State China National
Petroleum Corp. (CNPC) is set to start work immediately on its 20-year service
contract to develop Al-Ahdab oil field in central Iraq following a formal
signing Monday in Baghdad, making it the first company to break ground in
Iraq's oil sector since the 2003 US-led war there (IOD
Aug.29,p1).
The deal was signed by CNPC
head Jiang Jiemin and the director general of State
Oil Marketing Organization (Somo), Falah al-Amiri, with both companies acting as the contractor in a
joint venture where the Chinese state firm holds 75% and Somo
holds the state's 25% equity. North Oil Co. Deputy Director General Hameed
Saeedi signed for the state operator, which is named as first party in the
contract, sources in Baghdad told International
Oil Daily Tuesday. Representatives of the Chinese defense-industrial
firm China North Industries Corp., which was CNPC's partner in the old
production sharing agreement (PSA) signed in 1997, were also present at the Baghdad ceremony. The
Chinese delegation arrived in Baghdad on a
private flight from Dubai
and left immediately after the ceremony, the sources said.
Officials from the Chinese
company conducted several field visits in recent weeks to survey the area to
coordinate logistics, including security arrangements for staff, with the
governing council of Kut province, where the field is
located, the sources said. CNPC will open a local office in Baghdad as stipulated in the contract.
The $3 billion deal was
initialed in late August in Beijing
during a visit by Iraqi Oil Minister Hussein al-Shahristani and later received
the endorsement of the council of ministers. A final ratification by the
cabinet is not excluded, but Baghdad
sources said the ministry will not seek parliament's approval of the final deal
arguing it's a modification of the old PSA. The old agreement received
endorsements at the time from the Iraqi parliament when it was first initialed
in 1996 and ratification from the cabinet and Saddam Hussein's revolutionary
command council under the former regime in 1997 before it became effective. That contract
remained idle due to UN sanctions until the ministry decided to renegotiate the
terms in 2006 and convert it into a service type contract.
According to the deal, CNPC
will conduct a seismic survey on the field and submit a preliminary development
deal to the oil ministry for approval. It is expected to start production at
25,000 barrels per day following the initial three-year development phase and
ramp it up to a peak of 110,000 b/d once a final development plan receives the
go-ahead and sustain it for at least six years. CNPC will act as the operator
of the field until it recoups all its costs and set up a joint operating
company with the local operator to take over once development costs have been
repaid. Al-Ahdab, discovered in 1979, is estimated to have about 1 billion bbl
of reserves.
CNPC's fee under the
contract will be based on a remuneration or "R" factor, calculated as
total revenue divided by total cost. It will be as high as $6 per barrel in the
early stages of development, when production will be low and spending high, but
will decrease as output rises, dropping to close to $3/bbl once the production
plateau is achieved. Total remuneration for the contractor will be linked to an
internal rate of return of about 18%. Operating costs will be paid out of
production.
The Chinese deal has been
less controversial than other field development contracts the ministry intends
to award under its first bid round due to its vitality for power production in
the Shiite-dominated Wasit province. China's
Shanghai Heavy Industries was awarded a contract earlier this year to build a
$940 million power plant in al-Zubaydiya in Wasit, to be fueled by oil from Al-Ahdab.
The first of four 280
megawatt units is expected to start up in three years and will be fueled by
15,000 b/d, or 60%, of Al-Ahdab's initial production.
The plant will later run on associated gas from
Al-Ahdab, supplemented by gas from southern oil fields.
Other
firms involved in renegotiations of old contracts with Baghdad include India's
Oil and Natural Gas Corp. (ONGC) which has an exploration, development and
production contract for Block 8 in the Western Desert, signed in 2000, as well
as Indonesia's Pertamina and state Petrovietnam, who signed two contracts in
2002 for Block 3 in the Western Desert and Amara oil
field in the south, respectively.
Iraq tendered eight oil and gas
fields to international oil companies last summer and is also negotiating a gas
deal with Royal Dutch Shell following the signing of a heads of agreement in
September (IOD Nov.7,p3).
Ruba Husari, Dubai
