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Iraq opens big slice of oil riches to outside bids

A total of 44 companies will make their pitch this week, vying for the 15 fields in Iraq — the largest of the reserves located in Iraq's relatively calm Shiite-dominated south.
/ Source: The Associated Press

It's been a strained courtship between Iraq and oil companies jockeying for its untapped riches — complicated by jitters about insecurity, lack of a legal rule book to govern investments and Baghdad's tightfisted bargaining that turned last summer's much-hyped bidding round into a failure.

Even as the same security and political concerns remain unresolved, they appear ready to give it another go.

For the companies, the prize is too big to ignore: 15 fields that represent the largest cut of Iraq's oil wealth available to outside companies in decades. For Iraq, it means access to technical expertise and hard cash, with oil sales accounting for 95 percent of its budget.

A successful auction this time could set the tone for future deals as Iraq opens up the world's third-largest oil reserves to companies for whom cheap oil is becoming increasingly a thing of the past.

"The volumes," Samuel Ciszuk, an oil expert with London-based consultancy IHS Global Insight, said, summing up simply the incentive for the companies despite the political uncertainties and the security risks.

"It's the huge volumes involved and access to the oil flows."

A total of 44 companies will make their pitch this week, vying for the 15 fields — the largest of the reserves located in Iraq's relatively calm Shiite-dominated south.

They include giants Exxon Mobil Corp., Britain's BP Group PLC, Chevron, ConocoPhillips and Total SA, as well as a range of state-backed companies from countries such as Russia, Angola, India and Kazakhstan.

Bidding location held under tight security
While they represent the best — if not only — option for Iraq's hope to rebuild an oil sector suffering alternately from decades of neglect, war and sabotage, what remains to be seen is whether these firms are willing to accept less lucrative contract provisions to stake their claim to a piece of the Middle East's last major oil and gas bonanza.

"Iraq has huge oil and gas reserves and all the world companies are interested in having even a small piece of the cake," said Kamel A. al-Harami, an independent oil analyst based in Kuwait and former president of Q8, the retail arm of the Kuwait Petroleum Co. "I do not think that security fears would play a major role in the decisions of the oil companies."

But extra precautions will certainly be on display after Tuesday's wave of deadly bombings that targeted government offices for the third time since August.

The last bidding round was held at a hotel in the Iraqi-guarded Green Zone. Friday's event was moved to the Oil Ministry building, which is under even tighter protection.

While the list of pre-approved bidders includes many of the same names — at least on the part of the international majors — that were present at the last bidding round, there was one significant snub.

Iraq's oil ministry dropped China's state-owned Sinopec Group for its $7.5 billion acquisition of Addax Petroleum, which has assets in the semiautonomous Kurdish region in northern Iraq.

The blow to Sinopec, which was among the more aggressive participants in the earlier auction, reflects the political dance which companies must concede to in order to tap into Iraq's oil.

The Kurds and Iraq's central government have been at odds over nearly two dozen deals signed by the Kurds with foreign companies after the U.S.-led invasion in 2003. Kurdish officials say they have the authority to deal directly with outside oil companies. But the government of Prime Minister Nouri al-Maliki says it is the only legitimate channel for oil deals.

The dispute has held up passage of a new oil law to govern the process. Washington had called the oil law one of its "benchmarks" for political reconciliation in Iraq, but debate has been further delayed until after parliamentary elections in March.

Fields contain high-quality crude
The oil fields up for bid are believed to hold at least 41.121 billion barrels of oil from Iraq's known reserves of at least 115 billion barrels. The headliners are two areas in the Basra region — known as the West Qurna Phase 2 and Majnoon fields — with more than 12.5 billion barrels each.

They also are called "green fields" because they have not been widely developed and will not require dismantling or retooling of old equipment. An added bonus is that many Iraqi fields have high-quality crude that can be extracted easily and at a relatively low production cost.

Iraq has held the line on what it is willing to offer.

The companies must accept 20-year service contracts and receive a flat fee per barrel produced for their services instead of production-sharing contracts, which are considered more lucrative. A joint-venture structure will give the companies 75 percent and the rest to the Iraqi side that gets to keep all the profits from sales — which could be tens of millions of dollars a year for the biggest fields.

Analysts say that while Iraq is still playing tough, it has learned some lessons from the failure of the last round, which saw only one deal signed on the spot out of the eight oil and gas fields on offer. Companies balked at the low per-barrel compensation Iraq was willing to pay.

BP PLC and its partner CNPC of China won the rights to develop Iraq's biggest oil field, the 17.8 billion-barrel Rumaila field in the country's south. Two other international consortiums have since revised their bids to develop two other prized oil fields near Rumaila.

"The Iraqis are a bit more relaxed with the terms, to a certain extent," said Cizsuk.

Strategic dilemma
The government has agreed to give international companies more operational control over the projects, he said, and has also clarified the taxes which would apply, eliminating at least one source of concern for the companies.

Although the current focus remains on the southern fields, companies keep an eye trained on the north. The oil fields around Kirkuk are another crown jewel, but major investment from foreign firms remains blocked by disputes between the Kurds and the central government in Baghdad.

Kurds exert wide influence over Kirkuk, which is outside the Kurdish enclave but they consider part of their historical territory.

Unlike the previous round, none of Kirkuk's fields is offered. But some nearby northern areas are up for grabs.

"Everyone is very interested in Kirkuk, but few companies want to wade into the strategic dilemma with the Kurds and Baghdad," said Ciszuk. "This is the big problem that Iraq needs to solve."