Iraq oil fields: European, Asian firms win first contracts

Iraq on Friday auctioned the rights to develop some of the world’s biggest remaining oil fields. Iraqi officials say the move will dramatically increase production over the next seven years, fueling reconstruction.

The contracts on the first of Iraq’s two-day bidding round went to European and Asian oil companies eager to get back into the market and unafraid of assuming the risk of investing in Iraq. The traditionally less aggressive US oil majors were present but did not submit bids for the five fields on offer.

Iraqi police and soldiers sealed off roads leading to the Oil Ministry, where the auction took place while helicopters hovered overhead.

Prime Minister Nouri al-Maliki, who was grilled in parliament this week over a series of bombings of government buildings, assured the oil executives that despite the attacks, security had not deteriorated.

Contracts were awarded for the two fields in relatively stable southern Iraq. But fields in the much more volatile north and on the edge of Baghdad’s Sadr City attracted either no bids or a single, unsuccessful bid seeking three times more profit than the Iraqi government was offering. The Iraqi government says it will develop those fields itself.

New era for Iraq’s oil industry
The auction marks a new era in Iraq’s volatile oil industry. Major oil companies that developed Iraq’s oil fields after World War II were nationalized by the Iraqi government in the 1950s. In the 1990s, trade sanctions imposed after Saddam Hussein’s invasion of Kuwait banned most international business with Iraq.

Iraq retains ownership of the oil under the agreements, while the oil companies developing the fields are paid a set price per barrel.

“This became your oil today,” Mr. Maliki told the Iraqi people. He said the revenue would be used for the welfare of citizens rather than being channeled to war and destruction.

“We’ve been waiting for decades to see these giant oil fields developed,” says Jabbar al-Liebi, an advisor to the Oil Ministry. He says the revenue from the increased production would substantially ease unemployment and improve services in the country.

Production predicted to triple
Oil Minister Hussein Shahristani said the two southern oil fields, along with those auctioned off in a previous round in the summer, would triple Iraq’s oil production.

“The combined total will be somewhat near 10 million barrels a day within the coming six to seven years,” he told reporters.

Some analysts question whether the output targets being proposed by the oil companies are realistic, and say Iraq’s oil production could likely more than double to 6 million barrels per day (bpd), but would have trouble reaching 10 million bpd.

While Iraq’s reserves in the north of the country are entangled in territorial disputes between the Arabs and the Kurds, developing Iraq’s giant oil fields in the south is seen by most analysts as relatively straightforward. By themselves, they would be enough to dramatically contribute to Iraqi reconstruction over time.

Developing those oil fields is “of crucial importance for the future of Iraq because it will decide on the level and the quality of production for the coming 20 years or so. For a country which is under reconstruction, such as Iraq, this is vital,” says Boris Boillon, France’s ambassador to Iraq.

Oil reserves among cheapest to tap
The fields being auctioned today and tomorrow are the last of Iraq’s known super-giant fields – those with more than 5 billion barrels of reserves. Since the oil is close to the surface, the cost of production is among the cheapest in the world.

The contract for the Majnoon field’s almost 13 billion barrels in proven reserves was awarded to a joint venture of the Anglo-Dutch Shell and Malaysia’s state-owned Petronas. The company agreed to raise production from a little more than 46,000 bpd to 1.8 million bpd over 10 years.

France’s Total, which was involved in developing Majnoon, lost its bid for that field despite Iraqi President Jalal Talabani telling the French during a recent state visit that they would be favored in awarding oil contracts.

The Oil Ministry has made a point of a transparent bidding process, in which the contracts are awarded by auction to the lowest bidder. On Friday, each company’s bid – delivered to the stage by a company representative – was put up on a giant screen.

The relatively low profit margins the oil firms were asking for on Friday stood in marked contrast to the previous bidding round, when oil companies were asking up to 10 times the amount of profit Iraq was prepared to offer.

“Some people were very much surprised that the international oil companies offered such low fees – less than $2 (per barrel),” says Thamer Ghadban, a former oil minister who heads the board of advisers to the Iraqi cabinet. The Iraqi government, in fact, had been willing to pay more profit per barrel than the oil companies were asking this time, he said.