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Iraq's auction terms shock oil firms
Barrel fees far too low; reservoir damage higher than government realises.
- Reuters
- Published: 23:26 July 3, 2009
London: Iraq's first auction of contracts to develop its oil fields since the US-led invasion was not the bonanza for the oil industry that executives hoped, and has tempered eagerness to participate in future bid rounds.
Iraq closed the oil auction on Tuesday after awarding just one of the eight fee-paying contracts on offer, to a consortium led by British oil major BP.
The next day the Iraqi cabinet approved a contract for BP and China's CNPC to develop its massive Rumaila oilfield but rejected other bids for deals it had hoped would revive its struggling oil and gas sector. The cabinet refused offers for several further fields submitted by other foreign companies, some of which had been revised after a major tender on Tuesday.
It was unclear if the cabinet decision was the final word on the country's first major energy auction since the US-led invasion in 2003. For Western oil majors which have struggled to add new reserves in recent years - as the biggest reserves holders like Saudi Arabia and Russia keep their biggest fields for their state oil companies to develop - Tuesday's auction offered an unrivalled opportunity.
Investors feared the companies might even have been prepared to agree to loss-making deals simply to gain a foothold in such a prolific area.
But in the end, the two sides differed wildly on the value of the opportunity on offer and largely stuck to their guns.
While the government said it was prepared to pay maximum fees of around $2 (Dh7.34) a barrel for most contracts, some companies sought fees 10 times that level.
The $2 fee - which BP accepted after initially pitching for $3.99 a barrel - would make Iraqi barrels among the lowest margin barrels in the world.
Royal Dutch Shell Plc has said that it achieves a margin of $2-$4 a barrel in the Niger Delta, $20 in the United States and $10-$12 in the North Sea.
"The Iraqis have been pushing operators hard on costs and in some cases operators have preferred to walk away rather than accept an uneconomic solution," a source at one of the companies said.
The Rumaila contract which BP and its partner China National Petroleum Corp won will be worth around $1 billion a year over 20 years.
Iraq plans to hold another bid round later this year, offering companies the opportunity to invest in undeveloped fields.
However, after Tuesday's result, analysts said they were pessimistic about its chances. A senior executive at Maersk Oil and Gas, which participated in the bidding on Tuesday, said he was unsure whether his company would participate in the next round.
The failure of even Chinese oil companies - typically the biggest payers in auctions - to meet Iraq's demands is not a good omen for future bid rounds, IHS Global Insight Middle East Energy analyst Samuel Ciszuk said. Part of the reason for the chasm on value perceptions may be related to reservoir damage, Ciszuk said.
After viewing data on the fields in recent months, foreign companies may have concluded the damage, due to underinvestment in recent years, is greater even than Baghdad realises.
An employee works at the Tawke oil field near Dahuk, 400 km (249 miles) north of Baghdad, June 27, 2009. For the first time since the 2003 U.S. invasion to topple Saddam Hussein, global oil firms will have a run at Iraq's vast oil resources when Baghdad auctions off contracts in its biggest fields this month. Picture taken June 27, 2009.
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