Why Iraq sees success in oil auction

Officials laud a transparent process on bids to develop oil fields – and the opening of investment to foreign firms shut out for more than 30 years.

Iraq is declaring a historic auction to develop some of the world's richest oil fields a success – despite a bidding process from which most international oil companies walked away emptyhanded – and is proceeding with plans for a second round of bidding at the end of the year.

"We showed the world two things – that the Iraqi oil industry is open for investment for the first time, and second, that the process was transparent," says Foreign Minister Hoshyar Zebari.

Representatives of the world's major oil companies flew to Baghdad last week to bid on the right to develop hundreds of billions of dollars worth of oil and gas for the first time since Iraq nationalized its oil industry in 1972 and expelled foreign oil companies.

Of the six giant oil fields and two gas fields on offer, only one – the Rumaila field in southern Iraq – was awarded after the other bidders decided that the profit margins being offered by the Iraqi government were lower than they would accept.

"The IOCs [international oil companies] are not happy with results, as the Ministry of Oil, [but] we are very happy," says a senior ministry official, Abdul Mahdy al-Ameedi.

A consortium headed by British Petroleum and China's CNPC was awarded the contract to develop the giant field after agreeing to cut their profit to $2 per barrel instead of the $4 they were seeking.

Other companies bidding on other fields had asked for up to 10 times the profit margin offered by the Iraqi oil ministry.

Bids in a plexiglass box

The ostentatiously transparent auction a week ago resembled a gripping, if somewhat mystifying, piece of theater – one that included the powerful added attraction of potentially trillions of dollars of revenue at stake.

Oil Minister Hussein Shahrastani, a former nuclear scientist, presided over a stage which included a plexiglass box where the oil company bids were placed. The ministry's terms of offer for each field was contained in a red envelope given to the oil company representatives and then flashed on a giant screen. It was all carried live on television.

Oil company representatives publicly confronted in the process with the ministry's offer of a fraction of the profit they sought requested time for consultations and huddled in small groups.

Of the eight fields on offer, four received only one bid each. A gas field in Iraq's volatile Diyala Province received no bids.

"This is one of the oddest things I've ever seen," observed one Western oil consultant who asked to remain anonymous.

The auction, designed largely by international consultants, was believed to be the first of its kind in a notoriously secretive region.

The contracts are not the usual production-sharing agreements in which foreign companies own part of the oil, set as they are against a backdrop of Iraqi fears that the government was selling its oil wealth.

Instead, they are service agreements in which the oil companies agree to put money up front and develop the fields in return for an agreed profit per barrel, above a certain minimum.

But for major oil companies that have been shut out of the world's third-biggest reserves for more than 30 years, they are an important foot in the door.

The BP-led consortium is expected to bring new technology to the Rumaila oil field that will increase production by about 1.9 million barrels per day.

Ninety-five percent of Iraq's revenue comes from oil. The drop in prices and lack of cash to develop the oil industry has left the country without the money needed for post-war reconstruction.

"Rumaila will almost double the total production of Iraq. The revenue coming out of this huge increase in production will be a huge sum of money," says Mr. al-Ameedi.

In Round Two, the ministry has invited 45 potential bidders to Istanbul, Turkey, at the end of August to give them details of the 16 oil and gas fields on offer – many of them undeveloped.

"The main difference is that the projects included in the second round of bidding are discovered, undeveloped fields," says Mr Ameedi.

The Iraqi government has said it aims to increase production from the roughly 2.4 million barrels per day of current production to about 6 million b.p.d. in the next six years. But officials say they need an extra $50 billion in investment in the oil sector to increase capacity to that extent.