Iraq Opens Bidding on Oil Field Contracts
Investment Could Revive Sector

By Mary Beth Sheridan
Washington Post Foreign Service
Tuesday, October 14, 2008

BAGHDAD, Oct. 13 -- Iraq opened bidding Monday on the first round of contracts to develop its oil fields since the fall of Saddam Hussein, a move intended to jump-start a sector crucial to the country's rebuilding.

Iraq has the world's third-largest oil reserves. But despite five years of efforts and $2.7 billion in U.S. reconstruction funds, Iraqi production is still well below the frequently cited U.S. goal of 3 million barrels per day.

Oil fields have been looted and attacked by insurgents since the 2003 U.S.-led invasion, technical experts have fled abroad because of violence and the infrastructure is creaky after years of international sanctions and neglect. Iraq needs billions of dollars of investment to increase production, experts say.

"Current production is by no means meeting demand for the reconstruction of the country," Iraq's oil minister, Hussein al-Shahristani, told reporters after meeting Monday in London with representatives of three dozen international oil companies. "International companies are needed to fast-track development. The response was fairly encouraging."

Vera de Ladoucette, director of Middle East research for Cambridge Energy Research Associates, noted that the first round of bidding involves fields representing a third of known Iraqi oil reserves.

"It's a huge step," she said.

Shahristani presented the oil companies with requirements for their bids on 20-year contracts to develop six major oil and two natural gas fields. Bids are due in six months and the government is expected to choose the winners in June, he said. Oil analysts estimate the contracts will lead to increases in production by 2011 or 2012.

Iraqi authorities are expected to soon announce a second round of bidding on other fields.

Oil is critical to Iraq's economy and generates more than 90 percent of government revenue. But bringing in foreign companies has been a touchy subject in this country, which nationalized its oil industry in 1972. Politicians have voiced suspicions that the U.S.-led invasion was aimed at giving Western companies access to oil.

Iraq's Oil Ministry scuttled an earlier attempt to award no-bid, short-term technical contracts to a handful of Western companies because it said talks had dragged on too long. Iraq signed a $3 billion oil development deal in August with China's state-owned oil company, reviving a moribund contract with the company from the 1990s.

Bob Fryklund, an oil expert with IHS, a research and consulting firm, said the kickoff of the bidding Monday "signifies really the meeting of the minds in the political realm that allows this to go forward."

Legislation aimed at establishing a new framework for the oil industry has been bogged down in parliament since last year. It would dictate how revenue is shared among regions and spell out the rights of foreign investors.

Shahristani has decided to forge ahead nonetheless, emphasizing that the new contracts would be technical service deals and would not allow international firms to keep any of the oil.

Iraq is a rare prize for oil companies, with known reserves of 115 billion barrels, the third-largest in the world after Saudi Arabia and Iran. Iraq's reserves are particularly attractive since other oil giants such as Venezuela and Russia have become less hospitable to foreign investors.

But Iraq also represents a considerable risk.

With the new oil legislation stalled, the government is relying on a law from the Hussein era. And while violence has dropped from the terrifying levels of a year ago, Iraq is still plagued by car bombs, sniper attacks and kidnappings.

"You have a degree of uncertainty, both legal and security uncertainty," de Ladoucette said. "But on the other hand, this window of opportunity might not present itself again."

On the legal side, she said, there remains a contradiction between the country's 2005 constitution, which gives the country's regions more say on oil deals, and the old legal framework, which favors Baghdad.

Violence is another concern. "The major uncertainty is whether Iraq's government will be able to guarantee a minimum level of security on the day the coalition troops leave the country," she said.

The U.S. government has tried to help Iraq rebuild its oil industry, strengthening infrastructure and providing training for a special corps of oil police who protect pipelines and other installations.

This summer, Iraq's oil production finally crawled back to its level before the 2003 invasion -- about 2.5 million barrels per day. But in recent months, it has slipped to about 2.3 million barrels because of poor weather, maintenance issues, and problems in a southern oil field caused by incorrectly injecting water to force out more oil, U.S. officials say.

Shahristani's goal is to increase Iraq's production to 4.5 million barrels a day by 2012.

U.S. officials believe foreign involvement in the industry is essential since most of the American money to rebuild Iraq's oil industry has now been spent. Iraq's own investments in the sector have been slowed by a sclerotic bureaucracy and other factors.

The government for the semiautonomous Kurdish region in northern Iraq has already signed its own investment deals with international oil companies, to the annoyance of the central government.

A member of parliament's oil committee, Abdul-Hadi al-Hassani, said Monday that it would insist on reviewing each of the foreign contracts before they were signed.

"If we see it is maximizing profits and merits to Iraq, we will accept," said Hassani, who belongs to a small Shiite party.