Iraq Watch - 3
Friday, October 17, 2008 12:16:08 PM
Iraq finally unveiled the terms of its big upstream opening. International oil companies now realize that to win a 20-year service contract to rehabilitate and redevelop some of Iraq's giant oil fields, they need to offer high production targets at the lowest cost. In return for committing to spend money on rehabilitating infrastructure, drilling wells and reassessing recoverable reserves in each field -- something that is long overdue -- they will be paid back their capital investment, operating costs and a remuneration fee linked to a weighted index. Since they can choose to be paid in kind and the long-term contract will guarantee a minimum volume of oil, they will be able to book reserves. Beyond the expansion of currently producing reservoirs, which form the basis of the proposed contracts, they will also have the chance to develop other, non-producing reservoirs and even explore for new deeper ones, which could form the basis of new contracts with different terms in line with the associated risk. All in all, it's not a bad contract for an industry suffering from a lack of access to reserves around the world.
Notwithstanding the logic or benefit of signing up foreign companies to develop producing fields on long-term contracts, the deals are not bad for Iraq either. The state will hold a majority stake in any partnership and receive cash, starting with a participation fee for each bid. It will then cash in with a signature bonus for each of the eight fields on offer, which reach as much as $42.5 million for a field like Rumaila, which is currently producing over 950,000 b/d. Iraq will not disburse any payments in the first two years of the contract, as repayment for costs and fees will only be made from incremental oil above the base production rate. The state will also receive taxes at a rate of 35% on net profits.
The greatest win for Iraq might be the fact that no contract will be awarded without fair and open competition. Majors that were involved in negotiating two-year technical service contracts earlier this year sought and failed to get guarantees that they would be picked to develop the same fields once long-term deals were offered. Now, they must compete against other companies, both in their league and not.
Still, a big question mark remains over the role of regional oil companies like North Oil Co., South Oil Co. and the recently created Missan Oil Co., once local operating divisions are set up for each field, as envisaged in the initial model contract. In a bid to stave off criticism of handing over control of the country's prolific oil fields to foreign operators, Iraqi architects of the upstream opening created a set-up that is at the same time complex and vague. By granting the foreign investor the role of co-operator, it is not obvious who will have the upper hand in running field operations and how responsibilities, including for achieving the output target, can be divided between the old and new players.
Opaque formulas might help create consensus where needed in Iraqi politics, but this approach could be disastrous for the oil industry. What Iraq really needs for its oil sector to make up years of missed opportunity is clarity.
Ruba Husari, Dubai