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Weekly UpdatesUnlike the KRG, the central government is only offering service contracts to IOCs for development of major oilfields already discovered and for a period of 20 years. These are officially called Exploration Development Production Risk Service Contracts (EDP-RSCs). But the KRG is offering far more attractive exploration and production sharing agreements (EPSAs), although Baghdad still does not accept their legality and Shahristani keeps insisting on their cancellation (see omt19IraqFieldsMay11-09).
The June 30 deal with BP-CNPC, approved on July 1 by the council of ministers, is based on a service fee of $2 for every barrel of crude oil extracted over and above Rumaila's capacity of about 1m b/d. At first, BP-CNPC submitted a bid of a $3.99/b fee. Finally in the evening of June 30, the JV accepted the Oil Ministry's $2/b fee. Rumaila is believed to have 17 bn barrels of proven oil reserves. Under the 20-year deal, BP/CNPC is expected to bring new technology to Rumaila to raise its production to about 2.9m b/d. Iraq's petroleum industry was nationalised in 1972.
ExxonMobil bid for Rumaila in competition with BP-CNPC. But it insisted on a $4.80/b fee before it walked away.
The Oil Ministry typically offered a maximum fee for any barrel produced beyond current levels at $2 for all the six oilfields - a figure which proved a deal-breaker. Bids made by IOCs ranged from about $4/b in most cases, to over $20/b - the high range caused by IOC fears that violence would cause operating costs to rise considerably in the coming months and years. An un-named executive from an Asian IOC was on July 1 quoted as saying of the Oil Ministry's fee: "It's a losing proposition. It's not worth it for us to pursue this".
IOCs did not like the idea of getting paid a set fee. They typically prefer EPSAs which give them ownership of a portion of the oil produced and the right to book the reserves. But IOCs were willing to bid on the fee-for-service deals because of the enormous size of Iraq's oil reserves.
Revitalising old oil and gas fields requires a large up-front investment, and the companies wanted contract terms which gave them a chance for a good return. An executive of a Western IOC was quoted as saying: "We are not some non-profit charity. The terms on offer were unrealistic".
Wood Mackenzie, the Edinburgh-based energy consultants, figures BP/CMPC must spend $15-20 bn overhauling Rumaila, including a $500m signing loan to the government which will be paid back to the partnership together with a set interest rate (see omt19IraqFieldsMay11-09).
Under the bidding conditions, the IOCs had to agree to the Oil Ministry's per-barrel production bonus, and many declined to do so. Because only one field was awarded, Shahristani adjourned the bidding early. He gave the IOCs which scored the highest points for bidding for each field a chance to re-submit their bids in the evening of June 30. The points were based on the company's bonus proposal and its peak-production standard for the field.
Under the terms of the contracts, IOCs are barred from using private foreign security firms. Abdul-Mahdi al-Ameedi, deputy head of the ministry's Petroleum Contracts and Licencing Directorate (PCLD) said security was to be handled by an arm of the Oil Ministry responsible for the field in question - either the South Oil Co. (SOC), North Oil Co. (NOC), or the Maysan Oil Co. (MOC) in south-central Iraq. He said: "Our petroleum oil police have the responsibility to train and arm local people from any town where the field is located".
Rumaila's southern part straddles the Iraq-Kuwait border (see profile of this field in gmt19IraqFieldsMay11-09 & gmt23KwtFieldsJun8-09. Iraqi officials say they expect to be able to come to a unitisation agreement with Kuwait, in which experts determine how much share of production belongs to each country. Ameedi says: "For the time being, we have made some progress in that but we did not finalise the agreement". (Saddam Hussein used the pretext of Kuwait taking more than its share of crude oil from South Rumaila as one of his justifications for invading the the emirate in August 1990).
The political uncertainty over Iraq's investment climate is also taking its toll. The Oil Ministry developed the auction process to ensure transparency after a controversy over no-bid contracts in 2008. But for BP-CNPC, Rumaila lies in one of the relatively less insecure parts of Iraq - though the predominantly-Shi'ite Basra region has seen much violence during the previous years when rival Shi'ite militia groups battled for influence there.
The relationship between BP-CNPC and SOC concerning Rumaila operations has not been explained to the public as yet. But SOC's top management is generally hostile to foreign involvement in its area of operations. SOC's Director-General Fayed al-Nema is one of the leading critics of the auctions. He was appointed to this position on May 18, 2009, on the hope that - unlike most of his predecessors - he would co-operate with the Oil Ministry in facilitating the bidding rounds. But in June he told parliament that, under the ministry's licencing rounds, Iraq would lose full control of its resources.
Nema argued that the long-awaited federal petroleum law should be passed before any such control was handed over to IOCs. He said Baghdad should abandon the proposed licencing rounds and switch back to more limited and shorter-term service contracts, which the government controversially abandoned in September 2008. If it did so, he told parliament, control of the oilfields would remain in state hands.
Although Nema had strong support from other SOC managers, however, parliament recommitted to the licencing rounds, which were first proposed in June 2008. With the licencing rounds going ahead, SOC will have to share control of three of the country's largest oilfields: Rumaila, West Qurna and Zubair, all in the south.
Apart from Rumaila, the first action which covered about 60% of Iraq's proven oil reserves was to involve Kirkuk and Bai Hassan in the north, the first phase of West Qurna and Zubair in the south, and the Missan fields south-central Iraq, which will be licenced in three parts: Burzugan, Fauqi and Abu Ghirab. The two gas fields are Akkas in the western province of Anbar (see above) and Mansouria in the north-eastern province of Diyala.
The June 30 auction coincided with the withdrawal of US combat troops from Iraqi cities. But some US troops remained for training and logistical purposes, and most of the American military bases are close to the urban centres - thus enabling them them to join Iraqi forces in the event of a government request for them to intervene in emergencies. Yet there have been signs that the US military presence in Iraq beyond an official end-2011 deadline (see fap1-IrqUS-StayJul6-09).
After having proved their point that Iraq petroleum wealth might temporarily be for rent - but not for sale - some government officials now are saying the Oil Ministry might be more flexible in the next round of bidding. The Christian Science Monitor on July 7 quoted an un-named "senior Iraqi official" as stating: "We said to Shahristani, 'You should not be so strict - we need as much production as possible, and you are pushing them [IOCs] away'. It has to go through a transparent bidding process, but I think they will be more flexible".
Iraq's Kurdish Foreign Minister Hoshyar Zebari this week said of the June 30 auction: "We showed the world two things - that the Iraqi oil industry is open for investment for the first time, and second, that the process was transparent". The Oil Ministry's Ameedi says: "The IOCs are not happy with results, as the Ministry of Oil, [but] we are very happy" - pointing to the BP-CNPC deal for Rumaila.
The ostentatiously transparent auction on June 30 resembled a gripping, if somewhat mystifying, piece of theatre - one which included the added attraction of potentially trillions of dollars of revenue at stake. Shahrastani, who was imprisoned during Saddam's regime, presided over a stage which included a plexiglass box where the IOCs' bids were placed. The ministry's terms of offer for each field was contained in a red envelope given to the IOC representatives and then flashed on a giant screen. It was all carried live on TV.
Confronted in the process with the ministry's offer of a fraction of the profit they sought, IOC representatives requested time for consultations and huddled in small groups. Of the eight fields on offer, four received only one bid each. The Mansouria gas field in Diyala received no bids.
The Monitor quoted an un-named "Western oil consultant" as saying: "This is one of the oddest things I've ever seen". The auction, designed largely by international consultants, was the first of its kind in a notoriously secretive region. But for major IOCs shut out of the world's third-biggest reserves for more than 30 years, they were an important foot in the door. Ameedi said: "Rumaila will almost double the total [crude oil] production of Iraq. The revenue coming out of this big increase in production will be a huge sum of money". Ameedi defended Shahristani's position on the contract terms and the fees, saying what was offered to the IOCs was fair.
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