New urgency to get to Iraq's oil
By: The Associated Press | 27 Feb 2009 | 02:10 PM ET
http://www.cnbc.com/id/29431386

BAGHDAD - International companies have waited years to tap into Iraq's vast oil wealth and now Iraqi officials are working feverishly to make that happen.

There is growing apprehension about the cost of rebuilding the country with the price of crude, the nation's major source of revenue, nearing five year lows.

"It is a hard fact that oil and gas have become the sole source and the basis of our economy," Iraqi Prime Minister Nouri al-Maliki said Friday.

Iraq must produce more oil and it is foreign oil majors that have the wherewithal to do that.

Iraq recently sweetened the terms: increasing ownership percentages for foreign oil companies and making it easier to meet production targets. But the government wants production to begin quickly.

The country is now requiring any oil company that signs a contract to begin operating in the country within six months.

Though low crude prices have not diminished interest in Iraqi oil, negotiations between the two sides have lingered over security concerns and the absence of a national law regulating Iraq's oil industry.

Prim Minister al-Maliki said the government would form a committee to oversee development of the country's devastated oil industry and increase exports.

"Time is crucial ... development that has been halted for decades has been hurting the Iraqi people," said al-Maliki.

He said Iraq must also work quickly to diversify its economy to cushion future spending from a drop in oil prices.

But right now, the onus is on ramping up oil production, and fast.

As violence has declined in Iraq, so to has the price of oil worldwide.

Benchmark crude prices have tumbled from about $150 per barrel in July to around $40 today.

The Iraqi government relies on oil sales for more than 90 percent of its revenue. Falling oil prices have reduced the projected 2009 budget from $79 billion to $64 billion and have forced Iraqi officials to slash rebuilding plans by 40 percent.

U.S. officials have repeatedly warned any significant slowdown in reconstruction could imperil the security gains that have reduced violence in Iraq to a five-year low.

It remains to be seen how international firms will respond to Iraq's new carrot and stick approach. Iraqi officials introduced the new deal terms in mid-February at a meeting in Istanbul with over 30 companies authorized to bid on the first oil and gas contracts offered since the 2003 U.S.-led invasion.

Iraq hopes the contracts, scheduled to be awarded in June, will boost oil production by 1.5 million barrels per day within four years. Iraq currently produces about 2.4 million barrels daily.

The arrival of multinational oil corporations in Iraq has been contentious because many critics saw the war as a vehicle to gain control of the nation's vast oil wealth.

Those concerns had driven Iraq over the past few months to take a tough line in negotiations, ruling out production sharing and demanding majority ownership for the government.

The recent change in terms suggests the falling price of oil has bolstered the arguments of Iraqi officials like Oil Minister Hussain al-Shahristani, who want to move forward quickly to boost production with the help of foreign nationals, said analysts.

"This group thinks the reality is we do need international oil companies and we need to bring them in quickly, so that means we need to make concessions on the contract terms," said Valerie Marcel, a Middle East oil expert at the London-based think tank Chatham House.

Al-Shahristani said last week oil companies will have six months after signing contracts to begin operations.

The firms will operate in joint ventures with state-owned Iraqi companies, and Iraq has agreed to increase foreign ownership in the deals from 49 percent to 75 percent, said a senior Iraqi oil official, speaking on condition of anonymity because he was not authorized to talk to the media.

The companies are bidding on long-term service agreements that would pay them fees depending on production levels.

Analysts said it was unlikely Iraq will give in on terms that international firms really want — those that would give them a share of production profits. But the new terms are an improvement, and analysts said firms can't pass up the chance to tap into Iraq, which has the third largest oil reserves in the world.

"Foreign oil companies need to get into Iraq, which is probably the last remaining area with low cost oil and plenty of it," said Muhammad-Ali Zainy, a Middle East oil expert at the Center for Global Energy Studies in London.

Iraq nationalized its oil industry more than 30 years ago, limiting access to foreign companies. U.N. sanctions against Iraq following Saddam Hussein's invasion of Kuwait in 1990 further limited growth.

The sanctions were removed after Saddam was toppled in 2003, but the security situation in Iraq quickly deteriorated, delaying any significant attempt to boost oil production.

Violence has declined steeply over the past year, but roadside bombs continue to kill, as do suicide attacks.

Many analysts said the greatest risk was the lack of a national oil law outlining the regulatory framework under which the companies would operate. The law has been held up for months because of disputes between the Kurds and the Arab-dominated central government over the level of regional control of oil resources.

The Iraqi government says it can use the country's previous laws without agreement on a new framework. But that could leave companies open to renegotiated contracts once a national oil law was passed, and after they have invested millions.

"If the deal is only approved by the Cabinet and there is no oil and gas law, it will be in a bit of a legislative vacuum, and that is not ideal," said Marcel, the expert with Chatham House.
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