Iraq finalizes deal with Lukoil-Statoil consortium to develop prized oil field

By Sinan Salaheddin, AP
Sunday, January 31, 2010

Iraq seals deal with Russia’s Lukoil-led group

BAGHDAD — A consortium grouping Russia’s private oil giant Lukoil and Norway’s Statoil ASA on Sunday signed a final deal to develop one of Iraq’s biggest oil fields, capping an auction process key to the OPEC nation’s plans to boost output and generate sorely needed reconstruction revenues.

The deal on West Qurna Phase 2 field in southern Iraq is the last of the 10 fields that Iraq awarded last year during two international licensing rounds as it looked to revamp an oil sector battered by years of sanctions, neglect and, most recently, postwar violence and political bickering.

The signing Sunday also offers some much-needed political capital for Iraqi officials as they head into elections in March determined to show that they are actively turning the country around following the turmoil and instability that has defined Iraqis’ daily lives since the 2003 U.S.-led invasion to topple Saddam Hussein.

“These contracts will bring in cash to Iraq, and move ahead plans to develop the infrastructure,” said Oil Minister Hussain al-Shahristani, adding that these deals afforded Iraqis the chance to “look toward a bright future.”

Although it sits atop the world’s third largest proven reserves of conventional crude, Iraq currently only produces about 2.5 million barrels per day — a level still far below its pre-2003 war output.

Officials say international companies like Lukoi and Statoil, which together won West Qurna Phase 2 in the December licensing round, are key to raising that output to over 12 million barrels per day in about six years.

Such production — viewed by analysts as unrealistic in that timeframe — would rival Saudi Arabia’s. The kingdom, seen as the de facto leader of the Organization of the Petroleum Exporting Countries, currently produces over 8 million barrels per day, but has an overall output capacity in excess of 12 million barrels per day.

For the 15 international firms that won development rights in the various fields, the 20 year contracts were their first chance at access to Iraq since Saddam expelled foreign firms and nationalized the sector in the 1970s.

Despite the tempting spoils, the auction results were mixed, with only 10 deals struck out of the 21 oil and gas fields offered during the two licensing rounds.

Weighing on the process was the lack of a national oil law in Iraq, continued instability in the country and bickering between the central government in Baghdad and the Kurds in the north over final saw on the oil in that region.

Iraqi officials say they have no plans to open the reserves for the foreseeable future and instead will focus on adding more reserves through new exploration.

The fields which saw the most active bidding and interest were the least expensive to develop in the relatively stable, Shiite-dominated, south. In all, the fields awarded hold over half of Iraq’s proven reserves.

Under the agreements, the contracts can be extended for another five years.

Instead of the more lucrative production sharing contracts, the companies will get a set amount for each barrel of oil they produce, with the compensation ranging from $1.9 to $6 per barrel. The payout reflects a number of variables, including the type of crude, the ease with which the fields can developed and security concerns in the area.

West Qurna Phase 2 was a coup for Lukoil.

With known reserves of 12.88 billion barrels, it was the biggest among the 15 fields offered during the last bidding round in December. Lukoil had been granted the development rights in 1997 by Saddam, only to see the $3.7 billion contract rescinded by the dictator five years later.

The auctions, however, failed to attract many of the major players whose expertise analysts say is crucial to Iraq’s development goals.

Many of the fields went to state-run companies like Malaysia’s Petronas while U.S. giant Exxon Mobil Corp. secured only one field and largely shunned other offerings.

Iraq’s first postwar oil deal went to China National Petroleum Corp. in 2008. The deal, which gave CNPC rights to develop a central field, was the first Saddam-era deal honored by the postwar government.

Overall, the big winners were firms from Malaysia, China, Russia, Europe, Angola and two American companies.

Topping the list is Petronas, which is leading a consortium and participating in three others. CNPC struck three deals while Royal Dutch Shell, Korea’s Kogas and Angola’s Sonangol nabbed two fields each.

Of the American companies, Exxon Mobil is developing one field while Occidental is participating in a consortium to develop another field. Britain’s BP PLC won the rights to develop the giant Rumailah field with CNPC.

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