As Baghdad plans to let oil majors take charge of more than 20 fields by the end of the year, the drop in oil prices has come at an awkward time.
With the price of oil now down to just over $40 a barrel, a decline from $147 a barrel in July 2008, and many major economies in recession, doubts are beginning to surface over the timing of Iraq’s push to more than double oil production to 6 million barrels a day (b/d) by 2013, from its current level of 2.4 million b/d.
Bids were due in the second half of March for the first oil round. However, some Asian and European oil majors have said that they may not bid for licences because of the low oil price, while others have criticised the tough conditions that Baghdad has proposed.
Others still remain wary of Baghdad’s ability to agree deals after past negotiations broke down due to bureaucratic wrangling.
Iraq’s strategy for boosting output, led by Oil Minister Hussain al-Shahristani, centres on two licensing rounds that cover more than three-quarters of the country’s proven reserves of 115 billion barrels of oil, the third largest deposits in the world.
The first bid round, launched in October 2008, covered six oil and two gas fields already in production. The planned 20-year service contracts, which cover fields with more than 43 billion barrels of proven reserves, are expected to add 1.5 million b/d to Iraq’s existing production.
A second round, which was announced on 31 December, is more risky because it covers fields that have been discovered but remain untapped. However, despite this, Iraq expects to add 2-2.5 million b/d to its total output from this offering. The round gives oil majors an additional 10 oil fields, and one gas field.
Industry experts say co-ordinating these two oil rounds in a single year will be a massive test for the country’s bureaucratic Oil Ministry, but Baghdad is not stopping there. Earlier this year, it started discussions with oil majors over further licences at two sizeable oil fields -Nasiriyah and Amarah -which were not included in the first two bid rounds.
One source close to the ministry tells MEED that preliminary talks have started with at least three companies for the development of Nasiriyah, including Spain’s Repsol YPF, Japan’s Nippon Oil Corporation and Italy’s Eni.
He adds that talks are also continuing with Vietnam’s state-run energy company PetroVietnam for the development of the Amarah field
The firm originally signed a $300m deal with Iraq in March 2002 to develop the field, but it was delayed and then suspended following UN sanctions against the Saddam Hussein regime. Iraq has proved willing to rekindle old relationships such as this. A previous deal with China National Petroleum Corporation was also hit by sanctions, but in September 2008, Baghdad agreed a 20-year deal with the Chinese firm for the development of the Al-Ahdab field.
Other deals are being pursued to boost production on existing fields. It emerged in early January that Iraq’s state-run South Oil Company is seeking to boost output by 400,000 b/d by 2010 at the existing fields of Luhais, Ratawi, South Rumaila and Zubair.
“They should be congratulated for getting so much off the ground, given the obstacles they face,” a Middle East analyst at one energy consultant tells MEED. “But equally, you could argue that they are trying to achieve too much, given low oil prices and the economic constraints the world faces over the next few years.”
Oil majors interested in Iraq also face a tricky balancing act. With national oil companies in other countries increasingly closing their doors to Western oil majors, Iraq represents a golden opportunity for these firms. But Baghdad has adopted a tough negotiating stance. Price, rather than operating experience, is the only criteria the ministry will consider for new licensing deals.
Several oil majors tell MEED that this was not considered a problem in 2008, when most companies’ profits hit record highs because of inflated crude oil prices.
But now, with oil close to $40 a barrel, most firms have been forced to scale back their investment plans and opinions have changed.
“The balance between risk and reward has become more difficult to call in the past few months,” says the Middle East head of one European oil major. “We will always consider attractive new acreage, but the terms make this a risky investment and we are not yet convinced it is the right opportunity for us.”
Iraq’s Oil Ministry remains upbeat, about the first bid round in particular, although it concedes the mood within the industry has become more uncertain. Sabah Shibeeb al-Saidi, head of the legal and commercial department at the ministry’s Petroleum Contracts & Licensing Directorate, tells MEED the licence round will not suit all of the 35 prequalified companies.
“The financial strife we are experiencing at the moment will have an impact for sure,” says Al-Saidi. “There is little doubt about that. But we do expect good bids because the fields we have here are very rich [in oil] and the cost per barrel [to develop them] will be very low.”
Technical and commercial terms on all of the fields in the first bid round were up for discussion when the ministry held a workshop with oil companies in Turkey in mid-February.
“We will listen and we will explain,” said Al-Saidi in advance of the meetings. “It is a two-way street.”
With so much focus on the intricacies of the first bid round, some in the industry are concerned that wider questions around setting up the correct legal and regulatory environment in Iraq have been pushed into the background.
Al-Saidi says it was right to go ahead with the launch of the first two rounds, without the much-delayed oil law being in place. The law, which still exists only in draft form, was meant to spell out who is responsible for exploring and developing Iraq’s oil fields, and how future income will be shared between Iraqi provinces.
“There is no conflict between the law and the model contract,” argues Al-Saidi. “We would not have proceeded if there was.”
He does concede, however, that several prequalified oil majors are still concerned about the absence of a solid legal framework.
Despite a general consensus that the two bid rounds are a step in the right direction, oil majors have seen previous attempts at deals fail in recent times. In 2008, Baghdad held discussions with energy firms over technical service agreements (TSA). It had hoped the short-term TSAs would boost its oil production by up to 500,000 b/d to 3 million b/d over a 12-month period. Instead, differences between Iraq’s oil and finance ministries over payment terms and the length of the contract for oil majors ultimately derailed the negotiations.
An executive at one US oil major that was involved in the TSA discussions with the Oil Ministry says the real test is yet to come.
“During those TSA discussions, we began to understand that these guys say one thing one week and do completely the opposite the next,” he says. “It did not give much confidence in the system there.”
Despite the previous setbacks, the ministry is bullish about the prospects for the first licensing round. But it remains aware that its success or failure will have a big impact on Iraq’s reputation as a place to invest.
Oil majors, understandably, are more downbeat. While enthusiastic about the field prospects, they are wary of unplanned changes in the oil ministry’s contractual, regulatory and legal positions.