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U.S. firms lag in bids for Iraqi oil
Russians, Europeans and Chinese win most contracts for developing major fields

By Ernesto Londoño
Sunday, December 13, 2009

BAGHDAD -- Chinese, Russian and European companies won the right this weekend to develop major oil fields in Iraq, while U.S. firms made a paltry showing at auctions that represent the first major incursion of foreign oil companies into Iraq in four decades.

The companies that secured 10 contracts in auctions held over the weekend and in June stand to profit handsomely, but they are taking a significant gamble.

Iraq has the third-largest proven crude reserves in the world, but the country remains perilous; it suffers from chronic corruption and acrimonious politics that have prevented the passing of new laws to regulate the sector.

Of the seven U.S. companies that registered for the auctions, only one emerged as the leading partner in a consortium that won a contract. Another U.S. company has a minority stake in a contract.

China's state-owned oil company has a major stake in two contracts. Russian firms are parties in two others.

European firms made a strong showing. Royal Dutch Shell, Italy's Eni, British Petroleum and Norway's Statoil got deals.

Companies from Malaysia and Angola were parties to five winning bids.

Oil analysts say the outcome was surprising, considering that U.S. oil companies have long yearned to work in Iraq.

The analysts said it is ironic that U.S. companies do not appear poised to cash in on the aftermath of a war that many in the United States and the Middle East argued was motivated by a desire to tap into Iraq's oil reserves.

After the invasion, the United States paid oil executives to advise Iraq's Oil Ministry and set up large military and civilian task forces to boost the country's ailing energy sector.

"American oil executives provided free training to the ministry," said Ben Lando, bureau chief of Iraq Oil Report, a trade news outlet. "It is quite strange that after wanting access to Iraqi oil for so long, U.S. companies have largely remained on the sidelines."

Security concerns, underscored by coordinated bombings Tuesday, and the threat of political instability as the U.S. military withdraws probably gave American oil executives pause, analysts said.

In some cases, U.S. companies were at a disadvantage because their rivals, particularly the Chinese and Russians, have lower labor costs and do not answer to shareholders, which might allow them to take more risks.

"U.S. companies report back to their shareholders, not to public opinion," said Ruba Husari, editor of Iraq Oil Forum, another trade news site. Nonetheless, she said, "their low profile is intriguing," considering that the auctions are widely seen as the last major opportunity for years for international oil firms wanting to do business in Iraq.

U.S. Ambassador Christopher R. Hill called the opening of Iraq's oil industry to foreign investment an achievement of "historical significance" and said he was encouraged by how transparent the process had been.

Hill said the embassy advised U.S. companies as they weighed the pros and cons of doing business in Iraq, as diplomats do around the world.

"I'm not in a position to express disappointment," he said of the American showing at the auctions. "They had to make a decision based on what they're prepared to pay."

Exxon Mobil was the only U.S. company that led a winning consortium. Los Angeles-based Occidental Petroleum Inc. got roughly a 25 percent share in another.

The state-owned Chinese National Petroleum Corp. bid on more contracts than any other company.

In marked contrast to the Americans, Chinese diplomats in Baghdad have kept a low profile in recent years, working out of a hotel and drawing little public attention. But Iraqi officials say they have been struck by the caliber of Chinese diplomats, many of whom speak flawless Arabic and have developed a nuanced understanding of Iraqi politics.

"We all know that China is on track to become a major economic as well as technological power," said Assam Jihad, a spokesman for the Oil Ministry.

Under the 20-year service contracts, the Iraqi government will pay companies a set fee for each barrel produced above the current output level at each field.

The contracts also position the companies to play major roles in Iraq if the government loosens restrictions on foreign investment. The contracts awarded at the auctions are service contracts, which do not give companies a share of profits.

This weekend's auction was far more successful than the one in June, when the ministry awarded one contract out of the 10 on the auction block. Two other deals from that auction were reached later.

Of the 10 fields up for grab in the second round, the ministry awarded seven contracts.

Iraq's oil revenue, the backbone of its economy, has dipped below target this year as a result of lower prices and export volumes. Officials hope the refurbished fields could pump as much as 11 million barrels per day in eight years. The country currently pumps 2.4 million a day.

A dispute over federalism between politicians in Baghdad and their counterparts in the autonomous Kurdish regional government in northern Iraq is one of the biggest challenges oil companies entering Iraq are likely to face.

The chairman of the Iraqi parliament's oil and gas committee, a Kurd, has warned executives that the contracts are illegal. He has called for the resignation of Oil Minister Hussain Shahristani.

"These companies should think twice before signing contracts," said the lawmaker, Ali Hussein Belo.

Meanwhile, deals the Kurds have signed with foreign companies for fields in northern Iraq have come under fire in Baghdad, which banned those companies from participating in the auctions.

The fight could draw oil companies into one of the most protracted battles over power in Iraq. "We have faith in the government," Mounir Bouaziz, a vice president for Shell, said after his company won a coveted field. "The government is behind these contracts."

Special correspondents K.I. Ibrahim and Aziz Alwan contributed to this report.

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