Only weeks after shelving its plans for oil majors to ramp up production by 500,000 barrels a day through short-term technical service contracts, Baghdad is finally putting definite oil plans in place. The Iraqi Oil Ministry is now focusing on its upcoming oil licensing round, which covers six oil and two gas fields.
A high-level team of Iraqi oil officials took their plans for Iraq’s debut bid round to London on 13 October, revealing a mixed bag of terms and conditions to the 35 assembled prequalified oil companies. The 20-year service contracts hold out the promise of participating in developing more than 43 billion barrels of proven reserves, which, in combination with a second licensing round due to be unveiled before the end of the year, represents about 80 per cent of Iraq’s reserve base.
But Baghdad does not plan to unconditionally hand these riches over to the international oil companies (IOCs) and is adopting a tough negotiating stance, placing a series of hurdles in the path of the bidders. It has informed the IOCs that their technological proficiency will not count for anything when it comes to the bidding stakes. Price is the only criteria that the Oil Ministry will consider.
The ministry has also indicated that firms may have to form bidding consortiums with rival oil companies if they are to stand a chance of winning any contracts, to take advantage of a wider range of experience and expertise.
Other unexpected additions to the bid round include a requirement for companies to undertake 3D seismic surveys, adding to the cost. The six oil licences up for auction cover Kirkuk and Bai Hassan in the north, West Qurna-1, Rumaila and Zubair in the south, and one licence covering fields in Missan province: Burzurgan, Fauqa and Abu Ghirab. The two gas licences cover two fields: western Akkas and eastern Mansouria.
Baghdad’s decision to open out the competition beyond the cherry-picked six majors selected for the for the ill-fated technical service contracts reflects domestic anxiety about handing over the country’s future hydrocarbons assets to foreign oil companies.
Over the border in Kuwait, it is this anxiety and fear that has held up the development of the country’s oil fields, with the state’s parliament and government gridlocked over the way IOCs will be involved in helping to boost production.
But having carried out exploratory studies on the fields in recent years, the companies that were negotiating the one-to-two-year deals – the UK’s BP, Australia’s BHP Billiton, the US’ Chevron and ExxonMobil Corporation, the UK/Dutch Shell Group and France’s Total – are likely to pursue service contracts on the same fields that they have been exploring for some time.
The bidding parameters suggest that hydrocarbons nationalism retains a strong hold on Iraq’s oil strategists. The insistence that the Iraqi operator – whether South Oil Company, North Oil Company, Missan Oil Company or State Oil Market Organisation – takes a 51 per cent stake in any of the joint venture arrangements provides further reassurance that the country’s wealth will not be sold on to foreign interests.
Bids will be evaluated according to strict criteria: predefined production targets and a series of fees. There will be a maintenance fee for production at maturing fields, an incremental fee and an enhanced production target.
The fees will differ according to the quality of the acreage, ranging from $250,000 for the two gas fields to $500,000 for the giant Rumaila and Kirkuk fields. The signature bonus is to be graduated according to the production rate laid out by the contractor.
It will be a minimum $10m, and there will be a $50-a-barrel premium for additional barrels set above the baseline figure of 100,000 barrels a day (b/d), stepped according to the fields’ expected plateau rate. Baghdad will extract further fees from the participating firms, taxing them at a rate of 35 per cent of net profits.
The ministry is considering a classification system for the bidders. One category of oil company is set to be granted rights to bid on all oil fields apart from the largest two, Rumaila and Kirkuk, which will be reserved for a second group of bidders with global operations that produce more than 500,000 b/d. A third category will cover those that are not qualified to become field operators but will be able to participate in consortiums.
In a sign of the authorities’ impatience to move ahead, companies will be expected to sign the contracts within three weeks of the award and then open local offices within three months of cabinet ratification. The IOCs will then sign their partnership contracts with the relevant Iraqi partner.
The Iraqis have left little room for doubt over who will ultimately control the process. The local partner will co-operate in the consortium as a contractor, but an Iraqi-chaired joint management committee will be granted decision-making powers. The make-up of the committee is heavily slanted towards the Iraqi side, with four members from the regional operator and two more from the contracting group, leaving just two representatives from the IOC.
The details presented in London still leave much to be decided. The likely rates of return have not been agreed, but the Oil Ministry has previously indicated that an 18 per cent internal rate of return would be acceptable. It will reimburse the companies for cost recovery on a dollar-for-dollar basis, either in cash or in kind. However, payment will only come once incremental production is under way.
Oil Minister Hussain al-Shahristani wants to move fast on the licensing rounds, with bids to be submitted by 31 March and contracts to be signed by the end of June 2009.
With the end of US financial assistance and lower global oil prices, Baghdad will require the speedy co-operation of IOCs if Iraq is to feel the benefit of the anticipated 1.5 million b/d of new oil that will come on stream as a result of the bid round.
Shahristani says the country is not in a position to wait for the much-delayed oil law to be passed before moving ahead with licence awards. Such are the potential rewards for IOCs, that for all the tough terms, the Iraqis may get what they want. “We expect competition to be extremely strong for all of these areas, given that these are giant discovered resources that offer opportunities for investment in an area that will be an important producing region for some time to come,” says Alex Munton, analyst at UK energy consultant Wood Mackenzie.
That the ministry also wants to press ahead with a second licensing round, covering major fields such as Majnoon, Nahr bin Umar, Nasiraya, Halfaya, East Baghdad, as well as nine smaller fields, confirms the country’s ambitions. Baghdad wants to sign final contract awards on these by the end of 2009, just six months after the first bid round deals are due to be signed.
This focus on long-term, fee-based service contracts highlights another facet to Iraqi oil policy this year: the unwillingness to be sidetracked into tinkering with the legislation.
Shahristani has given up on the oil law for the time being. Since only this piece of legislation could have provided a regulated environment for the signing of production-sharing agreements – the preferred route for IOCs – the service contracts look set to be enshrined as the only route to investment.
This need not prove a big obstacle for IOCs, even if they will have to forego the much-prized reserve bookings they would have offered.
In the past couple of months, Iraq has shown it is able to cut deals with foreign oil majors, signing a $3bn contract with China National Petroleum Corporation on the Ahdbab field in August that converted a Saddam-era production-sharing contract into a service contract. “These deals show there is a willingness to enter into legal contracts in the absence of an oil and gas law,” says Munton.
The feeling among oil executives is that, as it stands, the oil law is attuned towards an internal Iraqi debate about how to structure its oil industry, and rather less relevant to con-tractor-government relationships. For example, Baghdad has yet to finesse the detail of its future relationships with the Kurdistan Regional Government, which links into wider political issues such as the future status of Kirkuk.