One of the so-far unanswered questions regarding the scramble by so many international oil companies to secure service contracts in Iraq -- Exxon Mobil in particular -- is exactly why they are so interested, especially after their initial disdain. After all, the stated remuneration is a meager $1.90 per barrel in the case of West Qurna-1, which Exxon and Royal Dutch Shell will be redeveloping. The answer could be buried in a US Securities and Exchange Commission (SEC) document that sets out new rules for how and when operators can book reserves, including those associated with service contracts. "Before the change in the SEC rules, an IOC would not have deployed capital for this type of contract if it could not have booked the reserves," says Wayne Kelley, managing director of reservoir engineering consultants RSK (UK) Limited. What the rule changes that come into force on Jan. 1, 2010 mean is that a company which is publicly traded in the US could add its share of Iraqi reserves to its holdings. Besides defining reserves as the estimated quantities of oil, gas and related substances that are economically producible, the incoming SEC rule states, "there must exist, or there must be a reasonable expectation that there will exist, the legal right to produce or a revenue interest in the production of oil and gas, installed means of delivering oil and gas or related substances to market, and all permits and financing required to implement the project." Adding reserves is becoming more difficult for all the majors. Had it not been able to book from inventory its share in the Kearl Canadian oil sands project in 2008, Exxon would have been hard pressed to have shown any growth last year.
Exactly how much oil Exxon or Shell would be able to book from West Qurna-1's 8.6 billion barrels of reserves is a matter for the two companies' reservoir engineers and accountants to determine, along with the federal bean counters at the SEC and other government regulatory agencies. A stake in West Qurna-1, however, would be only the first step for Exxon and Shell, just as Rumaila could be the initial project for BP and China National Petroleum Corp. and Zubair for Eni. While the SEC rules change makes the technical services agreements much more attractive, they are hardly the endgame for the companies that so far have signed technical service agreements (PIW Oct.19,p1). The real game for these five companies and others likely to sign up in upcoming Iraqi bidding rounds is to get into position for the future possibilities. "I think it's a pretty smart move on the majors' part to get into the projects on these terms," Kelley said. "There is going to be a tremendous shortage of capital in the future on the side of the Iraqis. They are going to need the majors to obtain the capital."
The fact that Exxon is involved in a service arrangement at all, rather than as a project operator, represents a major sea change in the structure of the petroleum world. But the Iraqi model of technical service contracts in which the IOC puts its own capital at risk in exchange for some sort of upside may be the way of the future, as the national oil companies (NOCs) which control access to the biggest concentrations of reserves do not have all the tools to exploit their own resources. The fact that IOCs are taking these contracts would have been almost unthinkable 20 years ago, irrespective of the changes in the SEC rules, and reflects the dearth of world-class oil opportunities outside of the Middle East and parts of Russia. It is not the preferred business model for IOCs, but it demonstrates how difficult it has become to get access to high-quality assets. The ability to book reserves expands the number of areas where service agreements could be applied as they mitigate risk, with analysts citing Iran and Russia as two possible future locations.
