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British groups vie for Iraq oil and gas contracts

Times Online

December 11, 2009

Alice Fordham in Beirut

More than 40 international oil companies will gather in Baghdad today to bid for contracts to work on the world’s third-largest reserves.

The auction, which will take place over two days, offers service contracts to work on ten oilfields, groups of oilfields and one gasfield in the country, including the “supergiants” of East Baghdad, West Qurna-2 and Majnoon, which have reserves of 8.1 billion, 12.9 billion and 12.6 billion barrels of oil, respectively.

Three British companies — BP, Cairn Energy and BG Group — are among the bidders, alongside companies such as Royal Dutch Shell, Total and Gazprom. Competition is expected to be fierce and the groups were reluctant to reveal which fields they wanted.

The enthusiasm and number of bidders is high, despite enormous obstacles in terms of security, infrastructure and an administration rated the world’s fifth most corrupt in Transparency International’s annual Corruption Perception index.

Initial reluctance to invest in Iraqi oil was compounded this year after a first round of bidding for contracts, in June, was delayed by sandstorms, blighted by unexpectedly tough terms and shaken by the failure of the Iraqi Government to pass a hydrocarbons law setting out definitively the terms of investment.

Only one contract, of a potential six, was awarded to China National Petroleum Corp and BP, which has a long history in Iraq, to work on Rumaila oilfield.

However, confidence among investors has risen in the past month, since two consortiums — Exxon Mobil with Shell and Italy’s Eni with Occidental Petroleum Corp and Korea Gas Corp — signed deals to work on the West Qurna-1 and Zubair oilfields.

Enthusiasm for this round of bidding was further increased by the fact that the fields offered are undeveloped. Investors in the partially exploited fields offered in the first round were obliged to work with outdated Iraqi equipment, some of which dates to the first half of the past century, and to combat the effects of years of poor management.

Robert Powell, an Iraq analyst at the Economist Intelligence Unit, said: “The first licensing round was a damp squib at first, but the two subsequent deals were pretty close to a triumph . . . it gives confidence.”

Mr Powell said that challenges remained and that there were dangers that the “opaque system” and “unreliable bureacracy” could change tax levies after contracts had been signed as the hydrocarbons law has still not been passed.

Pragmatic concerns also remain, such as the fact that the drilling process usually requires significant amounts of water to maintain pressure, a problem in drought-stricken Iraq. Mr Powell said: “The Iraqi Government has promised to make sure there will be enough water, but there are major question marks about whether that is a promise they can keep.”

Industry insiders are concerned also by the ability of Iraq’s infrastructure to cope with field development. Umm Qasr, Iraq’s only functioning port, was devastated in the early part of the war and it is probable that it will struggle to cope with the large-scale import of massive machinery.

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