Iraq Oil Report, October 20, 2009

ISTANBUL – A half dozen major international oil companies are close to deals with Iraq, on the heels of BP and the Chinese National Petroleum Corp., which are one step away from receiving the first new oil contract issued by Baghdad – for the largest oil field in the country.

The deals are part of the Iraqi Oil Ministry effort to bring foreign capital, expertise and technology to dramatically boost production in the underachieving yet third largest oil reserves in the world. Iraq holds 115 billion barrels of proven reserves but produces just around 2.4 million barrels per day (bpd).

Iraq’s prime minister and oil minister are in Washington, D.C., right now courting investment at an investment conference organized by Iraq’s National Investment Commission, the U.S. Embassy in Baghdad and the U.S. Chamber of Commerce.

The 17 billion barrel Rumaila field was awarded to BP/CNPC during a June 30 auction. After months of negotiations, the ministry and companies reached an agreement, which was approved last week by the Iraqi Council of Ministers.

Now it needs final signature by the two sides. "Hopefully it will be within two, three weeks," said Abdul Mahdi al-Ameedi, acting director general of the ministry’s Petroleum Contracts and Licensing Directorate – the dealmaker division of the ministry. Ameedi spoke at a press conference here Monday following meetings with foreign oil companies readying bids for another auction in December.

Oil companies in June balked at the remaining five oil fields on offer. But after a clarification of terms and the industry realizing the deals could be profitable – enough at least to not let BP and CNPC reenter Iraq alone – the chase is on.

The ministry is allowing companies which initially bid for fields to resubmit offers.

Exxon Mobil with junior partner Shell is in a bidding war with Lukoil and junior partner Conoco Phillips for the 8.7 billion barrel West Qurna Phase 1 project. (Phase 2 is included in the upcoming auction.) Ameedi said Monday that Total and a CNPC-led consortium have also expressed interest, calling it "mature and advanced stage of negotiation with these companies" which should end with an award within two weeks.

Eni with partners Occidental Petroleum and the Korea Gas Corp. will meet over the coming days to finalize an all but assured deal for the 4 billion barrel Zubair field. China’s Sinopec was also a partner in the initial bid, but has since been blacklisted for its investments in Iraqi Kurdistan’s oil sector, a complicated internal Iraqi controversy.

Shell, with partners CNPC and the Turkish Petroleum Corp. – minus Sinopec as well – is also in discussions about 8.6 billion barrel field.

Foreign oil companies, once in total control of Iraq’s oil sector, want access again after being nationalized out three decades ago, and have softened their stance to Iraq’s strict terms.

Wary of claims it is giving away Iraq’s most lucrative resource – oil sales account for 95 percent of the state revenue – the ministry remains adamant to keep as much oil revenue at home. Still, it must lure international oil companies that can help turn around oil fields damaged by mismanagement by Saddam Hussein, wars and sanctions.

Awarding only one out of the eight oil and gas fields offered in June was called a failure by critics of the ministry. Even top officials in the U.S. government went public telling Iraq to sweeten its terms. Companies said profits weren’t large enough for the risk associated with a still dangerous and politically unstable country.

The ministry said it has since better explained its terms but largely stuck to them. At a press conference last week in Baghdad announcing West Qurna and Zubair developments, Oil Minister Hussain al-Shahristani and government spokesman Ali al-Dabbagh said the strategy has been a success in guarding Iraq’s oil reserves for the best terms possible.

BP/CNPC’s contract pledges to increase Rumaila’s oil production from just around one million barrels per day now to 2.85 million bpd within seven years. It will do so for $2 for each incremental barrel produced as well as being reimbursed for capital and operational expenses.

The companies don’t get the entire $2 – what’s known as the remuneration fee. A 35 percent tax will be applied to it. The remainder will be split between the foreign companies and the state oil company partner, which has a 25 percent stake in each project.

The tax will only be applied to profit, not cost recovery, a clarification without which had been a turnoff originally to oil companies. It is "basically the same," Ameedi said, "but we made some clarification and we didn’t reduce the tax rate and we didn’t sweeten it for the sake of the (international oil companies)."

Most bids exceeded the ministry’s minimum production plateau but it was the remuneration fee that has been a thorn in the deals making. The companies wanted much more than the ministry was willing to pay.

The Exxon and Lukoil groups have both agreed to the ministry’s $1.90 per barrel fee for West Qurna, which is currently producing less than 300,000 bpd. Exxon lowered its June offer of 2.35 million bpd to 2.1 million bpd. Lukoil has countered with an increase from its recent 1.5 million bpd offer. Neither the company nor ministry is saying what that number is, but multiple sources have said it is more than the recent Exxon offer.

Latecomers Total and the CNPC-led group have not agreed to the remuneration fee or officially resubmitted their bid, Ameedi said.

Eni’s group has agreed to the $2 per barrel fee and to increase production on the Zubair field from 200,000 bpd to 1.1 million.

The Kirkuk field is more complicated of a sell for Shell. It is Iraq’s oldest field, commercially producing for eight decades. It also saw some of the worst oil field practices under Saddam Hussein and the sanctions, including reinjecting crude back into the field. Iraq needed the associated gas but didn’t have an outlet or storage for the oil.

It also flows from central government controlled territory into officially recognized Kurdistan Regional Government territory. The KRG has recently started producing oil from the part that flows into the KRG – called the Khormala Dome – sending it to a local refinery. This will complicate contracts for the Kirkuk field and central-regional government tension.

Thamir Ghadbhan, a top advisor to Prime Minister Nouri al-Maliki, said the Khormala Dome dispute will be solved, likely after January’s national elections.

Khormala is one of three domes, or separate but related structures, of the Kirkuk field. Shell’s bid in June "took into consideration the three domes and didn’t consider only two domes because of the situation in Kirkuk," Ameedi said.

Kirkuk is producing 680,000 bpd currently. Shells bid offered to raise this to 825,000 bpd. It wanted $7.89 per barrel remuneration fee; the ministry maximum was $2.