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Shell, Lukoil to Join Iraqi Top Producers Based on Winning Bids

By Anthony DiPaola

Dec. 13 (Bloomberg) — Royal Dutch Shell Plc and OAO Lukoil will join BP Plc and Exxon Mobil Corp. among Iraq’s top oil producers based on their pledges in winning bids this weekend as the country auctioned 28 percent of its crude assets.

Russia’s Lukoil and partner Statoil ASA of Norway won rights yesterday to develop the second phase of Iraq’s “super giant” West Qurna deposit, agreeing to pump 1.8 million barrels of oil from the field within six years. Shell and Malaysian partner Petroliam Nasional Bhd., or Petronas, committed on Dec. 11 in Baghdad to extract the same amount of crude from Iraq’s Majnoon field.

China National Petroleum Corp., Russia’s OAO Gazprom, and Angola’s Sonangol SA also won contracts in the two-day auction. The government in Iraq, which holds the world’s third-largest oil reserves, aims to boost production capacity to more than 12 million barrels a day, Oil Minister Hussain al-Shahristani said.

“When you have such huge reserves in a few fields, it’s only the giant oil companies that can win and afford to do the work,” said Tariq Shafiq, an adviser with London-based Petrolog & Associates and a former Oil Ministry official.

Iraq offered almost a third of its reserves in 10 blocs in the second round of oil licensing yesterday and Dec. 11. A first round in June assigned a similar amount of crude, with BP and China National Petroleum Corp. agreeing to develop Rumaila, the largest field awarded, with 17 billion barrels of reserves.

The Persian Gulf state is trying to attract investors to rebuild its economy after almost a decade of conflict and prior sanctions destroyed infrastructure. Iraq pumps about 2.4 million barrels a day and hasn’t exceeded 3 million since late 2000.

$200 Billion

Iraq will get about $200 billion a year from the development contracts awarded to international companies in the two rounds. The winning bidders will spend about $100 billion developing the deposits, al-Shahristani said after the auction ended in Baghdad yesterday. The work is scheduled to start about six months from the signing of the deals.

He called the second round a “success” after Iraq awarded seven contracts and got no bids for three blocs. In the first auction in June, Iraq signed only one contract out of 10 offered. The government agreed last month to two other deals and is in talks on a fourth field from the first round.

London-based BP and China National agreed in June to produce 2.85 million barrels a day at Rumaila, the only field locked up in that round.

Security Concerns

Exxon, based in Irving, Texas, and Shell, based in The Hague, agreed last month to terms for the first phase of West Qurna and pledged to pump 2.33 million barrels of crude a day there. Eni SpA agreed to pump more that 1 million barrels a day from the Zubair field, and Shell is still in talks over Kirkuk, all of which were offered in the first auction.

The opening of Iraq’s reserves persuaded more than 35 international and state-run oil companies to set aside concerns that insurgent attacks or political instability may disrupt operations. Bombings in Baghdad last week left at least 101 people dead and hundreds injured as violence escalates before elections planned in March.

Al-Shahristani has said the government would approve bids awarded this weekend by the end of year and said final approval for Exxon and Eni’s deals is imminent.

Petronas was one of the most active bidders in the second round, having been involved in four winning bids and one losing offer for West Qurna-2.

Total SA may be disappointed in the results after it won a stake in the Halfaya field and lost on two others, said Samuel Ciszuk, an analyst at IHS Global Insight in London.

Return to Iraq

Paris-based Total, seeking to return to the country it first explored in 1927, was interested in Majnoon and West Qurna-2, exploration and production head Yves-Louis Darricarrere said Dec. 2. Majnoon holds 12.6 billion barrels of reserves and Halfaya holds 4.1 billion barrels, according to U.S. estimates.

“We are pleased to resume our operations in Iraq with our partners at Halfaya,” Total spokeswoman Phenelope Semavoine said by telephone yesterday.

Lukoil, the Russian producer with the most oil assets abroad, beat out teams headed by BP, Total and Petronas in the bidding for West Qurna-2.

The winning bidders for two of Iraq’s largest fields, West Qurna and Majnoon, offered their services at one-quarter to one- third of the best bids proposed at the first auction in June, according to Oil Ministry data. BP agreed in the first round to develop Rumaila for $2 a barrel, half the initial bid.

Price Is Right

“The round is a success in the sense that the prices given for the fields were right,” said Shafiq.

Shafiq said he doubts Iraq can achieve 12 million barrels a day of capacity in the six years without damaging the field reservoirs and hurting potential production.

Thamir Ghadhban, an adviser to Iraqi Prime Minister Nuri Kamil Al-Maliki and former oil minister, questioned on Dec. 7 whether production from Rumaila, West Qurna-1 and Zubair will reach the levels proposed by BP, Exxon and Eni.

West Qurna, described as a “super giant” by Iraq’s Oil Ministry, is being developed in two licenses. The 12.9 billion barrels of oil reserves in West Qurna’s phase two make that deposit the biggest on offer in the second bidding round, according to U.S. Energy Department data. The first phase has about 8.7 billion barrels of reserves.

Saddam Hussein

Lukoil received a contract to develop the deposit from former Iraqi dictator Saddam Hussein in 1997. He then annulled it in 2002. Lukoil’s CEO unsuccessfully lobbied Iraqi Prime Minister Nuri al-Maliki to reinstate it this April.

Petronas and Japan Petroleum Exploration Co., known as Japex, won the Garraf field yesterday, outbidding groups led by Turkish Petroleum Corp., known as TPAO, and PT Pertamina, Indonesia’s oil company.

Gazprom led the only group bidding for rights to develop the Badra oilfield. It won the contract after lowering its cost for the work.

Sonangol, Angola’s state-run oil company, lowered its initial bids for the Qaiyarah and Najmah crude deposits to meet Iraq’s conditions. Iraq received no bids for the Middle Furat, or Middle Euphrates, fields, the Eastern Fields and the East Baghdad deposit.

Iraq, the third-largest producer in the Organization of Petroleum Exporting Countries, is the only member not subject to a production quota. It is “too early” for OPEC to set a quota for Iraq’s crude production, Oil Ministry spokesman Asim Jihad said yesterday. Boosting capacity as planned would enable Iraq to rival Saudi Arabia’s 12.5 million barrels of daily capacity, OPEC’s largest.

Iraq will hold a 25 percent stake in all field development licenses, with the remainder split between companies winning the bid. Bidders must accept service contracts with a flat fee for each barrel extracted, rather than production-sharing agreements in which they gain a stake in the crude produced. This means they are not positioned to benefit from a rise in oil prices.

CNPC, Petronas and Total won the contract to boost production at Halfaya to 535,000 barrels a day, beating groups led by Statoil, Italy’s Eni SpA and India’s Oil & Natural Gas Corp.

To contact the reporter on this story: Anthony DiPaola in Dubai at [email protected]

Last Updated: December 12, 2009 15:46 EST

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