Risks battle rewards as Iraq opens up its oilfields

Oil&Gas Materials 26 June 2009 06:31 (UTC +04:00)

For the first time since the U.S. invasion to topple Saddam Hussein, global oil firms will have a run at Iraq's vast oil resources when Baghdad auctions off contracts in its biggest fields this month, Reuters reported.

The June 29-30 tender for service contracts in six already producing oilfields and two undeveloped gas fields is fraught with risk following a revolt in the state-run oil industry, and amid violence and political uncertainty.

Oil companies say they have no choice but to bid -- the allure of the world's third largest oil reserves, and of greater riches down the road from Iraq's under-exploited and under-explored oil resources is just too great.

"These fields are the jewels of the Iraqi oil industry," a senior executive at an international oil company planning to bid told Reuters. "Of course we'll be there. But it's a big risk to take. We can win the contract, but can we execute it? Who will approve the deals? Will the local partners cooperate?"

In addition to the revolt, semi-autonomous Kurds have warned they could make it difficult for companies to work around the disputed northern city of Kirkuk, while Iraq's parliament has insisted it must approve every deal.

"A huge controversy has surrounded this first licensing round since before it even began," said former oil minister Esam al-Chalabi. "As expected, the process will not be safe and the foreign companies will face inevitable problems ahead."

When former President George W. Bush invaded Iraq in 2003, critics charged it was because the United States wanted to get its hands on Iraq's 115 billion barrels or more of reserves.

Eyebrows may be raised if oil companies from nations that took part in the invasion, like Britain, walk away winners.

But on the face of it, it is Iraq that is calling the shots.

The contracts are 20-year service deals, which offer payment based on a fixed fee for additional output. Oil firms prefer production sharing deals that allow them to book some of the reserves and take a share of the profit.

Winning firms must pay the Iraqi Oil Ministry $2.6 billion in signature bonuses and cover Iraq's 25-percent share of development costs, which it will pay back in oil.

Oil Minister Hussain al-Shahristani, summoned before parliament, insisted the deals were in Iraq's interests, and would earn the country $1.7 trillion over the next two decades in additional oil revenues.

The first auction aims to add 1.5 million barrels per day to Iraq's output of 2.4 million barrels per day -- lower than before the invasion. A second round at year-end for undeveloped fields could add 2.5 million barrels per day, helping boost output above 6 million barrels per day in five years.

Dependent on crude exports for 95 percent of state revenues, Iraq desperately needs cash to rebuild after years of sectarian war between once dominant Sunni Muslims and majority Shi'ites.