KRG's Defence Of EPSAs.

During Maleki's visit Aug. 2 visit to Kurdistan, experts from the KRG's Ministry of Natural Resources presented the Iraq PM with a resume of a detailed study by a prominent Western petroleum and legal consulting firm out-lining the advantages to the host state of EPSAs over service contracts. Contained in that summary was the amount of cash the KRG had received out of 31 oil and gas EPSAs signed: a total of over $4.96bn.

Out of 17 northern blocks' EPSAs, the KRG had got $89.50m in upfront payments, $296m in secondary payments, and $215m in dues yet to be paid. Out of 14 southern blocks' EPSAs, the KRG had got $42m in upfront payments, $255.50m in secondary payments, and 260.50m in dues yet to be paid. In addition, it got $1m in upfront bonuses, $59m in secondary payments, and $3,745m in investments to be made.

The KRG's ministry said the biggest single EPSA was signed in June 2008 by the state-owned Korea National Oil Corp (KNOC), under which the firm deposited $200m, now being used to provide seed funding for two power plants under construction in the Khubat area. KNOC is committed to invest $2.1bn on infrastructure development. The KRG will spend another $400m of KNOC's money on the power plants. The KRG will spend the $1.5bn balance on sewage and water treatment facilities.

The same ministry said IOCs will spend about $511m on developing the 17 northern blocks and $516m on developing the 14 southern blocks. In addition, Genel Enerji of Turkey was due to make payments from its crude oil exports which began on June 1 from the Taq Taq oilfield which it had developed in partnership with Addax Petroleum of Canada which is based in Switzerland. It was to receive payments from crude oil exports made by DNO of Norway out of the Tawke oilfield which also began in June (see omt20IraqExprtMay18-09).

The KRG has its own petroleum law, whereas Iraq's parliament is yet to approve a national law for this sector. But even if the national petroleum legislation has been passed, IOCs are reluctant to invest in 20-year service contracts to develop discovered oil and gas fields in return for a per barrel fee. Under the only such contract signed on June 30 to develop Iraq's biggest oilfield, Rumaila near Basra in the south, a JV of BP and the state-owned China National Petroleum Corp (CNPC) had to halve its fee to $2/barrel demanded by the Oil Ministry. That was the reason why about 30 other IOCs did not take up any of the remaining seven fields put for auction at the end of June.

Baghdad's 2nd Bid Round: Undaunted by that fiasco, Shahristani has since advanced the date of the second auction from end-2009 to the autumn. The man behind the auction and its tough terms, Shahristani is facing more radical resource nationalists in parliament who say no matter how tough his terms the oil minister is letting Iraq's petroleum sector be occupied by IOCs. Even within his ministry's oil companies, there are ultra-nationalists opposed to the service contracts (see ood1-IrqFieldsAuctnJuly13-09).

The Oil Ministry holding a workshop on the second round in Istanbul on Aug. 25, when ten undeveloped fields will be presented. Deal-makers from the world's biggest IOCs are expected to demand a much higher fee than the one accepted by BP/CNPC. Reuters on July 31 quoted an executive of a major Western IOC as saying: "We'll need to see better margins, it's as simple as that". Executives were still struggling to understand the gulf which emerged at the June 30 auction between the return on investment they expected and the maximum Baghdad was prepared to pay.

After years of talks, to realise only on auction day that the sides were so far apart on a fee frustrated many involved. Oil firms had put a lot of money into courting Iraq since 2003: between them over $500m on training Iraqi officials, negotiating quixotic contracts, technical studies and preparing bids and more. Reuters quoted an executive of a European firm as saying: "Everybody was astonished at what happened there [on June 30]. It is hard to accept what they came out with and believe that will be the case going forward". Reuters quoted another executive as saying: "The whole process was a shambles from start to finish".

Big IOCs at Istanbul are to push every button they can. They would try to bridge gaps on payment. They are expected to meet Oil Ministry officials again in early November.

One of the factors separating the two sides is perception of the risks involved. Security and violence remain big issues for companies which would need to send specialist staff to remote areas. Baghdad has down-played that threat. The other obstacle is the absence of a national petroleum law to establish the terms of foreign investment. But a compromise deal between Baghdad and Erbil would help speed up parliament's approval of the petroleum law.

Yet the IOCs will first wait to see what will happen to KRG's EPSAs before making any commitments to Baghdad. If Baghdad approves the EPSAs, then it may adopt similar agreements for the rest of Iraq.

Maleki's cabinet on Aug. 1 approved a bill to reinstate the Iraq National Oil Co. (INOC) and this was later submitted to parliament. Government spokesman Ali al-Dabbagh said the cabinet passed the measure to ensure petroleum exploration, development and production moved forward. But the new draft does not name the operations for INOC in an effort to avoid disputes between Baghdad and the KRG. Baghdad set up INOC in 1964, but Saddam abolished it in 1987.

Russia Gets Turkey To Back South Stream Gas P/L: Russian PM Vladimir Putin in Ankara on Aug. 6 scored a geo-political coup by getting Turkish PM Recep Tayyip Erdo?an to sign agreements, including one for the South Stream gas pipeline to the EU which may undermine the EU/US-backed Nabucco project. Italian PM Silvio Berlusconi, who had joined Putin on several energy projects, attended the Ankara ceremony. Turkey thus granted the state-controlled monopoly Gazprom use of its waters in the Black Sea, under which the giant wants to route its South Stream gas to in East and South Europe.

The state-owned crude oil pipeline operator Transneft is to join a JV to build a pipeline across the Anatolian Peninsula from the Black Sea to the Mediterranean, and Gazprom affirmed a commitment to expand an existing Black Sea gasline - Blue Stream - for trans-shipment across Turkey to Cyprus and/or Israel. Energy companies in both countries agreed to a JV to build conventional power plants, and Putin offered to re-open talks on Russian assistance to Turkey in building nuclear power reactors. Italy energy group ENI broke ground on the trans-Anatolian crude oil pipeline this year.

While the offer of specific pipeline deals and nuclear co-operation represented a new Putin tactic, the wider struggle for dominance of the Eurasian pipelines is a long-running chess match in which he has often excelled. As he had in the past, Putin travelled to Turkey with his basket of tempting strategic and economic benefits immediately after a similar mission by his opponents.

In July, EU PMs and Ergo?an signed a pact in Ankara to support Nabucco, which would compete directly with South Stream. By skirting Russian territory, Nabucco would under-cut Moscow's monopoly on EU gas shipments and the pricing power and political clout which come with it. That may explain why Nabucco, which cannot go forward without Turkey's support, has faced obstacles thrown up by Moscow, including efforts to deny it vital gas supplies in the East and a customer base in the West. Turkey and other countries in the path of Nabucco have been eager players in this geo-political game, entertaining offers from both sides. Ankara has even tried, without much success, to leverage the pipeline talks to further Turkey's bid to join the EU, while keeping options with Russia open (see ood6IrqPetExptJun15-09).

Gazprom will thus proceed with seismic and environmental tests in Turkey's exclusive economic zone, necessary for laying South Stream. The trans-Anatolian crude oil pipeline marginally improves Russia's position. The pipeline is one of two Bosporus bypass systems circumventing the straits between the Black Sea and the Mediterranean, which are operating at capacity in tanker traffic.

The preferred Western route is the Baku-Tbilisi-Ceyhan pipeline, which allows companies to ship Caspian crude oil to the West without crossing Russian territory; the pipeline crosses Georgia and avoids the crowded straits by cutting across Turkey to the Mediterranean.

Russia prefers north-bound pipelines out of the Caspian which terminate at tanker terminals on the Black Sea. The success of this plan depends, in turn, on creating additional capacity in the Bosporus bypass routes. Russia is backing two such pipelines.

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