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Big Oil Jumps for Licenses in Iraq


DECEMBER 10, 2009

Companies Look Past Instability, Dicey Terms for Access to Prized Reserves




Foreign oil executives are flocking to Iraq as it prepares to open some of its untapped oil assets to Western oil companies, undeterred by a string of attacks Tuesday that killed more than 120 people.

Iraq’s second oil-licensing round, to be held Friday and Saturday, has elicited substantial interest from Big Oil. The most tempting prizes are the Majnoon and West Qurna-Phase 2 fields, each of which contains more than 12 billion barrels of proven reserves. The fields have been in the majors’ sights for decades.

The auction is key to Iraq’s goal of reviving an oil industry battered by years of war and sanctions. The country plans to increase oil production over the next six or seven years to six million barrels a day from 2.5 million now.

For big international energy companies, the licensing marks the latest stage of their return to a country from which they’ve been barred since 1972, when Saddam Hussein nationalized the oil industry. Iraq is thought to have proven reserves of 115 billion barrels of oil—putting it No. 3, after Saudi Arabia and Iran, and making the nation a magnet for Western firms shut out elsewhere in the Middle East.

But analysts say there are major obstacles to the government’s efforts to expand oil output. Parliament has yet to pass an oil law covering key issues such as revenue allocation, and elections next year could bring in a government that might not honor oil contracts. Also, security remains fragile.

Sabah Kadhem al-Saadi, an official in the Oil Ministry’s petroleum contracts and licensing directorate, said Wednesday that all 44 companies that had registered to make proposals still intend to come to Baghdad. That includes most of the supermajors, including Royal Dutch Shell, France’s Total SA, and Chevron Corp. of the U.S. Many companies are unwilling to discuss their proposals beyond confirming their interest.

The companies will bid for rights to fields that are yet to be developed, which is particularly attractive in Iraq because its developed fields are widely viewed as having been damaged by poor management. The first round, in June, involved oil fields already in production.

The latest contracts on offer are for 10 groups of oil and gas fields. Among them are giants like Halfaya in southern Iraq, as well as clusters of small deposits offered as a single package. One such group is the so-called Eastern Fields of Gilabat, Khashem Al-Ahmar, Nau Doman and Qumar.

Interest is high despite terms that the majors would balk at in other circumstances. Iraq is offering 20-year technical-service contracts, under which companies are effectively employed by the government and propose a fee they will be awarded for every barrel of oil they extract. The Oil Ministry also pays the companies’ production costs. Oil companies tend to prefer production-sharing agreements, which give them a share of the oil produced.

Ambivalence about the terms clouded the first round of bidding. In the end, only one contract was awarded, to a consortium of BP PLC and state-owned China National Petroleum Corp., to expand output at the giant Rumaila field. Other companies, which were seeking at least $4 a barrel, walked away after Iraq refused to pay more than $2.

Some companies changed their minds later. A consortium led by Italy’s ENI SpA last month agreed to be paid $2 a barrel to increase production at the huge Zubair field. Soon after, Shell and Exxon Mobil Corp. reached a similar deal with Baghdad on another field, West Qurna-Phase 1.

Analysts said the majors had put up a united front in the hope Baghdad would fold and offer more attractive terms. But cracks began to appear after the companies took a closer look at the contracts and realized that the terms weren’t as onerous as first believed. For example, they learned a 35% tax on the companies applies only to the per-barrel fees they receive from the government, not from other revenue.

“They saw that the contracts will actually generate quite a lot of revenue. You get full cost recovery and then a premium on every barrel,” said R. P. Eddy, head of Ergo, a research firm focused on emerging markets, which has an office in Baghdad. “They realized they just had to do this.”

Among the bidders in this week’s auction is a Chevron-Total partnership angling for Majnoon. In the 1990s, Total negotiated with Mr. Hussein’s regime to develop the field, though no agreement was ever signed.

Russian oil firm OAO Lukoil experienced a similar setback with a 1997 deal it signed with Baghdad to develop West Qurna-Phase 2. That contract was canceled by the Iraqi government five years later. Lukoil, which lost out to Exxon and Shell on West Qurna-Phase 1, will bid for the second phase this week.

Terms for the second round are slightly different from the first. As with the June round, winners will be selected based on the fee per barrel they’re willing to accept and what they expect to produce. This time, however, the scoring has been changed to give greater weight to the fee. Iraqi officials say the aim is to dissuade companies from promising unrealistically high output targets.

Write to Hassan Hafidh at [email protected] and Guy Chazan at [email protected]

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