The six oil fields to be awarded in Iraq's first licensing round will put more than 43 billion barrels of oil reserves into the hands of international oil companies (IOC), whose challenge will then be to arrest declining output and ultimately deliver an increase in production to an agreed plateau. A second bidding round envisaged by the Iraqi oil ministry would put another 51 billion bbl of reserves in a dozen more fields out for tender -- so, if everything goes to plan, some 80% of Iraq's total 115 billion bbl of proven oil reserves will feature in the two rounds. With so much at stake, the competition will be fierce, but the controversy within Iraq could be even fiercer. The first round will also include the Akkas and Mansouria gas fields (PIW Jul.28,p1). The 20-year model contract for the rounds doesn't allow for production sharing -- a taboo issue in nationalistic post-Saddam Iraq -- but will allow IOCs to book some reserves. The final list of second round fields is still under discussion, but an initial list includes giants like Majnoon, Nahr bin Umar, West Qurna Phase 2, Nasiriyah and Halfaya; smaller fields such as Gharraf, West Kifl, Qayara and Nur; and the 8 billion bbl East Baghdad heavy oil field, which is considered geologically challenging and in need of further appraisal (PIW Sep.29,p8). The ministry is also considering three small oil fields -- Qamar, Gullabat and Naudoman -- as well as the Khashm al-Ahmar gas field. All four are in northern Diyala province and could provoke a row with the northern Kurdish region, which regards them as border fields that should come under its authority.

Tender protocols for the first round currently being finalized indicate that bidders will be assessed on commercial rather than technical criteria, sources close to the process tell PIW. Iraqi Oil Minister Hussein al-Shahristani also said last week that winning bidders will be those "charging Iraq the lowest fees." Companies will also be required to pay a signature bonus, calculated according to a sliding scale based on the field's potential. The IOCs' remuneration will be linked to an internal rate of return, with 18% considered "acceptable" to Baghdad, ministry sources say. Costs will be recouped from output and IOCs will also be expected to pay tax.

According to the current thinking in Iraq's oil ministry, the service contract applicable for the first bid round will be limited to a maximum of 20 years, with the possibility for the IOCs to receive remuneration in kind. Contracts will be split into a rehabilitation phase, focused on arresting output declines in the major producing fields, and a development phase, in which production is raised to a defined target and sustained there for a certain number of years. One tricky issue will be how to calculate a base production level for declining fields, above which output would be considered as incremental for the purposes of calculating IOCs' remuneration. Iraqi sources say a decline profile is likely to be used, reflecting expected production were no new investments to be made. Any output above that profile would be counted as incremental production.

Development of all fields will be carried out by a joint venture between the IOCs and either state North Oil Co. or state South Oil Co., with the state company holding a 51% majority stake. Each field will have a joint-venture operating company and a joint management committee (JMC), which will act as a buffer between the state company and the joint venture operating company, with equal number of members from the IOC and the state entity and decisions taken unanimously. The board of the joint operating company and the JMC will be tasked with approving field development plans.

Iraq's Licensing Rounds

* Fields for second licensing round not yet finalized.
Reserves in billion bbl. Source: Iraq oil ministry.