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China and Iraq Finalize Oil Contract, as Western Oil Majors Waver

MONEYMORNING.COM

Friday, August 22nd, 2008

China and Iraq Finalize Oil Contract, as Western Oil Majors Waver

By Jason Simpkins
Associate Editor

China and Iraq will sign a deal next week to develop the Ahdab oil field, 100 miles southeast of Baghdad, at time when political gridlock and security concerns have cast doubt over several pending short-term contracts.

The new agreement, valued at $1.2 billion, is a variation of a deal struck with the state-owned China National Petroleum Corp. in 1997, when Iraq was in the clutches of Saddam Hussein.

“The Chinese contract was signed with the former regime,” Hussein al-Shahristani, Iraq’s oil minister, said in an interview that appeared on Iraqi news Web site al-Noor. “It’s valid. It was unfair because it was a production-sharing contract. We have negotiated with them for a year. It was turned from a sharing contract into a service contract.”

Al-Shahristani, will put the finishing touches on the deal during a visit to China early next week, when he is joined by Latif Hamad, governor of the Wasit province – where the Ahdab field is located.

“The governor will discuss the logistic cooperation with the Chinese company, especially the security side,” provincial spokesman Majid al-Atabi, told The Associated Press.

The deal with China is one of several contracts Iraq is touting in an effort to boost oil production by roughly 500,000 barrels a day, from 2.4 million barrels to 3 million barrels by the end of 2008. Iraq then hopes to increase production to 4.5 million barrels a day by 2013.  As it stands now, the country sits on estimated 115 billion barrels of reserves, but exports a meager 2 billion barrels a day – 10th in the world.

Thirty-five foreign oil majors were invited to bid for contracts to provide technical support and help boost production in eight oil and natural gas fields last month. However, it was recently reported that oil majors are balking at the commitment, as the terms of the contracts have been shortened, and security concerns and political gridlock have undermined any progress.

“It appears that on present form (the Iraqi government) probably won’t proceed with most of these or all of them,” Charles Ries, coordinator for Iraq’s economic transition at the U.S. embassy told reporters earlier this week. “But I think that some of the companies are open to continued discussions even on relationship grounds, and some of the companies… don’t think it’s worth their time.”

Ries said that the contracts lost much of their appeal when Iraq reduced the length of their terms from two years to one, and when it became clear that companies who signed wouldn’t be given any preferential treatment for future long-term deals. Ries added that the deals, worth about $500 million apiece, “were never going to be hugely lucrative.”

Iraq has been negotiating with Royal Dutch Shell PLC (RDS.ARDS.B), BHP Billiton Ltd. (ADR: BHP), BP (BP), Exxon Mobil Corp. (XOM), Chevron Corp. (CVX), Total S.A. (ADR: TOT), and a consortium of smaller firms led by Anadarko Petroleum Corp. (APC),  according toReuters.

Anadarko has already pulled out, but officials insist negotiations are ongoing. An anonymous Iraqi official responded to reports that talks had disintegrated Wednesday, telling the AP that deals with Shell, BP, Exxon, Chevron, and Total were “still on the table,” and “none of them has pulled back.”

Development of the energy sector will be crucial to Iraq’s reconstruction and development, as oil accounts for 90% of export earnings and 70% of the country’s gross domestic product.

http://www.moneymorning.com/2008/08/22/china-iraq/

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