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Iraq takes lead by easing terms for oil projects

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By Carola Hoyos in London

Published: February 27 2009 02:00 | Last updated: February 27 2009 02:00

Iraq has sweetened the terms it is offering international oil companies vying to develop the country’s reserves in the first concrete example of a global shift in power beginning to sweep through the oil industry.

With the collapse in oil prices, from $147 a barrel last summer to $35 today, international oil companies are regaining some of their influence while the clout of oil- and gas-rich countries in which they work has eroded.

In Iraq, companies such as BP, Royal Dutch Shell, Chevron and Total will now receive stakes of 75 per cent rather than 49 per cent if their bid wins. Iraq has also lowered the production targets it initially demanded that companies achieved before they were paid for their work.

Baghdad’s decision to improve incentives will be followed by others, industry insiders say. They point to the sharp contrast between the financial positions of the national oil companies of resource-rich countries and the international oil companies they cite as evidence the industry is close to tipping point.

Oil-rich countries are slashing domestic budgets and relying even more heavily on their national oil companies as piggy banks to fund social programmes from hospitals to religious schools. That has left national oil and gas companies, such as Russia’s Gazprom and Venezuela’s PDVSA having to slash their budgets. PDVSA has been accused of defaulting on payments to companies it hired to drill for oil.

In Russia, cash-strapped national oil companies have turned to China for loans totalling $25bn, offering future oil supplies in return – a deal that would not have happened before oil prices plummeted. Brazil also turned to the Chinese for money. But not every petro-state has that option.

The Nigerian National Petroleum Corporation has had to turn to Shell for a $3bn loan to sustain oil production and investment. Shell’s largesse has yet to translate into contractual benefits but has allowed it to become bolder in lobbying against Nigerian government plans to increase taxes on the oil and gas industry.

Such desperation stands in stark contrast to the more enviable positions of international oil companies. Far from being national piggy banks, companies such as ExxonMobil of the US built up war chests of tens of billions of dollars during the boom years.

That has spared them – at least for now – from having to slash budgets, cut dividends or turn to borrowing.

The contrast is a significant one with the past five years when oil-rich nations and their state-controlled companies had the upper hand because high oil prices meant they could secure funding without the help of international oil companies. During that time they rewrote even legally binding contracts to the detriment of foreign investors desperate to gain access to the dwindling number of attractive oil assets around the world.

Countries such as Russia and Venezuela captured greater shares of project profits and even majority stakes previously held by international oil companies.

But such assertiveness has all but disappeared as international oil companies have become more selective about the projects they choose to back. Wood Mackenzie, the industry consultant, has worked out that before taxes all the exploration projects round the world turn a profit at $40 a barrel. But under current tax regimes, only about half can break even at that price. This means many countries will need to improve their terms if they want foreign oil companies to find them more oil.

Alan Murray, who heads Wood Mackenzie’s exploration analysis, said: “It is a big shift backwards with the international oil companies recapturing some of the bargaining position they had before.”

So far, oil executives say the shift in power has yet to translate into changes in terms, other than in Iraq.

Paolo Scaroni, chief executive of Eni, the Italian oil company, said: “We might find ourselves one day refusing to do a development because we don’t get a return and then the country being prompted to improve the conditions. But we are not there yet.”

For Baghdad such evidence of change is a reminder of lost opportunity. Had Iraqi politicians passed the oil law governing international investment last year and had their contract talks not been delayed, they would have been in a far stronger negotiating position than the one in which they find themselves now.

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