Thursday, July 02, 2009 11:12:07 AM
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.
Baghdad saw BP/CNPC's promise of a massive production increase at $2/bbl as a triumph. The award of Rumaila alone had allowed Iraq to more than meet the aim of the first bid round without giving away the country's oil on the cheap.
And now Iraqi technocrats are pushing ahead with a second bid round, which features 10 discovered, but undeveloped oil fields -- including the treasured Majnoon, West Qurna-2, East Baghdad and Halfaya. A road show in August in Istanbul is being planned.
But bidders from round one want closure.
The coming weeks are expected to see an Iraqi panel of experts reviewing the bids for the oil fields of Kirkuk, Bai Hassan, Zubair, West Qurna-1 and Missan. Bilateral discussions are also seen as almost inevitable. Those fields may also be rolled into the second bid round.
Only time will tell.
Monday, June 15, 2009 11:55:04 AM
The clock is ticking on Iraq's first bid round, with Iraq hoping to lure Big Oil's billions and cutting edge technology to arrest and reverse an alarming decline in production, especially from its southern fields.
In the run-up to the Jun. 29-30 bid opening at the Rashid Hotel in Baghdad, Iraqi officials are at pains to stress that the landmark oil and gas opening will definitely go ahead, regardless of the vehement internal opposition.
Rumors are rife that round one, which aims to boost output by 1.5 million barrels per day at such giant, already-producing fields as Kirkuk and Rumaila, will be delayed or cancelled.
The keenest public advocate of the opening, Oil Minister Hussein Al-Shahristani, is the target of relentless criticism, with some lawmakers and oil officials saying the minister must bear responsibility for the sharp drop in output.
They also oppose any long-term involvement by international oil companies (IOCs) in the six oil fields -- Kirkuk, Rumaila, Bai Hassan, Zubair, Missan and West Qurna-1 -- on offer under the initial investment opening. These half dozen fields, now pumping some 2 million b/d, are Iraq's economic lifeline.
Unfazed by the fierce domestic attacks, Al-Shahristani is determined to see through the bid round, which includes the gas fields of Akkas and Mansuriya.
If signed and approved by the Iraqi cabinet, the 20-year service contracts would mark the return of international oil companies, which were thrown out of Iraq more than 30 years ago by nationalization.
Still, many inside and outside Iraq wonder whether the first licensing round, which features $2.6 billion in associated soft loans, will prove little more than an exercise in frustration.
Given the strident nationalism of many Iraqi politicians and oil executives, they see little chance for any work to get done on the ground even if contracts are signed. The absence of a legal framework is also a major obstacle.
But oil company executives are taking Iraq's internal politics in their stride and steeling themselves for the contest in Baghdad.
Let the games begin.
Friday, February 06, 2009 1:52:16 PM
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.
If formalized, this change would have other significant implications, especially on the structure of the operatorship of the fields (Iraq: Contract Labyrinth). The two issues are intertwined. If the state partner has a controlling majority, it then becomes the operator of the field while the foreign partner is called a co-operator. For international oil companies, ceding control over the decision making process and the freedom to carry out a development program they bid on with billions of dollars, is a non-starter. It’s an issue than can make or break the contract, they argue.
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.
From there on, the scenario for the outcome of the first bid round is almost predictable. A deadlock is inevitable especially as major companies dismiss as unfeasible any contract that is not endorsed by the legislature and the Iraqi parliament is unlikely to give its blessing to a scheme that puts Iraq’s crown jewels in the hands of foreign oil companies for the next 20 years, albeit under technical service contracts.
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.
Ruba Husari, Dubai
Sunday, November 09, 2008 12:04:49 PM
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
Friday, October 17, 2008 1:16:08 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
Friday, September 26, 2008 2:10:28 PM
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.
National operators like North Oil Co. and South Oil Co. would be transformed, having had no foreign partners since nationalization in the mid-1970s. The benefits of teaming up with the world's best are huge, but they also face the risk of losing their identity as guardians of Iraq's national resources. In the race with time to return Iraq to its place on the world oil stage, some argue that there should be no sacred cows -- even if this means the two national operators should be diluted and new entities set up.
This makes it a good time to stop and think about Iraq's priorities. So far, the ministry has set short- and long-term targets for production capacity. But it's not clear whether this is part of a well-structured policy that defines where the sector is heading or how it should be run. Output targets are not a policy in themselves, nor are successive bidding rounds, unless they form part of a well-considered plan tying all the components together.
Many oil producing countries went through similar processes of transformation as they reopened their doors to international oil companies. Those that succeeded best had strong, modern laws and regulations that clearly defined the roles and responsibilities of state companies versus the foreign partners.
The rapid developments in Iraq underscore the urgent need for a national oil company to oversee the sector and ensure that every step fits into a long-term strategy. More importantly, the speedy opening creates a stronger need for a hydrocarbon law to provide terms of reference for the new partnerships with international oil companies, and to ensure they are stable and beneficial partnerships in the long run.
By ensuring a successful outcome for the first bid round, the ministry would score several points: It would see some 1.5 million b/d of incremental output come on stream within a few years, raising both its revenues and world standing; it would confound critics by awarding contracts through a competitive and transparent process; and it would prove that international companies are willing to commit to long-term deals for a decent fee under service contracts, showing that production sharing contracts are not the only game in town for successful development of Iraq's oil.
So, what should be the priority at this juncture: a second licensing round with a bumper offering, or a drive to build strong legal and structural foundations for Iraq's oil sector?
Ruba Husari, Dubai
Monday, September 15, 2008 4:16:44 PM
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