Costs and security fears weigh on Iraq’s international oil auction, with only 2 deals stuck

Costs and security fears weigh on Iraq oil auction

BAGHDAD — Iraqi officials cheered and clapped as the first oil field up for bid went to a major international consortium at the opening of the country’s biggest postwar auction Friday. But from there, the chill set in.

Oil executives from around the world made deals on only two fields, both in Iraq’s relatively stable south, while shunning six others in regions with sporadic violence — and where the risk outweighs the profits that the Iraqi government is offering.

Iraqi officials portrayed the day as a success because they secured deals that will ramp up production in the two giant fields. But the lack of energetic bidding highlighted Iraq’s difficulties in turning its wealth of oil — the world’s third largest reserves — into a financial bonanza.

Energy experts say Iraq has been tightfisted in the deals it has offered major producers. There is also a long-running feud between the central government in Baghdad and the Kurds over control of petroleum reserves in the north.

Security is yet another issue, particularly in central Iraq and areas north of the capital. Violence in general has been down for more than a year, but dramatic attacks still happen. Bombings killed at least 127 people in Baghdad on Tuesday.

“Iraq can absolutely get big commitments” from oil firms, Samuel Ciszuk, Mideast energy expert with London-based IHS Global Insight, told The Associated Press. “But with the current situation, they can only make progress on the biggest and cheapest fields” where the security risks and development costs are low.

At fields in eastern and central Iraq, “risks — both above ground and below — are much greater … and infrastructure is much less well developed,” he wrote in a report on the day’s auction. “The volumes produced from these fields are also far lower than from the south.”

Oil majors in the U.S. have not spoken openly about the bidding process, saying only that there is interest in Iraq. On Friday, officials with Marathon Oil Corp., Exxon Mobil Corp. and Chevron Corp. had no comment.

“Given that Iraq’s oil and gas reserves are among the largest in the world, they are going to play a key role in meeting the world’s forecasted demand,” Kirsten Smart, spokeswoman for the European oil giant Shell, said in London.

“We are committed to supporting Iraq to achieve a substantial production increase, using the most advanced technology that we can bring to bear,” she said.

One big reason oil majors haven’t rushed back into Iraq are the terms that the government is offering.

Companies must accept 20-year service contracts and receive a flat fee per barrel produced for their services instead of production-sharing contracts, which are much more lucrative.

Iraq’s first postwar international oil auction in June — billed as oil companies’ first chance in over three decades to grab a share of Iraq’s oil wealth — was an embarrassment.

It netted only one deal on the spot: Britain’s BP and CNPC nabbed the 17.8 billion barrel Rumaila field in the south. Deals on two other southern fields were brokered later.

Mark Gilman, an analyst with The Benchmark Company, said most oil companies wouldn’t put up with the risks in Iraq were it not for the vast reserves underfoot.

“The reason for participation, in my view, is to get a foot in the door,” Gilman said. Oil companies are wagering that not only will the security improve, but that the country eventually will offer more lucrative production deals, he said.

Drawing in international oil powerhouses is vital for Iraq, which relies on petroleum for 90 percent of its government budget.

It may also be crucial for an energy-hungry globe.

The International Energy Agency predicted Friday that global oil demand will rise slightly faster in 2010 than previously forecast, driven by increased economic activity in Asia and the Middle East.

Iraq could easily produce enough oil to cover that rise if it reaches the goals set out by its leaders. It’s too early to say if that would help prevent energy price spikes in coming years, but demand is expected only to grow stronger.

Oil Minister Hussain al-Shahristani said Iraq would develop on its own the fields if it had to. But the country sorely needs help revamping its dilapidated oil sector. Iraq is limping along with production at about 2.5 million barrels per day, of which roughly 2 million barrels a day is exported.

Friday was the opening of the two-day international licensing round, in which 15 fields with roughly one-third of Iraq’s 115 billion barrels in reserves are on the auction block. Successful deals for all 15 fields could have potentially boosted Iraq’s production by another 2.6 million barrels per day over the next decade.

Two of the bids that were successful, however, include giant oil plays.

The Majnoon field is a 12.58-billion barrel behemoth. The Halfaya field contains an estimated 4.1 billion-barrels.

A consortium grouping Shell and Malaysia’s state-run Petronas beat out France’s Total SA and China National Petroleum Corp., or CNPC, to win Majnoon.

Shell-Petronas will take $1.39 per barrel produced and said they would raise production from the current 45,900 barrels per day to 1.8 million barrels per day over 10 years.

Halfaya was won by CNPC, Petronas and Total, beating out three other consortiums led by Italy’s Eni, Norway’s Statoil ASA and India’s ONGC.

The consortium will get $1.40 per barrel produced and plans to raise production from the current 3,100 barrels per day to 535,000 barrels per day over 13 years.

Five fields located in more restive regions received no bids.

Four were in Diyala province, home to some of the country’s most violent areas. The fifth — the central and northern part of the East Baghdad field — fell victim as much to its location as to security fears.

That field, with estimated reserves of about 8 billion barrels, holds harder-to-refine heavy oil and is situated mainly in residential areas that make it difficult to exploit.

The day’s final field, Qayara, in Ninevah province in the north, drew only one bid, which was rejected. Angola’s Sanongol said it wanted $12.5 per barrel, more than twice what Iraq was willing to pay.

The biggest prize of the auction — West Qurna Phase 2 with its 12.88 billion barrels in reserves — is to be auctioned Saturday, along with six other fields.

West Qurna is expected to see fierce bidding because of its reserves and its southern location. The others are all significantly smaller and in areas of central or northern Iraq.

Most recent major attacks have been in Baghdad, but smaller-scale violence continues almost daily in Ninevah and Diyala provinces north of the capital.

Salaheddin reported from Baghdad, El-Tablawy from Cairo. AP writers Chris Kahn in New York and Toby Sterling in Amsterdam contributed to this report.