Baghdad to miss oil production target

08 August 2008
Cutting deals with oil majors from two years to one will hit plans to raise output by 500,000 barrels a day.

Baghdad will miss its first post-war target of boosting oil production by 500,000 barrels a day (b/d), following its decision to scrap plans for two-year service deals with oil majors.

Two international oil company (IOC) executives and an official close to Baghdad’s Oil Ministry tell MEED that the abrupt decision in June to cut the length of the service deals to one year from two will result in Iraq missing its target.

Oil majors had been expecting Iraq to announce the outcome of a series of technical service agreements on 30 June. The announcements have been delayed while talks continue (MEED 4:7:08).

One IOC executive says while there is no suggestion that any company will pull out of the revised service deals, there is widespread recognition that the original production goal of 500,000 b/d is unrealistic. “It is simple really,” says the executive. “We are being given half the time to do the original job we signed up for. There will have to be a recognition that 100,000 b/d per field is not a realistic target any more.”

While oil companies say talks are continuing with the ministry over changes to the short-term technical service agreements, some are growing frustrated over the precedent that it has set by changing the conditions. “We hope this is a one-off,” another IOC executive tells MEED. “We are here and we are committed but we need water-tight contracts that are not changed on a political whim.”

He estimates that production will reach 300,000-400,000 b/d, missing the ministry’s stated target by a minimum of 100,000 b/d.

“I would be very surprised if each consortium could raise production by much more than 60,000 b/d each now,” he says.

One Oil Ministry official agrees that the original target will be diffi-cult to reach, but insists a final agreement with oil majors is weeks, rather than months, away. “We are doing everything in our power to get these new contracts signed,” he says. “It is our top priority.”

In July, it emerged that the Oil Ministry was proposing a plan that would involve IOCs being paid partly in cash and partly in oil, which the Finance Ministry considers unlawful under Iraq’s constitution (MEED 11:7:08).

Six groups are expected to sign deals: the UK/Dutch Shell Group, both by itself and as part of a partnership with Australia’s BHP Billiton, the UK’s BP, the US’ ExxonMobil Corporation, the US’ Chevron in partnership with France’s Total, and a grouping of the US’ Anadarko Petroleum Corporation, Swiss oil trading firm Vitol and the UAE’s Dome International.

Under a trade service agreement, the oil companies act as contractors or service providers to the Iraqi government, and are paid a fixed fee to complete the work.

Major oil companies generally prefer to sign production-sharing agreements, but the long-term potential of the country’s reserves has led most oil majors to decide that service agreements are worth pursuing.

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