The swift success of Iraq's oil opening to foreign companies could finally see Baghdad achieve its decades-long dream of becoming a global oil power that rivals Opec heavyweight Saudi Arabia. Now the hard work begins. In theory, 10 mega-projects awarded in Iraq's two postwar licensing rounds could deliver about 9.5 million barrels per day of new production and boost capacity to 12 million b/d within seven years -- as stipulated in Baghdad's service contract. The reality is that flows are more likely to rise to around 6 million b/d -- a level industry experts say could be easily reached -- provided Opec doesn’t slap supply limits on Iraq, now exempt from quotas, before it gets there. As expected, major players such as Exxon Mobil, BP and Royal Dutch Shell will play a lead role in tapping Iraq's prized oil fields. But perhaps the biggest winners in Iraq's oil auctions were two state Asian firms -- China National Petroleum Corp. and Malaysia's Petronas. As its bold expansion gathers pace, the companies will have to overcome a host of infrastructure and operational hurdles. In the near time, however, they'll be keeping a close eye on Iraq's national elections on March 7.

Six years after the removal of Saddam Hussein, the long-awaited expansion of Iraq's oil sector could finally be at hand. If negotiations succeed, mega deals now in the works with the world's top oil companies could deliver an extra 5 million barrels per day of production by 2016. In barely three months, BP and China National Petroleum Corp. (CNPC) have finalized the $15 billion Rumaila oil field contract they won in Iraq's first licensing round. Rivals scorned the deal when the duo agreed a fee of just $2 a barrel to treble output at the supergiant field. But BP boss Tony Hayward's revelation that returns on investment could reach 20% may have persuaded the likes of Exxon, Lukoil, Total and Eni to cave in to Baghdad's tough payment terms for the fields of West Qurna-1 and Zubair they left behind in round one. The giant northern Kirkuk oil field, also left on the block, is being renegotiated as well. But that's just the unfinished business of the-end June auction. Iraq's second licensing round takes place in early December and the untapped and sought-after fields of Majnoon, West Qurna-2 and Halfaya could pump several million b/d between them. International oil companies are poring over the 20-year technical service contract and will discuss the details with Iraqi officials at a workshop on Oct. 18-19 in Istanbul. Iraqi officials will also address their oil sector's skills shortage while in Istanbul at the Oct. 16-17 Getenergy for Iraq conference.

Iraq kicks off its second oil and gas tender on Aug. 25 in Istanbul even as the dust settles on round one. A few lessons have been learnt in the month since only one winner -- BP and China's CNPC for Rumaila -- emerged from the opening auction. It's patently clear to foreign investors that Iraq will drive a hard bargain for access to its oil fields. And bids from the world's leading oil companies have shown Baghdad that reliable producers such as Rumaila and Kirkuk may be able to pump far more than it ever anticipated.

Fierce domestic opposition to the process, which unnerved investors and toughened Baghdad's commercial stance, has softened somewhat because the fields on offer in the second tender are untapped -- unlike the first round fields that had been producing for decades.

But Iraq's insistence on paying as little as $1.90 a barrel -- versus expectations of at least twice that -- to boost output from the first round fields has many wondering if the wide commercial gap can be bridged in the next tender. The $2/bbl service fee by BP and CNPC is unlikely to be repeated, since Oil Minister Hussein al-Shahristani recognizes the increased expense of tapping the undeveloped fields of Majnoon, West Qurna-2 and Halfaya that are included in the second round.

Potential investors, particularly those from Asian national oil companies, are expected to be more aggressive in the upcoming auction amid fierce competition. Shahristani is not expected to show a huge amount of flexibility. But diminished internal antagonism to the second round could give the oil ministry more leeway. The bidding contest takes place at the end of November.

It took just hours for Iraq's first bid round to produce a sole winner -- BP and China's CNPC for Rumaila -- and seven rejects. Big Oil and top national oil companies walked away from the auction block empty handed and frustrated by Iraq's insistence on paying them as little as $1.90 per barrel for their cutting edge technology and expertise.

Collapsing oil prices and dwindling revenues are forcing Iraq’s oil ministry to review the terms of the first bid round it launched last summer. After all, the state entity might not be able to finance a 51% carried interest in each of the six oil fields as stipulated in the bid round’s tender protocol and draft model contract. As a result, companies meeting ministry officials at a technical workshop in Istanbul Feb 12-14 might hear news that is music to their ears; a reduction of the state partner’s equity in the oil fields projects to 25%-30%. At least that is the thinking in Baghdad at the moment.

Control over oil fields is a divisive issue, within and outside of Iraq, especially where fields being tendered (Rumaila north & south, West Qurna-phase1, Zubair, Missan, Kirkuk and Bai Hassan) are producing some 2 million b/d and represent the state’s major source of revenue. Putting the lifeline of the country in the hands of foreign companies is not acceptable in post-war nationalist Iraq. It would amount to a privatization process of Iraq’s oil wealth.

Enter the “saboteurs”. With Prime Minister’s Nuri al-Maliki’s blessings, Deputy PM Barham Saleh is hard at work to convene a gathering in Baghdad in two weeks to discuss the urgent needs of Iraq’s oil sector. It won’t be surprising if the plan put on the table - as an alternative to the controversial one pursued by the oil ministry - calls for the quick rehabilitation of producing oil fields by engineering contractors and oil fields services firms in parallel with the opening of green fields to Big Oil. 

In response to the controversy over whether the Iraqi oil ministry has the right to award oil field development contracts under its first bid round, former Oil Minister Thamir Ghadhban argues that the ministry relies on a 1987 law that placed the powers to sign contracts into the hands of the oil minister and on the fact that the 2005 Iraqi constitution does not require the legislature's vote on the signed contracts (See The Iraq Oil Debate).  The question is whether this legal and constitutional foundation provides international oil companies with sufficient guarantees that a contract signed by the oil ministry in the absence of a hydrocarbon law, even with the endorsement of the Iraqi cabinet, will have the long term validity and durability to sustain the long term investments needed over the contracts' 20 years. Royal Dutch Shell's head of upstream Malcolm Brinded argues that it's the structure of the contract that will determine its long term robustness especially if supported by a transparent award process (www.energyintel.com/DocumentDetail.asp). One CEO of a European major is more adamant that only contracts backed by a hydrocarbon law have the long term legal standing international oil companies need, especially were the contracts to be disputed in the future by subsequent governments.

Under the previous regime, production sharing contracts awarded to China's CNPC for the development of Al Ahdab field and to Russia's Lukoil for West Qurna-phase 2, before its cancellation later by Saddam Hussein -- as well as three other contracts with India's ONGC, Indonesia's Pertamina, and Vietnam;s Petrovietnam -- were approved by decree and had the power of law after endorsement by the Iraqi parliament. Under international law, a change of government has no impact on the enforceability of deals done with an ousted regime. That's one of the reasons why CNPC's 1997 deal could be revived and renegotiated or "re-adapted" under the new regime, even though lawyers can argue that countries have a sovereign right to terminate contracts regardless of enforceability.

Iraq's contract award process as defined by the Iraqi oil ministry in the initial tender protocols sent to international oil companies in late October, is complicated and lacks clarity (www.energyintel.com/n/Portal/iraq-watch-3.aspx). But assuming the ministry was able to conclude the process by June as it has announced, it might still find itself, together with the oil companies involved, in legal limbo when it comes to the validation of the deals.

Ruba Husari, Dubai

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.

A second bid round for Iraq's upstream sector, currently being prepared by the oil ministry, promises to transform the country's oil industry. If all goes to plan, a second set of oil and gas fields would be awarded by the end of next year, hard on the heels of the first eight fields announced this summer -- and the Iraqi oil industry will be bustling. That's good news for world oil markets and the global industry in general. Iraq is one of the last oil provinces in the Middle East, or even in the world, with huge untapped reserves.

After more than five years of stagnation, Iraq finally seems to be opening its doors to the international oil industry. First China's CNPC concluded a revised contract for developing the Al-Ahdab oil field, then Royal Dutch Shell reached a heads of agreement on a major gas project in the south, which could see Iraq joining the gas exporters' club in the next few years. If all goes to plan, Baghdad by next summer could award at least eight new long-term contracts for international oil companies to help revamp major producing fields ravaged by decades of conflict and sanctions. So far things are progressing swiftly as the ministry is gearing up for an Oct.13 road show to shed more light on the first bid round launched in late June.

All agree the opening is long overdue: It provides an opportunity for Iraq to regain its place in the regional and global oil business, and rebuild an efficient and modern industry as the backbone for the new Iraq. But there are naturally differences of opinion over the nature and conditions of the opening, which in our opinion, is a healthy matter. The debate over which model best serves national interests can pave the way to a common understanding and a win-win situation for Iraq and the oil companies.

For many years, Energy Intelligence has taken the lead in providing thorough and reliable coverage of Iraq's oil industry. It continues to do so today. The Iraq Oil Forum takes that coverage a step further by providing a platform for dialogue, presenting decision-makers with a variety of opinions on key issues and oil executives with insight into the debate.

Three Iraqi oil experts who played a role in Iraq’s oil industry at different times have accepted our invitation to comment on three questions that we raised. With their diverse opinions, we open the platform for a dialogue among all those interested in Iraq. We invite comments on these issues and proposals of other discussion topics.

Ruba Husari, Dubai