Baghdad is excited about the prospects for harnessing its energy resources, after suffering from significant declines in production since the fall of the Saddam Hussein regime, and rightly so.

But Iraq’s optimism may have to be tempered by the realities of the current climate, where oil prices are low and international oil companies (IOCs) are more wary of committing themselves to large new investments.

Iraq launched its first bid round for exploration and production licences in January 2008, at a time when a barrel of oil cost more than $90. But it now costs little more than $40 - a depreciation of more than 50 per cent. Yet in the intervening period, Baghdad’s contract terms have become increasingly tough.

Tax levels have more than doubled from the amount that IOCs had first expected, while the stake that Iraq will retain in any venture has also risen sharply, from a possible 20 per cent to 51 per cent.

With energy prices showing no sign of recovery, IOCs are increasingly concerned by the level of profit they are likely to make under such a deal and, for the foreseeable future, their main priority is keeping their balance sheets strong.

Senior industry executives claim it would be difficult to accept the contract model being floated in Europe, let alone in a country as volatile as Iraq, but say that they are still keen to work in the country.

As MEED went to press, IOCs and Iraqi officials were holding a series of meetings in Istanbul on the first oil and gas licences to be awarded in the country since the US-led invasion of 2003.

Both sides still have much to gain from a successful outcome. As long as they are both willing to compromise, there is still the promise of a revived energy industry for Iraq, and profits for IOCs.