In just four days in early November Baghdad signed three upstream deals that, if realized, will boost production capacity by around 4.8mn b/d – equivalent to a major oil producing region such as the North Sea. The awards have smashed a series of industry records, from capacity boost – they should see West Qurna Phase 1 and Rumaila become respectively the second and third most prolific oil fields in the world – to highest government take. However, turning the contracts into successful projects presents significant challenges.

While much could still go wrong, the headline-grabbing November signings represent a breakthrough after years of delays and false dawns for Iraqi oil development. And with a 150,000-200,000 b/d development on the Nassiriyah field due to be signed imminently and a second upstream bidding round with 35bn barrels of proven oil reserves to be awarded in December, Iraq appears poised to emerge over the next few years as a major global producer.

On 2 November an Eni-led consortium signed an initial deal aimed at boosting capacity at the Zubair field by 930,000 b/d. The following day, BP and CNPC attended a formal signing ceremony for their agreement to raise capacity at Rumaila by 1.85mn b/d. But these were eclipsed by an initial contract signing on 5 November by an ExxonMobil-led consortium for a 2.06mn b/d expansion of West Qurna Phase 1. All the awards are for 20-year service contracts, with a 25% state stake carried by the foreign investor. ExxonMobil and its partner Shell, along with an Eni-led consortium including Occidental Petroleum and Korea’s Kogas, made failed bids for West Qurna and Zubair in Iraq’s first upstream licensing round in late June (MEES, 6 July). But the firms later accepted Baghdad’s tough remuneration terms and rebid. The projects are all in Basra province in fields currently controlled by South Oil Company (SOC).

Both the Eni and Zubair deals will likely be presented to cabinet for approval soon, and the Ministry of Oil is likely to fast-track ratification, MEES understands. Political opposition to the ministry’s policy remains – Minister of Oil Husain al-Shahristani is to be questioned by parliament on 11 November (MEES, 2 November). Prime Minister Nuri al-Maliki has come out to back Dr Shahristani, accusing these who oppose ministry policy as inadvertently helping Iraq’s enemies. The oil ministry “signed many important contracts, which will boost Iraq’s production and exporting ability,” agencies report Mr Maliki  as  saying.  “For  that,  evil  supporters  of  the  past regime ... and al Qaeda ... want to send a message to investors through the last bombings,” he added referring to the 25 October double-suicide bombing in Baghdad, which left over 150 dead. The Iraqi government that comes in after parliamentary elections scheduled for January could well have a very different policy from that of Mr Maliki. But it would be a bold politician who would seek to overturn these three deals, given the extremely tough terms agreed and Iraq’s urgent budgetary needs, not to mention the inevitable diplomatic and investor backlash.

Security does present a formidable challenge, but the biggest obstacles are probably those associated with the contracts themselves and the sheer scale of the envisaged capacity jump, especially if significant awards are made in the second bidding round. Iraq does not have the ability to absorb such major development in such a short time, nor is it likely that the global oil services sector has the capacity to expand Iraqi capacity to more than 6-7mn b/d without putting severe strain on resources, costs, and quality project delivery. Outright oil prices will likely be affected, and such a transformation of Iraq’s status within OPEC is almost certain to have an impact on relations with Iraq’s oil producing neighbors, many of whom stand accused of already meddling in the country’s internal affairs (see page 27).

Potential For Compromise

BP and Eni have accepted $2/B for incremental barrels produced, while ExxonMobil will take $1.90/B. From these fees, 35% tax will be taken and costs, including those of the state partner, deducted. Companies will not receive a cent until 10% has been added to an agreed baseline production rate. When capital costs are recovered an ‘R-factor’ will come into play, reducing company take even further. “It is only the first seven years of this contract that counts. After that we get virtually nothing,” argues a source from one of the winning companies. Baghdad’s envisaged blueprint for development involves it building both the pipeline and export facility infrastructure needed. And regional oil companies will have to provide water for reinjection free of charge – given chronic water shortages a massive task and one that has “social and political aspects,” the source argues. “We look at this like we are the builder. Iraq wanted it cheap and dirty, we will give it cheap and dirty. But if half way through the job, they come and ask for extra things, then they will have to pay,” he argues. Another source close to the negotiations concurs: “Water is clearly a big issue and it is going to be problematic for the regional company to deliver on its own.” At the end of the day, changes are inevitable. “This gives us a seat at the table. This contract will undoubtedly morph into something different,” says the first executive. “Oil contracts are usually a work in progress,” notes the second.

One area of potential compromise could be over the discovered but not developed reservoirs in the three fields awarded. These, believed to be substantial in all three projects, will be subject to a separately negotiated remuneration fee. And Article 2 of the model contract stipulates: “For a period of six years from the Effective Date, the Contractor shall have the exclusive right to negotiate a separate agreement to explore for and develop the undiscovered potential reservoirs.” Iraq’s bidding rounds were designed to be transparent and deliver clear political results in terms of low fees and high production rates for the government. While the awards have been more or less successful, implementation could well be a messy and far from straight-forward affair.

BP, which already has 20 staff in place in Basra, will spend the next month monitoring Rumaila to determine a precise baseline production figure. This was quoted as 956,000 b/d when Rumaila was awarded in June, but the ministry argues that real production is running a good 50,000 b/d above this. A similar approach is likely to be applied to West Qurna and Zubair and eventual targeted increases could well be slightly less than the 2.847mn b/d implied from Round 1 bidding (see table).

ExxonMobil Fights Off Challenge From Lukoil

ExxonMobil had to fend off stiff competition to win West Qurna-1, with senior Russian politicians making last minute efforts to salvage a bid by Lukoil, MEES understands. When the two firms accepted the ministry’s $1.90/B remuneration fee, Lukoil is believed to have bid lower than a 2.1mn b/d production plateau offer from ExxonMobil, but the Russian firm subsequently revised its offer upwards and ExxonMobil was forced to respond. It is possible, given the lengthy negotiations and sheer scale of the US major’s undertaking, that terms may have been tweaked, but no details have been forthcoming. West Qurna is a personal project of Lukoil’s Azeri president, Vagit Alekperov, and the loss of Phase 1 is understood to be a bitter blow for the company.

Iraq’s First Licensing Round Awards

Note : units are '000 b/d for production, bn barrels for oil reserves, and trillion cu ft for gas reserves.

Source : Production Contracts & Licensing Directorate, Iraq Ministry of Oil, and industry sources. West Qurna Gas Reserves figure includes gas in West Qurna Phase 2.

© Copyright MEES 2009.