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Price Squabbles, Security Concerns Lead Oil Giants to Pass On Iraq Fields

Iraq contains some of the world's richest oil reserves, but low fees being offered by Baghdad kept refiners away.
Iraq contains some of the world's richest oil reserves, but low fees being offered by Baghdad kept refiners away. (By Nabil Al-jurani -- Associated Press)

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By Ernesto Londoño, K.I. Ibrahim and Steven Mufson
Washington Post Foreign Service
Wednesday, July 1, 2009

BAGHDAD, June 29 -- Iraq's effort to woo foreign energy companies to help resurrect its ailing oil fields fell flat Tuesday, as most companies balked at the financial terms offered by the government despite the lure of the country's vast reserves.

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The impasse on deals for all but one field was a setback for the oil firms eager to gain access to the largest reserves in the world outside Saudi Arabia, and for Iraq, for which oil revenue could hold the key to prosperity. The impasse was also a setback for the United States, which has encouraged Iraq to make use of foreign investment and expertise to help bring stability to the most important sector of the country's economy.

During a day-long live auction for eight 20-year service contracts, the Iraqi Oil Ministry was able to nail down just one deal -- for the giant Rumaila field in southern Iraq. The Iraqi Oil Ministry reached an agreement with British Petroleum and China National Petroleum Corp. only after BP and CNPC accepted a much lower fee than they originally sought in return for raising the field's output beyond current levels. Rumaila, Iraq's biggest oil field, has an estimated 17 billion barrels of oil reserves, an amount equivalent to more than half the reserves of the entire United States.

"It's tough to walk away from the opportunity to get your foot in the door in Iraq," said Robert E. Ebel, an expert on Iraqi oil at the Center for Strategic and International Studies. "When you look at all the oil in the ground, you figure 'I better be here.' But when you think about all the above-ground problems, you might think that 'I better strike a better deal.' "

In the current bidding round, Iraq said it would reimburse companies for costs and pay them a per-barrel fee for increases in production from the country's abundant but long-neglected fields. But it did not offer the companies an ownership stake in the crude, which would have been a more attractive type of contract. It also demanded nearly $3 billion in "signing bonus" loans for the six oil fields, which are active but underproducing, and two largely undeveloped gas fields.

BP and China's national oil company submitted a joint bid to raise output at Rumaila from about 1 million barrels a day to 2.85 million barrels a day for a $3.99-per-barrel fee. The ministry said it would pay a maximum of $2 a barrel. In the end, the companies agreed to that price. "We're pleased with the process so far and look forward to concluding the contract in due course," said BP spokesman Toby Odone.

But the bids on other fields came nowhere close to the government's offers. The televised session at the al-Rasheed Hotel, near Baghdad's Green Zone, ended shortly before the clock struck 5 p.m. in the Iraqi capital.

Oil Ministry spokesman Asim Jihad said the ministry was satisfied with the outcome of the auction. He said that Prime Minister Nouri al-Maliki's cabinet would review the bids and that further negotiations with the companies were not out of the question. Oil industry sources yesterday said the situation remained "fluid." A major European company said it expected further word today.

"This is an important step to develop the oil industry, and it's a good sign that this type of event took place in Iraq," Jihad said. "It was transparent and it sent a good message about stability in Iraq."

But some oil experts said it would be hard to bridge the large gap between oil company bids and the Iraqi oil ministry's expectations. In recent days, several Iraqi lawmakers and some veterans of its oil sector criticized the service contracts as giveaways to Big Oil. For Maliki, the controversy became a political liability just as he was proudly proclaiming Iraq to be sovereign. Awkwardly, the auction coincided with a national holiday declared to mark that sovereignty.

Iraq not only possesses huge proven reserves, it also holds the world's best oil prospects. Because its reservoirs are large and tend to be relatively shallow, drilling is relatively easy and cheap. Little exploration has been done since 1980 and much of the western part of the country remains unexplored. Moreover, many other oil-rich countries have nationalized or otherwise maintained tight control of their energy sectors.

The auction yesterday represented the first opportunity for major oil companies to return to Iraq since they were expelled in 1972 amid a regional move toward nationalization. For half a century before that, the Iraq Petroleum Co. was run by the precursors of Exxon Mobil, Royal Dutch Shell, BP and Total. BP has information dating to the 1920s on Iraq's oil reservoirs.

Many of the companies have already been informally advising Iraq's government on how to keep up production in existing fields. Iraq is currently producing about 2.4 million barrels a day, well below its peak output. Many of the fields have been damaged or neglected during three decades of war and sanctions.

Oil Minister Hussain Shahristani has said that the goal of the bidding was to raise the country's output to 4 million barrels a day. Oil industry executives say that Iraq could eventually produce 6 million barrels a day.

While eager to tap into Iraq's fields, oil executives were apprehensive about injecting themselves into a country with volatile politics and an active insurgency.

"The security issue is a very serious question," said James Placke, a senior associate at Cambridge Energy Research Associates. "It introduces an uncertainty that is just irresolvable because you just don't know what the security situation is going to be like five years from now."

Another disincentive for oil firms has been Iraq's failure to enact a hydrocarbons law. But in the end, price was a key issue.

In the Kirkuk field, for example, which was discovered in 1927, a consortium led by Royal Dutch Shell said it could double current production to about 800,000 barrels a day for a fee of $7.90 a barrel. Iraq's Oil Ministry wanted to pay only $2 a barrel in that field.

A consortium led by Exxon Mobil said it could boost production in the West Qurna field alone to 2.35 million barrels a day for $4 a barrel. The Iraqi government wants to pay $1.90 a barrel there. No company bid on the Mansuriya field in the violent Diyala province.

The biggest gap between bid and Oil Ministry targets came from a Conoco Phillips-led consortium. The oil firms offered to develop the Bai Hassan field for a fee of $26.70 a barrel; Iraq's target was $4.

Other bids were closer to the Iraq government's targets.

Mufson reported from Washington.


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