Meetings move Iraq closer to next oil field auction
Submitted by Ben Lando on Monday, 19 October 2009No Comment
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By BEN LANDO
Iraq Oil Report

ISTANBUL – Representatives from 44 of the world’s largest oil companies have concluded two-day meetings here with the Iraqi Oil Ministry, hashing out a rough draft of the contract on which the companies will base their bids for 10 oil projects in December.

Iraq hopes to raise oil output from just under 2.5 million barrels per day (bpd) now to 6 million bpd within seven years by bringing in billions of dollars in foreign oil company investment, partnered with Iraqi state oil companies.

“The development of those oil fields will lead to the expansion of the Iraqi oil and gas production capacity as well as the export capacity,” Thamir Ghadhban, former oil minister and chief adviser to Prime Minister Nouri al-Maliki, said in a press conference after the meeting Monday. “Therefore there will be the opportunities for Iraq to provide greater revenues that are needed to improve the standard of living in the country, to improve on education, higher education, health, reconstruction – the various services that are badly required in the country.”

Oil sales account for 95 percent of state income, earning more than $61 billion last year. Due to lower oil prices, Iraq has so far this year earned only $28.5 billion. It has ambitions to rival Saudi Arabia’s production levels of between 10 million and 12 million bpd capacity in 10 years, Oil Minister Hussain al-Shahristani told reporters last week in Baghdad.
Oil Minister Shahristani (left) and government spokesperson Dabbagh announce progress on the Zubair and W. Qurna oil field projects (photo: Ben Lando/IOR)

Oil Minister Shahristani (left) and government spokesperson Dabbagh announce progress on the Zubair and W. Qurna oil field projects (photo: Ben Lando/IOR)

The date for the auction has been set for Dec. 11 and 12, to take place in Baghdad in the theatre inside Iraq’s Oil Ministry headquarters.

A semi-final draft of the second round contract will be published Oct. 21. After this companies will give final comments and critiques, and a final version is expected early November. Companies criticized a June auction as being too strict on terms, but are largely optimistic for the December auction.

The companies’ bids will be based on weighted criteria: the amount oil produced from the fields (and for how long) and the fee they they want to be paid for each barrel of oil. A penalty will be assessed to companies that miss production targets, but the amount hasn’t been determined yet.

The ministry isn’t making public its expectations, allowing the companies to exceed them in the auction. But it wants a sustainable production, not a quickly ramped up but temporary output that would look good on paper but be detrimental to the field long-term.

Just like in the June 30 auction, the ministry aims to make a show of it in December: field by field, companies will submit their offers, which will be graded and the score put on a screen for all to see. “We will immediately announce the winner,” said Abdul Mahdi al-Ameedi, acting director general of the ministry’s Petroleum
Contracts and Licensing Directorate.

If there’s a tie, the companies will re-bid. If another tie, the winner chosen at random. But, Ameedi said, companies who have formed partnerships will be given the advantage over those who go it alone.

Sinopec, the Chinese state firm which has recently purchased Addax Petroleum, is not in attendance. It has been disqualified from bidding because Addax has signed oil deals with Iraq’s Kurdistan Regional Government, which Baghdad calls illegal.

As ministry and company officials wander through the halls of a posh hotel here, there are alternating smiles and consternation, the faces of difficult discussions over the world’s third largest proven reserves.

Only one contract was awarded of the six oil and two gas fields offered in a first auction June 30. Companies said the terms were too harsh. BP and the Chinese National Petroleum Corp. will likely sign the contract for the super-giant Rumaila field within three weeks.

The BP/CNPC consortium agreed to the terms and now other major oil companies such as Shell, Exxon Mobil, Eni, Lukoil, Conoco Phillips and Total are reconsidering their initial offer for the fields. With a major competitor already a step ahead, the companies have taken another look at the economic viability of the projects.
Ameedi said this is because the ministry clarified its terms – explaining there is less revenue to be taxed – not sweetened them.

The remaining issues, ministry and company officials said separately, are varied but can be overcome.

For example what to do with the natural gas that will be produced naturally as oil is pumped from Iraq’s massive reservoirs. Iraq has little natural gas infrastructure, with the vast majority being burnt away – or flared – instead of monetized.

“The ministry is very much concerned about the utilization of gas and this practice of flaring is not really allowed anymore,” Ghadhban said. Iraq is trying to institutionalize and industrialize the gas reserves, and hopes to soon become a net gas exporter.

Company officials told Iraq Oil Report it’s not clear what responsibilities they have for the gas and, in the contract, how they will be compensated. Other concerns include the supply of water necessary in the oil production process, especially in a country with poor infrastructure and an ongoing drought.

Industry sources here also tell Iraq Oil Report the ministry has expanded what can be included in cost recovery, such as additional infrastructure and security.

Officials at the press conference said the only big difference of what the companies will be reimbursed for between the first and second bidding rounds is the signature bonus. In the first round the companies paid in the form of a loan, whereas the second round it is a lower but non-recoverable fee.

Other fees payable are environmental studies and remediation, and facilities built outside the contracting area.

The companies will not be taxed on cost recover, only on the remuneration fee, which is the profit on the project. It is a 35 percent tax and, after it is applied, then the state company partner will get its 25 percent share. International oil companies were initially concerned the state company would get their cut first, and then the foreign firms would bare the tax burden.

The state partner is selected by the ministry from one of its 16 oil companies. For example, the State Organization for Oil Marketing – the seller of crude and importer of fuel – is partner in the Rumaila field; the Missan Oil Company will be the Zubair partner.

The remuneration fee will also be assessed on a per field and per reservoir bases. Whereas the first round include producing fields, the second round has discovered but non-producing fields and undiscovered fields. The fee will be determined by the size and technical capacity of the discoveries.

And with more modern techniques being applied, the minimum amount of time for the production plateau may be extended beyond the seven years envisioned in the contract.