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Iraq First Bidding Round - ‘The Greatest Race on Earth’ or was it?
Global Arab Network - Dr. Mostafa Al Bazergan
On 30 June 2009, the Iraqi Ministry of Oil received bids for eight oil and gas fields. Leading international oil and gas companies headed towards Iraq in the country’s first licensing round for more than three decades, described by the Oil Minister, Hussein Shahristani, as the ‘greatest race on Earth’.

The results were disappointing, both from the Iraqi perspective and that of most of the participating companies. Only one field – the giant Rumaila oil field – was awarded to BP and CNPC, whilst the other seven received no bids or bids which did not meet the Ministry’s minimum expectations.

The results were announced in a live TV show. One after the other the companies stood up and said ‘sorry we can’t do a deal’. The story goes that an adviser to the Iraqi oil minister was heard to whisper something along the lines of ‘oops we've
messed up’. What happened?

Put simply, the gap between Iraqi perceptions and the risk-reward balance required by the oil industry was just too great.

One of the greatest myths about the oil and gas industry is that international companies are desperate to get access to oil and that they would accept any terms. Another myth specific to Iraq is that it is easy oil, as wherever you drill a whole in the ground you get oil. The reality is quite different.

Investors do have a choice. After all, they have limited resources and they seek to allocate them in the most efficient way, especially in today’s tough financial environment where those resources are constrained. The international oil companies’ capital will flow to the most attractive opportunities in their global portfolio, where it looks as though the best balance between risk and reward can be achieved. As for the second myth of ‘easy oil’, all oil fields, whether perceived to be ‘easy’ or not, face the eternal challenge of maximising production and arresting decline. All oil fields can benefit from best practice reservoir management, the latest technology, extending field life and improving the economics of marginal projects.

Most of the oil companies lining up hopefully to bid for Iraq contracts were disappointed that the terms imposed by the Ministry did not provide them with prospective rewards to balance the perceived risks. Whilst many consortia submitted bids, most dropped out when the Iraqi Ministry unveiled their discouragingly low proposed figures for the key biddable item – the remuneration fee. Companies were invited to bid on two features of the newly-devised Iraqi technical service contract - the maximum remuneration fee and the plateau production target. The Ministry came forward offering a remuneration fee maximum between US$1.90/bbl and US$4.00/bbl for the oil contracts; and US$8.50/mcf for the gas contracts. These figures were far below the minimum levels which the international companies had been contemplating, causing disappointment all around .In some case the  minimum proposed by the international companies was as much as ten times higher than the Iraqi maximum. Bidding consortia were given the options of accepting these terms or losing out in the contest. With one prominent exception, all the consortia chose to walk away from the Ministry’s terms. The only bidder to stay in the game and accept the Iraqis’ tight offer was the BP consortium.

What happens next? Despite the companies being offered an opportunity to re-consider their bids, it seems unlikely that the gap in commercial terms will be bridged without some concession on the Iraqi side.

But is that likely? Abdul Mahdy al-Ameedi, Iraqi deputy director general at the oil ministry’s Petroleum Contracts and Licensing Directorate, has recently stated that for the second licensing round, the two parameters — a per barrel service fee and a plateau production target – will not necessarily be the same as in the first round. He added that as the fields on offer are of different type, there may be some modifications in terms. He also stated that the list of original 16 fields on offer could be revised.

Prior to the bidding round, from the uproar and cries of sell-out this all aroused amongst the many critics - technocrats and politicians alike- of the Oil Minister, one might have been concluded that major give-away concessions were being handed out and Iraqi control over oil production surrendered permanently to foreign interests. In fact nothing of the kind was being contemplated or is on offer, much as some international oil interests would love to get more deeply involved in Iraq’s development programme.

What Mr. Shahristani offered, far from ‘putting the Iraqi economy in chains’ or ‘squandering Iraq’s oil revenues’, as quite senior Iraqi oil industry figures have claimed, involves little more than technical support from foreign companies to help increasing Iraq’s oil output.

Few would question Iraq’s immense potential for expanded oil production. But the goal of raising output from today’s 2.4 million barrels per day (b/d) to no less than 6 million barrels per day (Mb/d), and all within five years, is ambitious indeed, and it has to be asked, is this just a dream or is it a practical and attainable goal? Realising that the 6 Mb/d target could seem just too ambitious, the Ministry of Oil has downgraded that target to 4 Mb/d in the next five years.

In the case of the BP consortium, which focussed on the Rumaila field, the proposal was for a peak production target of 2.85 million b/d, which would make Rumaila the second largest producing field in the world, after the Ghawar field in Saudi Arabia. The agreement requires the partners to reach this target, adding 1.8 million b/d of new production capacity, by the start of the seventh year from contract signature.

If Iraq now revises its offer, remaining committed, and being seen to be committed, to stronger international involvement, and if the door is held firmly open for future foreign investment of the kind which maintains, and even strengthens, Iraqi oil control, then even ambitious production targets might conceivably be attained. But it will take a change of mindset from the unhappy first bidding round will definitely be needed. To attract international engagement in its oil industry, Iraqis will have to offer terms more in line with the actual risk-reward balance and less with counter-productive rhetoric.

Global Arab Network

Dr.  Carole Nakhle, Surrey Energy Economics Centre. This article was published in Italian On AGI ENERGIA: www.agienergia.it

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