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Iraq hails oil auction but risky sites shunned

Iraq dubs its second postwar oil auction a triumph even as international companies largely snub the most violent regions in the Middle East's last major oil bonanza.
Oil industry officials sit in the audience as Iraqi oil officials go over offers Saturday during the auction at the oil ministry in Baghdad.
Oil industry officials sit in the audience as Iraqi oil officials go over offers Saturday during the auction at the oil ministry in Baghdad.SABAH ARAR / AFP-Getty Images
/ Source: The Associated Press

Iraq's oil minister began counting the money Saturday even before the first wells were drilled, dubbing the country's second postwar oil auction a triumph even as international oil companies largely snubbed the most violent regions in the Middle East's last major oil bonanza.

The two days of bidding produced deals on only seven of the 15 fields on offer. Of those, four were in the stable southern Shiite heartland while two in the north went to the only company that expressed interest: Angola's Sonogal. The last was in central Iraq, in a province where violence has remained low.

The auction was key for Iraq. Its oil bidding in June — the first in over three decades — largely failed, with only one giant field awarded out of eight offered. The hope was for a better showing this time. The deals are critical for boosting Iraq's oil exports — and bringing in revenue to help rebuild after the 2003 U.S.-led war and decades of neglect and international sanctions under Saddam Hussein.

Iraq has not been able to raise output to even close to pre-2003 levels and is limping along at roughly 2.5 million barrels per day using technology desperately needing an overhaul. That's well short of Iraq's goal of joining the ranks of other OPEC heavyweights and reaching 12 million barrels a day in six years.

Russians, Norwegians team up
On Saturday, Russian private oil giant Lukoil teamed up with Norway's Statoil ASA to snatch the crown jewel of the auction, the 12.88 billion barrel West Qurna Phase 2 field in southern Iraq. It was something of a coup for Lukoil, which won the contract in 1997 under Saddam, only to see the dictator rescind the deal five years later.

The U.S. companies at the auction, including Exxon Mobil Corp., stayed on the sidelines except for one failed bid by Occidental over the two days at the heavily fortified Oil Ministry.

The auction came after bombings Tuesday around Baghdad killed at least 127 people in a sobering reminder of the challenges the Baghdad government faces with the looming withdrawal of U.S. forces.

"It is a big victory for Iraq," Oil Minister Hussain al-Shahristani told reporters after the final field was auctioned. "It is a big achievement for Iraq to win such contracts at the current prices."

He estimated the two bidding rounds could eventually bring in $200 billion per year — more than three times Iraq's current annual budget, which is 90 percent built on oil revenue. Al-Shahristani and Prime Minister Nouri al-Maliki have both staked their political futures on promises of boosting oil output and improving security.

The size of the windfall, however, may be a case of wishful thinking.

Iraq exports between 1.8 million and 2 million barrels a day in any given month, and is not even included in the output restrictions on members of the Organization of the Petroleum Exporting Countries.

None of the U.S. supermajors like Exxon Mobil Corp. or Chevron submitted bids.

"We just decided not to bid," Richard Vierbuchen, president of Exxon Mobil Upstream Ventures (West) Ltd., told The Associated Press. He did not elaborate.

Companies such as Exxon Mobil and Britain's BP PLC are crucial for their technical know-how, which analysts say trumps that of some Russian or Chinese companies that have made aggressive inroads in Iraq.

The auction offered oil companies their biggest slice of Iraq's oil yet, roughly one-third of its 115 billion barrels in reserves.

Iraq more flexible this time
With a lesson learned from the June event, Iraq appeared to be more flexible in its terms. The government offered companies more operational control over the fields while still focusing heavily on the price it was willing to pay them for each barrel produced.

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 much more lucrative.

Success is vital for Iraq's leaders.

Political infighting has not only delayed passage of a national oil law, it has also meant that the Baghdad government can't even agree with the provincial government in the semiautonomous Kurdistan region over who controls oil rights there. Similarly, with elections coming up in March, al-Maliki and al-Shahristani, who is on the same ticket, need some political capital to ward off challenges from other top Shiite political leaders.

Debate on the oil law — which Washington had called a "benchmark" for political progress in Iraq — has been delayed until the new parliament is seated after the election.

The latest auction may, at best, be a step in the right direction — a face-saving event that officials can say saw the two biggest fields snapped up.

The Lukoil-Statoil consortium beat out three other groups led by BP, France's Total SA and Malaysia's state-run Petronas, nabbing the field with an offer to accept $1.15 per barrel of oil produced and to raise output to 1.8 million barrels per day in 13 years. That is more than twice the targeted daily output set by Iraq.

"We are very happy today," said Lukoil representative Andrey Kuzyaev.

Deals were also reached on Gharraf, a small southern field that went to a Petronas-led consortium that included Japex. Russia's Gazprom claimed a small central Iraqi field. The final field, in the north, went to Sonogal, which earlier in the day made an about-face and accepted Iraq's terms on another small neighboring field near restive Mosul.

Security at fields a concern
Even Gharraf's winners appeared concerned despite its location in the relatively calm south.

"It depends on the security situation," Katsuo Suzuki, Japex's vice president, said when asked when the companies would begin work. "We are in contact with several security companies to discuss the security situations and analyze carefully the situation to decide our program."

Three other central Iraqi fields were withdrawn from the bidding and Iraq said it would develop those alone.

A day earlier, a consortium led by Shell and Petronas won the rights to develop Majnoon, a 12.5 billion barrel southern field on which Total had bid. The French supermajor Total had eyed the field hungrily, also on the back of an earlier contract under Saddam that was also canceled.

A second major southern field was awarded Friday. Afterward, however, bidding tapered off and companies showed no interest in five fields offered in volatile eastern Iraq or near Baghdad.

Those fields were also withdrawn, and will have to be developed by Iraq.