Oil and gas majors line up for Iraqi acreage

23 October 2008
Despite onerous bidding conditions and the absence of an oil law, international oil companies are showing keen interest in the eight fields on offer in the country’s first post-war licensing round.

Five years after the US invasion of Iraq in 2003, more than 350 of the world’s most powerful oil executives gathered in London on 13 October for the opening of Iraq’s first, and long-awaited, post-war oil licensing round.

International Oil Companies (IOCs) have been keenly anticipating the round, but conditions set out by Baghdad have made bidding unexpectedly difficult.

At stake are the tenders for eight oil and gas fields, with reserves of more than 43 billion barrels of oil and 7.5 trillion cubic feet of gas. The oil field reserves in the licensing auction represent about one-third of Baghdad’s total known oil in the ground.

From these eight fields alone, Iraq hopes to boost the country’s oil production capacity by up to 1.5 million barrels a day (b/d).

Two more bid rounds to be launched in 2009 will complete the Oil Ministry’s ambitious strategy to lift output to 6 million b/d within a decade, almost three times current output.

Output targets

The Oil Ministry, however, is keeping detailed output targets to itself. One IOC executive who attended the London meeting says there have been no official guidelines from Baghdad about its forecast output.

“They are keeping that to themselves for the time being,” he says. “We have had no indication of what an enhanced production target would be, other than the fact the baseline figure would be keeping current production at least flat.”

Oil majors who attended the meeting say the minimum field increases are expected to be up to 800,000 b/d for Rumaila, 250,000 b/d for Kirkuk and Zubair, 200,000 b/d for Missan and 100,000 b/d for the Bai Hassan and West Qurna phase 1 fields. For the gas fields, they are expected to be 500 million cubic feet a day (cf/d) for the Akkas field and 300 million cf/d for Mansuriya.

It is safe to say that Baghdad is thinking in even bigger terms. Natik al-Bayati, director general of Iraq’s Petroleum Licensing Directorate, hints at its ambition by suggesting the giant Rumaila field could add “at least” another 1 million b/d of capacity.

“This is the order of magnitude we are talking about with these fields,” he says.

The great unknown for the oil firms is how to put together a competitive bid given the manner in which Baghdad will assess the offers.

Iraq’s Oil Minister Hussain al-Shahristani told MEED following the London meeting that specific production targets had not yet been set by Baghdad.

“There is no specified range [for output] within the contract because that is for the companies to calculate,” he said. “How the companies calculate their profits and their internal rate of return is up to them.”

However, if oil majors generate their own output targets, it will make bids difficult to assess. “You are not going to get a uniform set of numbers from each company because some are obviously going to be more ambitious than others and everyone has a different internal rate of return,” says the Middle East head of one European oil firm.

But despite a still volatile security situation, oil executives say the opportunity to gain a foothold in one of the world’s largest untapped markets is too tempting to pass up.

Global competition

“This is the one a lot of us have been waiting for,” says the Middle East head. “There are bound to be stumbling blocks along the way but you only need to see who else was in the meeting to see how strongly contested this is going to be.”

As if to underline that point, Al-Shahristani opened his presentation to the oil firms with a world map picking out every country represented by companies in the room.

While it was no surprise that US and European oil majors were on the map, a third of the 35 shortlisted firms were state-run national oil companies (NOCs), including China’s Sinopec, Malaysia’s Petronas and ONGC Videsh from India.

The bidding rules mean that the IOCs, which have been used to using their robust balance sheets and decades of operating experience to win large exploration deals, are facing a strong challenge from this second group of cash-rich rivals.

Baghdad says it will not consider a firm’s experience in using methods such as enhanced oil recovery when assessing bids.

Al-Shahristani, eager to push ahead with an ambitious timeline for the first bid round, has also ruled out any one-on-one meetings between his ministry and the oil firms.

His message is simple: the winning bidders will be those that charge Iraq the lowest fees.

Unmissable opportunity

Large IOCs, experienced in getting the most out of older fields, will now be marked mostly on the strength of their financial offers. Without being able to exploit their technical advantage, IOCs are worried about being able to compete with national oil companies, particularly those from Asia, which are desperate to gain a foothold in the country.

Adding to IOCs’ unease is the ministry’s directive that firms have a better chance of winning contracts by forming consortiums rather than bidding on an individual basis.

“The idea within some quarters that this bid round is a US/UK offering is completely off the mark,” says the Middle East head of the European oil major.

“If anything, the IOCs are now the underdogs. We only have a certain amount of leeway for how we play with our returns, but NOCs may be willing to tilt the risk/return ratio to get into the country.”

Amid the excitement about the launch of the bid round, the continued absence of a new oil law is being regarded as an inconvenient glitch that should not halt proceedings.

“We have spent more than a year waiting for the hydrocarbon law to be passed,” says Al-Shahristani. “We do not think the country can really afford any more debates.”

Oil majors are also resigned to pressing ahead without a firm legal framework in place, despite the potential for future disputes.

“We obviously have our lawyers doing legal due diligence but we do not expect the absence of the law to be a problem,” says one US oil executive who attended the meeting.

The tight development timeframe may also cause headaches for oil companies.

Baghdad is keen to avoid a repeat of previous situations, where firms have used unstable security conditions as a reason for delaying a project, and is insisting that IOCs open their local offices within three months of a contract being signed, with work starting within six months.

“We will not have a situation where a contractor pockets the contract and then claims ‘force majeure’ [freedom from liability],” says Al-Bayati.

“We had an experience before where we signed contracts that never materialised.”

While oil majors agree that, in theory, they will be able to keep to the ministry’s deadlines, there are still some significant hurdles.

Firms were surprised to discover that no 3D seismic studies had been carried out on the eight fields in the round, and it has emerged that there are only two seismic crews operating in Iraq.

“There is going to be a huge surge in activity towards the end of next year and questions remain over whether enough of the international contracting community are going to be committed to get their people back into the country,” says one senior oil industry executive.

But despite the timeframe and inherent uncertainties of operating in a country that has been ravaged by war, the chance to be involved in the largest upstream offering in years will undoubtedly lure the biggest companies.

“Of Iraq’s total reserves of 115 billion barrels, you are looking at the chance to bid for about two-thirds of that amount just in the first two licensing rounds,” one adviser to the ministry tells MEED. “I do not expect any one of these prequalified companies to pass up an opportunity like that.”

How the licensing process works

The service contract for the oil fields is divided into two phases: a rehabilitation phase of
30-36 months and an enhanced redevelopment and production phase covering the remainder of the 20-year contract period.

The three parameters being used to assess bids from oil companies are a fee for each
barrel of oil produced at a set minimum level, a fee for every barrel on top of that production level, and an enhanced production target. The weighting given by Baghdad to each factor has yet to be decided.

The rehabilitation phase involves oil companies undertaking short-term improvements to
existing production and gathering fresh data about the fields, with the aim of boosting output above minimum or baseline production levels.

An enhanced redevelopment plan will be submitted during the rehabilitation phase, to cover increased production.

Under the contract, successful bidders will pay Baghdad a signature bonus of $10m for the field’s licence and $50 for each barrel of oil produced above the baseline figure.

Oil majors will be paid a fee for maintenance and production, and will be reimbursed for capital and operating costs.

They can decide to be paid in cash or equivalent amounts of crude, which they can sell on at market rates.

A consortium of state-owned companies will hold 51 per cent stakes in the firms operating the fields, including the State Oil Marketing Organisation (Somo) and regional operators such as the North and South Oil Companies. Oil companies will take the remaining 49 per cent.

Companies bidding for the six oil fields will be classified into three categories. Only oil majors producing more than 500,000 b/d of oil equivalent are allowed to bid for the Rumaila and Kirkuk fields.

Smaller firms with substantial exploration experience will be able to bid on all other oil fields. A third category of companies will be able to bid as non-operating firms as part of a larger group.

Baghdad says it will favour bids from consor-tiums of oil firms rather than individual bids, but consortiums will be limited to bidding on three oil fields.

Companies allowed to bid for the two gas contracts are limited to those with significant experience in gas field development.

All foreign companies will be taxed on profits at a rate of 35 per cent.

Contractual and technical workshops will be held in the first few months of 2009, with bids expected to be filed by June 2009 and awards to be made over the following months.

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