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Oil groups set to end 40-year exile from Iraq

Financial Times

By Carola Hoyos in London

Published: May 7 2009 03:00 | Last updated: May 7 2009 03:00

International oil companies are preparing to go back into Iraq by the end of the year, despite Baghdad’s failure to pass an oil law and continuing concerns over security.

BP and Royal Dutch Shell are among companies expected to bid for oil service contracts next month, with the long-term objective of being allowed to develop the world’s third-largest oil reserves.

In the past week, executives from many of the world’s biggest oil companies – expelled almost 40 years ago – have assured Iraqi officials they plan to commit to working in the country.

Jeroen van der Veer , chief executive of Royal Dutch Shell, said his company was participating in the bidding process and that the new contract terms had made it more attractive to invest there. “Yes, sure. In the end, you have to make up your mind,” he said.

The service contracts, which are divided into six groups of fields, include upfront guarantees of soft loans worth a total of $2.6bn (€2bn, £1.7bn).

A BP spokesman said: “If successful, we could see ourselves back in Iraq by the end of the year barring any unforeseen delays.”

For five years, following the US invasion of Iraq, oil executives had been insisting on better security and the passage of a hydrocarbon law – seen as crucial by the Bush administration as an indicator of political stability – before they would be willing to invest billions of dollars. Now the companies say they are prepared to return to Iraq even though the country’s oil law remains bogged down by political discord and its fragile peace faces two imminent tests: the forthcoming elections and the US military’s departure.

Thamir Ghadhban, chairman of the advisory board to Iraq’s prime minister and a former oil minister, told the Financial Times that the coming bidding round – the first since the end of the 2003 war – would be heavily subscribed.

“International oil companies are short of reserves and opportunities and countries control almost 88 per cent of oil reserves. The only real opportunity is Iraq.”

He said an oil law would no doubt make the companies “more satisfied, but we are not working from a void. We have laws”.

Mr Ghadhban added that not one company had come to him with second thoughts or to declare it would not bid because of the absence of a hydrocarbons law. “The oil companies will bid and it will be competitive.”

BP, Shell, Total and ExxonMobil were part of the consortium of oil companies whose assets were appropriated by Baghdad when the country nationalised the industry in early 1973.

Iraq, which produces about 2.4m barrels of oil a day, holds reserves of about 115bn barrels, which are relatively easy and inexpensive to tap.

Only Saudi Arabia and Iran hold more oil, but both are off limits to international companies, which have had to move into increasingly remote or expensive areas such as the Arctic and Canada’s oil sands.

The breakthrough on Iraq’s contracts comes after months of negotiations between Iraqi officials and oil company executives.

Alex Munton, analyst at Wood Mackenzie, the industry consultant, said: “There has been an effort to try to go as far as they can so the oil companies’ concerns, raised by the absence of a hydrocarbons law, can be met through the contracts.”

He added: “Iraq may be at the bottom of any scale ranking investment climate – even for hardened oil companies – but it is at the top of any scale ranking the attractiveness of its oil reserves.”

Bids are due at the start of June and the winners are expected to be revealed by the end of that month. Iraq’s cabinet plans to ratify the agreements before the end of August, which would mean companies have to begin work in November or risk losing the contract.

“Iraq is not interested in signing contracts that will not be worked on,” Mr Ghadhban stressed, noting that the contracts committed companies to begin work three months after ratification.

Given Iraq’s recent record, delay and derailment remain a possibility. For Baghdad, however, getting the contracts signed has become more urgent since the collapse in oil prices – to $50 a barrel from $147 last summer – left a gaping hole in its budget.

For the companies, the drop in the oil price may have drastically reduced available cash but not so much as to force them to forgo the biggest investment opportunity since the fall of communism lifted the barriers to Russia and the Caspian.

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