Iraqi Government Outsmarts Big Oil over Contracts

BAGHDAD, Nov. 5 (UPI) — The Iraqi government’s hardball tactics with oil majors demanding a bigger slice of the profits from taking over the country’s rundown oil fields are paying off.

Big Oil has caved in and is now meekly accepting the same 20-year deal the companies rejected at a June auction, the first such event in Iraq in nearly 40 years, because the prospect of Iraq’s vast untapped reserves was just too good to miss.

The majors have shown a new willingness to drop their demand for payment of up to $4.80 for every barrel they produce on top of current production levels and accept the $2 offer that the government has stuck to since the June action fizzled.

The companies will recover all costs under the terms of the agreements. The government has sought to sweeten the pot by easing taxation terms during closed-door negotiations.

On Tuesday, BP and China National Petroleum Corp., the only consortium to accept the Oil Ministry’s terms in June, signed Iraq’s first oil contract since Saddam Hussein’s regime was overthrown in the March 2003 U.S.-led invasion.

The two companies pledged to invest $15 billion to build up production at the giant Rumaila field west of the southern city of Basra, with reserves of as much as 20 billion barrels, to help boost national output to 6 million barrels a day in the next few years, second only to Saudi Arabia.

Their target is to almost triple production from the current level of 1 million barrels a day to 2.85 million.

Samuel Ciszuk, an energy analyst with the IHS Global Insight consultancy of London, said: “The incremental this project brings to Iraq is tremendous.”

The contract, the largest deal struck in Iraq “in many, many decades,” underlines “the extraordinary opportunities there are in Iraq,” he said.

As with other companies bidding for the new contracts, BP’s deal marks its return to Iraq after being booted out with other Western companies when the oil industry was nationalized in 1972.

Earlier this week, the Oil Ministry signed a preliminary agreement on the Zubair field — 4.1 billion barrels — in the south with a consortium of Italy’s ENI, Occidental of the United States and Korea Gas Corp. of South Korea.

The ministry is expected to award the giant West Qurna-1 field — 9 billion barrels — north of Basra in the oil-rich south to a consortium headed by Exxon Mobil and Royal Dutch Shell, according to Iraqi officials. That consortium was competing against ConocoPhillips and Lukoil of Russia.

The Rumaila, Zubair and West Qurna deals alone are expected to add 4.5 million barrels a day to Iraqi production, about 5 percent of global supply and triple Iraq’s current output of 2.5 million barrels a day.

These agreements augur well for the next round of tenders, covering 10 largely undeveloped oil fields, that is scheduled for Dec.11-12 in Baghdad.

“The big oil companies are reconsidering Iraq because they realize that this may be among their last opportunities to get large volumes of crude,” according to BusinessWeek.

A big prize for the companies is the vast Majnoon fields in eastern Iraq, with reserves that could be as high as 12 billion barrels. It will be up for grabs in December.

Another is the northern oil field around Kirkuk. It has reserves of at least 8.5 billion barrels. Shell hopes to secure a contract there.

With violence once more worsening in Iraq, there are considerable security risks. Kirkuk, for instance, is at the core of a potentially explosive dispute between Arabs and Kurds.

And parliamentary elections scheduled for January could bring in a new government that may scrap or revise the agreements with Big Oil.

BusinessWeek noted that another peril lurks on the horizon as well: a possible dispute with the Organization of Petroleum Exporting Countries, “which had assumed Iraqi production would remain low until the world regained its thirst for crude.”

Once Iraq’s output starts to grow, bringing in revenue vital to financing reconstruction, “the Saudis and other big producers are likely to try to persuade Iraq — which belongs to OPEC but is exempt from its quotas — to toe the line,” according to BusinessWeek.

“The Iraqis, though, may want to pump the maximum, arguing that other cartel members who have profited for years from Iraq’s market absence should bear any future productions cuts.”

Copyright 2009 by United Press International

Categorized | Energy & Fuels, Other
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