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Oil groups resist tough bid terms

Financial Times

By Carola Hoyos in London

Published: July 1 2009 03:00 | Last updated: July 1 2009 03:00

Iraq’s first big effort to attract foreign investment to its oil sector met stiff resistance from companies yesterday.

Only BP of the UK and China’s CNPC were willing to agree to Baghdad’s tough terms, allowing them to win a bid to turn the country’s Rumaila field into the world’s second largest.

In a process billed as crucial to Iraq’s economic future, seven other oil and gas fields, including the highly sought after West Qurna field, failed to attract bids favourable enough to meet Iraq’s conditions.

“The maximum service fee the Iraqis were willing to pay blew a lot of bids out of the water,” said Alex Munton, analyst at Wood Mackenzie, the industry consultants.

The auction underlines the difficulties faced by Baghdad as it seeks to rebuild the state. Pressure is likely to increase on Hussein Shahristani, the oil minister, who is already under fire for failing to show progress in the dilapidated oil industry since the 2003 toppling of Saddam Hussein.

In the countdown to the US-lead invasion of Iraq, Bush administration officials predicted that Iraq would be able to meet its own postwar reconstruction needs within months. Paul Wolfowitz, deputy defence secretary, told a congressional panel in 2003 that oil revenues could bring between $50bn and $100bn within two or three years – a prediction that proved unrealistic.

Although companies were willing to venture into Iraq without new oil industry legislation, they yesterday balked at the fees the government was demanding.

BP was forced to halve its fee – to $2 a barrel from $3.99 – to secure the contract. It also promised to boost the field’s production, which is about 1m barrels day, to 2.85m b/d within six years, second only to Saudi Arabia’s huge Ghawar field.

It is an ambitious target and one that will not yield a high profit margin, said Mr Munton. But he said it would give the company a bigger stake in the Middle East, where its presence is lighter than its competitors.

For CNPC, BP’s partner, developing Rumaila will offer the chance to secure oil supplies for China and develop ties with a key petrostate. The rest of the auction was largely disappointing . Royal Dutch Shell initially bid for the Kirkuk field but rejected Iraq’s demand for better terms. Companies including ExxonMobil and ConocoPhillips, from the US, Europeans Eni and -Edison, and CNOOC, Sinopec and CNPC, of China, did the same at other fields. Mansuriyah, the gas field, failed to garner any bids.

Mr Shahristani, the architect of the bidding round, gave companies extra time to revise their bids but all, other than BP and CNPC, walked away.

The main problem had been the terms but companies were also concerned about the lack of a hydrocarbons law and the unanswered question of who had the final say on decisions during the fields’ reconstruction – the foreign oil company or Iraqi’s national oil company with which it would work.

Nadia Salem, Iraq team leader at Al Tamimi, a law firm, advised some of the bidding companies. She said: “From the contracts it is difficult to see who will have the final say. It looks like the Iraqis will run things on the ground at least in the first two years and the companies had to accept that.”

The bidding round took place on the day US troops handed over control of Iraqi cities to the country’s own security forces, highlighting, for some, security concerns about working in the country. But companies were willing to take risks for the chance to work at the biggest oil frontier to be opened up since the fall of the Soviet Union.

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

Only Saudi Arabia and Iran hold more oil but both are off limits to international companies, which are pushed into increasingly remote areas. Thus BP and CNPC’s gamble may yet pay off, especially if Iraq opens up more of its -undeveloped fields to bidding as Nouri Al-Maliki, the prime minister, hinted yesterday.

For Iraqis who want to see their oil production provide revenue for rebuilding the country, the auction’s outcome will come as a disappointment.

Editorial Comment, Page 8

Copyright The Financial Times Limited 2009

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