Political row to delay $3bn service deals

11 July 2008

Differences between Iraq's oil and finance ministries over payment terms for international oil companies (IOCs) threaten to further delay negotiations for technical service agreements worth $3bn.

One senior oil industry executive involved in talks with Baghdad tells MEED that the Oil Ministry has proposed a plan that will involve oil majors being paid partly in cash and partly in oil.

But the proposals, if passed, will contravene UN Security Council Resolution 1483, which states that oil revenues from export sales must be deposited in the Central Bank of Iraq's development fund, which is monitored by an international board.

While all six oil groups set to take part in the service deals buy crude from Iraq, the proposals were almost immediately dismissed by IOCs as breaking the UN resolution, passed following the US invasion of Iraq in 2003.

The senior IOC executive says the Oil Ministry is still clinging to the idea, despite being told by the Finance Ministry that the payment scheme is unlawful under Iraq's constitution.

"The development of these agreements has now been caught in an internal political argument," he says.

"It has become a matter of national pride between these two ministries and it will delay the whole project. Contra deals cannot be wagered on the side and that is a point the Finance Ministry has been making."

The delay is expected to last several months.

In early July, oil majors denied claims by the Iraqi government that negotiations for the service deals had broken down because of their demands for a share of the oil produced (MEED 4:7:08).

The six groups who are expected to sign deals are the UK/Dutch Shell Group, both by itself and as part of a partnership with 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.

The executive confirms that Baghdad has now formally requested that oil majors complete the work over just 12 months, compared with the initial two-year timeframe.

"It can be done in one year but it involves a change in structure to the contracts," says the executive. "That all takes time and we will see delays."

Iraq is hoping the technical service agreements will boost its oil production by up to 500,000 barrels a day (b/d) to 3 million b/d in the next 12 months, from 2.5 million b/d.

Earlier this year, Oil Minister Hussain al-Shahristani told MEED that two licensing rounds covering existing fields and three further large fields will result in the state's oil production soaring to 6 million b/d by 2013 (MEED 8:2:08).

Iraq is thought to hold the world's third-largest oil reserves, at 115 billion barrels.

Iraq's oil and finance ministries were unavailable for comment.

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