International oil companies (IOCs) have heavily criticised tough new contract terms unveiled by Baghdad for a series of upstream schemes, and are calling on the government to rethink its approach.

As MEED went to press, the contract conditions were being presented to the IOCs at a series of meetings in Istanbul. The meetings are due to end on 14 February.

Speaking to MEED ahead of the meetings, Abdul Hadi al-Hasani, deputy chairman of Iraq’s Oil & Gas Parliamentary Committee, said he was hopeful that the contracts to develop some of the country’s most lucrative oil and gas acreage, covering six oil fields and two gas fields, will be signed by June.

However, senior IOC executives have raised doubts over the terms being offered by Baghdad, saying the bidding system is unattractive and could undermine Iraq’s hopes of rebuilding its oil infrastructure in the long term.

According to Al-Hasani, under the new Exploration Development Production Risk Service contracts, an IOC’s share in each upstream project will be restricted to 49 per cent, with Baghdad retaining the balance through state-owned South Oil Company and North Oil Company.

Until now, it has been unclear what the division of ownership would be, but officials had previously suggested IOCs could hold a stake of as much as 80 per cent.

Tax will also be levied at a rate of 35 per cent on any profits, according to Al-Hasani – far higher than the 15 per cent rate that IOCs had anticipated.

Contracts will be offered for a 15-year period, said Al-Hasani, which could be renewed for a further period of up to 15 years if new discoveries are made during the initial period. IOC sources had expected that the initial contracts would be for at least 20 years.

“The contract model has been written with the aim that control remains in the hands of the Iraqis and the balance of everything is on Iraq’s side,” says the Middle East manager of one international oil major shortlisted for the upstream round. “It is the most wonderfully one-sided contract IOCs have ever seen.”

According to Al-Hasani, IOCs will be able to earn an internal rate of return (IRR) on their investments of up to 20 per cent. But IOCs question whether they will be able to make such returns.

“If companies can get a 20 per cent IRR, they would be very happy,” says the Middle East manager. “But if the oil price and contract terms stay the same, you would be lucky to get into double figures.

“Considering the enormous risk profile [of the projects], I would be surprised if companies were willing to accept anything less [than 20 per cent].”

“We are still very interested,” says a senior executive at another international oil major participating in the bidding. “But from what we see of the fiscal terms offered, there is not a lot of profitability in it and, if that is the case, then we cannot do it.”

Despite their disappointment at the terms of the contracts on offer, IOCs are hopeful that a compromise can still be struck.

“The hope is that [Baghdad] will take on board the lists of questions from each IOC, so that a contract model can be agreed that leaves the Iraqis in control, but has a better balance between risk and reward for the IOC,” says the Middle East manager.

TABLE: PROPOSED CONTRACT TERMS

Size of controlling stake to be retained by Baghdad 51 per cent
Tax to be placed on profi ts made by international oil companie 35 per cent
Estimated internal rate of return for international oil companies 20 per cent
Tenure of contracts 15 years
Source: MEED

IOC sources say that with oil now trading at about $40 a barrel, Baghdad is not in the strong position to negotiate that it was previously. “Some of the fields may struggle if the oil price stays at $40 or lower for the next few months,” says the Middle East manager. “It is unlikely to be enough revenue to recover costs on some of the smaller fields.”

“With the price of oil where it is at the moment, I do not believe they can push [for such terms] that hard,” says the senior IOC source.

According to sources with knowledge of the process, IOCs will be expected to submit bids for the contracts based on three factors: a dollar-a-barrel fee to get the fields back up to baseline production levels; a further fee to reach an enhanced oil production level, to be maintained for at least seven years; and a dollar-a-barrel incremental fee to cover the cost of that enhanced production development.

The lowest overall bidder across the three parameters will be awarded the contract.

Al-Hasani says IOCs will have the option to take a 20 per cent share in production, once production levels exceeded an agreed baseline.

“Making decisions on the basis of the low bidder may lead to disastrous consequences if the companies that win the contract do not bring sufficient expertise, or do not develop the assets economically or with a view to creating long-term infrastructures,” says the senior executive. “I think in the long term this is going to hurt them.”

The contracts are expected to be issued in March, with a May deadline for bids. Al-Hasani says he expects contracts to be awarded in June.

It is not clear which oil fields are included in the round, but initial discussions focused on the Kirkuk and Bai Hassan fields in the north, West Qurna-1, Rumaila and Zubair in the south, and three oil fields in Missan province: Burzurgan, Fauqa and Abu Ghirab.

The gas fields are the western Akkas and eastern Mansouria fields (MEED 21:1:08).