are mitigated by the prospect of getting first dibs on a slice of Iraq’s vast oil riches: not only is the country blessed with the world’s second largest petroleum reserves after Saudi Arabia but much of it is “easy” oil because it is simple to extract from the ground.

“It’s about cost-benefit analysis – for a minnow, it all stacks up,” says Martin Rudd, vice president of business development at the Olive Group, which provides security to some of the world’s leading oil companies. “It can be easier for them to operate in a country like Iraq as the level of their investment is smaller and the reputational risk is less than that of the oil majors.”

Until now, disputes over how to carve up the reserves have helped fuel political tensions between the country’s three main communities, the majority Shia and minority Sunni Arabs and Kurds. Iraq’s oil is unevenly distributed, with the bulk of the reserves in the Kurdish-controlled north and Shia south. With oil making up nearly 70 per cent of Iraq’s economy and more than 95 per cent of government revenues, virtually every problem facing the country has its wellspring in hydrocarbons.

It was a point not lost on the Iraq Study Group, the bipartisan body led by James Baker, the former US Secretary of State. In its report last year, the group warned that “the politics of oil has the potential to further damage the country’s already fragile efforts to create a unified central government”.

But there is growing speculation that the Iraqi parliament is about to pass crucial oil legislation that would regulate the industry and distribute its revenues more fairly. One of the key stumbling points has been who should sign oil contracts with international companies in the Kurdistan region.

And with President Bush preparing to announce the deployment of more troops this week as part of a new push to bring order to Iraq, a deal on a hydrocarbon law is likely to be seen by many as a sign that some kind of normality is returning to the region.

“It will impinge on the question of Iraq as a nation, as a federal system,” predicts John Teeling, the chairman of Petrel Resources.

The company, which this year celebrates its 10th anniversary in the country, is among the handful of independent oil and gas companies that decided early on that Iraq was simply too big an opportunity to miss. Historically, it has always been the independents that blazed a trail in difficult operating environments and were the first to sign deals with governments in those regions. Teeling argues that Iraq is no different.

Petrel, he explains, decided to go to Iraq because of the “scarcity of energy”. He argues that the demand for resources from developing countries such as China is such that supplies are at a premium.

“You go where the minerals are. The majors work differently. It’s wild-catting, just more sophisticated,” he says.

He cites three conditions which need to be met before going in. “The critical thing in all these countries is, can you get title? Number two is, are the rules of the game understandable and can you work within those rules? Thirdly, does it have the geology that can enable you to make a profit?”

John Dorrier, the chief executive at Gulfsands Petroleum, a Texas-based company also listed on Aim which has signed a memorandum of understanding with the oil ministry to explore a deal to capture flared gas on a southern Iraqi oil field, echoes that view.

“If you’re a smaller company, a large project in Iraq could be a transformational event,” he says. “We think that companies that have been there for a long time will be at the front of the queue [when lucrative exploration licences are ultimately awarded].”
 
Both companies believe the exploration potential in Iraq is simply too great an opportunity to miss.

“Iraq is the last great frontier in the Middle East. The striking thing about other new frontier areas is how poor their record has been over the past three years in terms of discoveries. In Iraq, 80 per cent of the oil wells ever drilled have been discoveries,” says David Horgan, Petrel’s chief executive.

The company was last year awarded a three-year $197m contract to redevelop the Subba and Luhais fields in southern Iraq. Petrel hopes the ratification of a hydrocarbon law will lead to the government confirming a contract, dubbed Block 6, which covers 10,000 sq km in Iraq’s Western Desert. Earlier this year, the company joined forces with Japan’s Itochu to work under a technical co-operation with the Iraqi oil ministry for the 760m barrel Merjan field in central Iraq.

Despite the opportunities, security remains a major issue. While Petrel uses local militia, Gulfsands uses private security companies to help protects its employees when needed.

Nor has it all been plain sailing, admits Horgan, and Petrel has had its own security scares in the past.

In September 2003, for example, the company got the “obligatory letter”, warning that anybody who collaborated with the foreign invaders would be “decapitated and burnt”. Somewhat incongruously the sender of the letter ended by apologising for any inconvenience. Petrel took the precaution of closing its head office in Baghdad and consolidating its offices across the border in Jordan. Today, its country manager tends to work from home.

“It does screw up your day-to-day operations in Iraq,” says Horgan philosophically. “But in the south, where our operations are, things are okay.”

Security issues have arguably been less of a concern for Norway’s DNO which set up operations in the Kurdistan-controlled north of the country, removed from the day-to-day violence of Baghdad. The company signed two production-sharing agreements with the regional government in June 2004 and “spudded”, or began drilling, its first exploration well a year later. Last week, it announced that one of its test exploration wells had flowed more than 8,000 barrels per day.

DNO argues that provisions in Iraq’s new constitution ratify the validity of these agreements.

“Our experience is that the Kurdistan region is working relatively well,” says Helge Eide, DNO’s chief executive. “We consider all agreements to be legally safe.”

The company still needs to get formal access to export the oil but Eide insists that if everything goes to plan, it should be able to produce oil during this quarter.

But Teeling, Dorrier and Eide are not the only ones active in Iraq. India’s largest state-run and private-sector companies are in talks on the joint development of a field in the country. ONGC and rival Reliance are believed to be in preliminary discussions to develop the Tuba oilfield in southern Iraq. ONGC had previously won approval to develop oilfields in Iraq but activity was halted last year.

Meanwhile, Lukoil, the Russian oil company, was given a contract to develop the giant West Qurna-2 oil field by the regime of former president Saddam Hussein. France’s Total and the China National Petroleum Company were granted similar contracts at the time.

But executives at the world’s major oil companies have not been sitting still. While none has yet committed any hard cash to the country, most have tried to foster relationships with Iraq’s government, mainly by providing training and technical expertise.

“There is a misconception that the oil majors are not there,” says Dorrier. “They are not able to send people to Iraq so they hold meetings outside.”

In recent years, both BP and Royal Dutch Shell (which has had a presence in the country since the 1920s and was a shareholder in the Iraq Petroleum Company), agreed to provide free assessments of the geological and technical data on Iraq’s two main oil fields, Kirkuk in the north and Rumaila in the south. Others, such as Chevron, have organised training sessions for Iraqi engineers outside Iraq.

Executives say there is a significant skills shortage in Iraq. Many of those that were trained are either reaching retirement age or fled the country.

“People talk of a lost generation,” says an executive from one of the oil majors. “English language skills are also very important.”

An executive at another major adds: “We are committed to Iraq and to investing there but unless there is security, we can’t put people on the ground. We have given three conditions that we need to go in: an elected government, a constitution as well as petroleum legislation, and security.”

Once the hydrocarbon law is ratified, two of those conditions will arguably have been met. Security, however, remains the stumbling block.

According to Dr Gal Luft, director of the Analysis for Global Security in Washington, the insurgents have changed their tactics over the past 18 months. Whereas before, they targeted the basic infrastructure such as the export pipelines, they have now turned their attention on people such as security personnel. Many of the export terminals are also still in ruins from the first Gulf War.

Luft concedes that if the hydrocarbon law is passed, it will have benefits but he believes the general outlook won’t change.

“No doubt it will be a net positive development but I doubt it will change the fundamentals. My main concern is the stability and continuity of the government and whether it would be able to convince investors that Iraq provides a hospitable investment climate.

“The common thinking in the industry is that Iraq is bad news, stay out of there,” he says.

Kevin Rosser, oil and gas consultant at Control Risks, is equally gloomy in his outlook on the situation. “The problem is the industry is so opportunity-constrained as a whole, when it comes to Iraq there is a tendency for hope to triumph over reality. Iraq’s oil industry is moving in the same tragic direction as the rest of the country. I am pessimistic about the prospects, at least for the forseeable future.”

Others, however, such as Petrel’s Teeling, predict that it is inevitable that once the situation stabilises, Big Oil will be queuing up for a slice of the action.

Says Teeling: “Our problem is going to be to make sure when the big lads come charging in, which is as sure as the sun rising tomorrow morning, we’re not going to be trampled all over… Our job is to make sure when the steamrollers come that hopefully we are on the roller and not under it.”

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2007/01/07/cciraq07.xml

royaldutchshellplc.com and its sister websites royaldutchshellgroup.com, shellenergy.website, shellnazihistory.com, royaldutchshell.website, johndonovan.website, shellnews.net and shell2004.com are all owned by John Donovan. There is also a Wikipedia article.

0 Comments on “Sunday Telegraph: Where Majors Fear To Tread”

Leave a Comment

%d bloggers like this: