Oil and Gas in the Capitals

	Vol. 230 No. 12
DR. A. F. ALHAJJI, CONTRIBUTING EDITOR, MIDDLE EAST

In the next few years, all eyes on Iraq

On Dec. 11 and 12, Iraq will conduct its eagerly anticipated second bid round. Both the central government and the IOCs have learned valuable lessons from the failure of the first bid round, and both are looking forward to making the most out of the second round.

Iraq plans to increase production significantly to 6–7 million bpd. While experts are divided on whether Iraq can achieve this objective, they agree on several facts. First, Iraq is underexplored. Second, political stability and transparency are keys to increasing production without interruption. Third, the IOCs’ technology and expertise are badly needed.

In June, Iraq offered eight fields in the first bid round, including Rumaila, Zubair, West Qurna-1 and Kirkuk. The results were disappointing. Only one contract was awarded. However, further negotiations modified the terms of the contracts and led to new agreements.

Several factors contributed to the failure of the first round, including the absence of a national hydrocarbon law. IOCs were worried about contract sanctity and the rule of law. In fact, many companies might not invest heavily until the US withdraws its troops from Iraq and officially ends the occupation to avoid repeating history: IOCs were nationalized in Iraq in the early 1970s and in Iran in the early 1950s on the grounds that contracts were signed under duress when both countries were occupied by the British.

Since no hydrocarbon law exists, some Iraqi experts questioned whether the Iraqi government has the legal authority to grant contracts. They believe that all contracts should be approved by the Parliament. In fact, many Iraqi and international experts believe that there is no guarantee that a new government in Iraq will honor these contracts, despite assurances from the current government.

Several Iraqi experts have criticized the first round, saying the contracts were heavily tilted to benefit the IOCs at the expense of the Iraqi people. One of the main criticisms was the length of contracts relative to same type of contracts in other countries. The companies also complained about the ambiguity of the tax structure and the high upfront payments.

First-round picks. The sole contract in the first bid round awarded the 17 billion-bbl Rumaila Field in southern Iraq to BP and China National Petroleum Corporation. An official technical service contract was signed between the two companies and Iraq’s South Oil Company in early November. One of the controversial issues that infuriated some Iraqi observers was that the companies asked for a remuneration of $4/bbl, which they later cut by 50% to $2/bbl. Later, BP announced that it will make a return on investment of 15–20% with a fee of $2/bbl.

The two companies plan to increase production in Rumaila Field from the current 1.1 million bpd to 1.5 million bpd within four years and to an eventual 2.85 million bpd with an investment of up to $15 billion over a period of 20 years. The companies will start recovering their costs at $2/bbl on incremental production after output increases by 10% from current levels.

However, most experts predict that BP and CNPC will limit their investment until a petroleum law is adopted to avoid the risk of a new government nullifying their contract. They also agree that ramping up production by 10% can easily be achieved through little investment and some repairs, especially since CNPC’s involvement provides access to cheap Chinese equipment. It is worth noting that Rumaila was discovered by BP in 1952, and that the company left Iraq in 1972 after nationalization.

The failure of the first bid prompted the government and the IOCs to renegotiate the terms of the bids that did not win. The negotiations were successful, and two major contracts were signed recently after the Ministry of Petroleum clarified various terms such as tax rates and cost recovery while the companies agreed to change production targets.

In early November, the Iraqi government signed an initial 20-year technical service contract with a consortium consisting of Eni, Occidental Petroleum and Kogas to develop the 4 billion-bbl Zubair Field and increase its production from the current 195,000 bpd to 1.1 million bpd within seven years. The companies will receive $2/bbl for any additional production above the current level, and are expected to invest between $10 billion and $20 billion.

Also in early November, the Iraqi government awarded West Qurna-1 to a consortium led by ExxonMobil and including Shell. The field holds estimated reserves of 8.5 billion bbl. Like other contracts in the first round, it was a technical service contract for 20 years. The consortium plans to increase production from 280,000 bpd to 2.1 million bpd. The companies will get $1.90 for each barrel they produce above current output levels.

Second-round prospects. More than 40 companies will bid for 10 projects: four in the south (West Qurna-2, Majnoon, Halfaya and Gharraf), three in the north (Qayarah, Eastern Fields and Najmah), and three central projects (East Baghdad, Middle Furat and Badra). Total reserves in these fields are estimated to be around 32 billion bbl with output potential of 2 million bpd.

To avoid repeating the failure of the first round, major changes and revisions were made: The government clarified the tax structure, companies will get access to undiscovered reservoirs, remuneration fees will be decided on a case-by case basis for each reservoir, the bid formula will be weighted toward the fee to prevent companies from inflating production, and the production plateau was lowered from 20 years to between seven and 13 years.

Experts think Iraq will pay higher fees this time because most of the fields, unlike those in the first round, are untapped and require larger investment.

Looking ahead, government officials said that 60 more undeveloped fields will be included in future rounds, in addition to 65 exploration blocks. It is certain that these bid rounds will be more successful under a national hydrocarbon law. WO