Iraq holds 2nd international oil auction, hoping companies look beyond security worries

By Sinan Salaheddin, AP
Friday, December 11, 2009

Iraq holds 2nd oil auction amid security fears

BAGHDAD — Iraq’s hope of luring international oil companies with its mother lode of oil met with mixed results Friday, with only two deals struck as security fears appeared to weigh heavily on the country’s second oil auction this year.

Of the 15 fields on offer in the first day of the two-day international licensing round, deals were struck on two fields in the relatively calm southern region of Iraq, while five located in more restive regions were withdrawn and a sixth field drew only one bid.

The lackluster showing — coming months after Iraq’s largely dismal first oil licensing round — contradicted Prime Minister Nouri al-Maliki’s upbeat tempo at the start of the auction being held at the heavily fortified oil ministry.

“There is no security deterioration in Iraq even if a security violation took place here,” al-Maliki told officials and company representatives at the start of the auction.

It was clear, however, that the week’s events were not soon to be forgotten by oil executives. A wave of attacks across Baghdad earlier this week killed at least 127 people and shook confidence in the abilities of Iraq security forces as U.S. troops depart

Two consortiums were quick to take al-Maliki at his word, at least in the relatively stable south — tempted by a chance to tap into one of the Middle East’s last major cheap oil bonanzas. They snapped up two southern fields with combines reserves of slightly over 13 billion barrels.

But no bidders stepped up for any of the four eastern Iraq fields on offer. Those fields lie in the restive Diyala province, home to some of the country’s most violent areas. No offers were submitted either for the central and northern parts of East Baghdad field in Baghdad and Salaheddin provinces, though that lack of interest could be linked as much to the fact that it lies residential districts, as well as to security fears.

A total of 45 companies, including Western giants like Exxon Mobil Corp. and Britain’s BP PLC, as well as state-run companies from Asia, are competing for 15 fields that represent about a third of Iraq’s 115 billion in proven reserves.

The 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 considered more lucrative. A joint-venture structure will give the companies 75 percent and the rest to the Iraqi side that gets to keep all the profits from sales — which could be tens of millions of dollars a year for the biggest fields.

In the first deals of the day, European oil giant Shell won the rights to develop the southern Majnoon oil field — the biggest of the fields on offer in the two-day licensing round. A second consortium led by the China National Petroleum Corp., or CNPC, won the rights to the Halfaya field, also in the south.

Shell and Malaysia’s state-run Petronas beat out a consortium grouping France’s Total SA and China’s CNPC to develop Majnoon, a 12.88 billion barrel behemoth in the Basra region.

Under the deal announced by Iraqi Oil Minister Hussain al-Shahristani, the Shell-Petronas consortium will receive $1.39 per barrel produced from the field. The companies bid said they would raise production from the current 45,900 barrels per day to a whopping 1.8 million barrels per day over a ten-year period.

Total and CNPC had asked to receive $1.75 per barrel, while offering to raise production to roughly 1.4 million barrels per day.

In the second deal, CNPC, teaming up with Petronas and Total won rights to develop Halfaya, which has estimated reserves of 4.1 billion barrels. Under the terms of the deal, the companies will get $1.40 per barrel produced, and said they would raise production from the current 3,100 barrels per day to 535,000 barrels per day over 13 years.

The CNPC-led consortium beat out three others, which were led by Italy’s Eni, Norway’s Statoil ASA and India’s ONGC.

The deals are crucial for Iraq, which relies on oil for 90 percent of its government budget and sorely needs international companies’ help in boosting production and revamping its dilapidated oil sector.

The current fields on offer are known as “green” fields, ones which have yet to be fully developed.

The security concerns, however, were apparent.

No bids were submitted for the Qamar, Gullabat, Naudman and Khashm al-Ahmar fields in eastern Iraq, and they were withdrawn from the auction.

While these are relatively small fields, the blow was in the lack of interest in East Baghdad, which analysts say has estimated reserves of about 8 billion barrels.

Al-Maliki has sought to assure oil companies about his country’s ability to secure their interests even after the withdrawal of the U.S. forces.

But the recent bombings, coupled with the lack of a national oil law, sectarian bickering within the parliament and a dispute over oil rights between the central government in Baghdad and that of the semiautonomous Kurdish region in the north, have provided little in the way of assurances.

Al-Maliki, addressing parliament Thursday, claimed that feuding between political blocs, coordination troubles between police and army, and budget cuts because of falling oil prices, have hobbled attempts to expand security operations.

In front of the oil executives, he struck an upbeat tone, underscoring that they were partners in a new Iraq.

“Developing the oil industry is definitely developing Iraqis’ lives, as well as the region,” al-Maliki said at the start of the auction, stressing that a stable Iraq offered the chance for greater cooperation and security in the region, as a whole.

The need for the push is clear.

The country is struggling to raise oil exports, currently in the range of roughly 2 million barrels. It relies on oil revenues for 90 percent of its government budget, and the funds are sorely needed to rebuild an infrastructure that was already hobbled under Saddam’s regime, but was devastated following the 2003 invasion.

Iraq’s first postwar bidding round in June flopped as firms resisted the financial provisions imposed by Iraq, which has the world’s third-largest known oil reserves.

The remainder of the fields will be offered Saturday.

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