25 February 2000
Iraq has finally started negotiations on its first modified buyback agreements, offering contracts with an average term of 12-15 years to a number of Asian companies – including Malaysia’s Petronas, which is discussing a deal for the 200,000 b/d Ratawi field.
Iraq believes buyback contracts may prove easier to implement than production-sharing contracts (PSCs) once United Nations sanctions prohibiting investment are lifted. “We want something we can really implement and we think the old type of contracts [PSCs] are more complicated in the present circumstances,” says an Iraqi industry source.
However, the key determinant of the buybacks’ success will be their attractiveness to foreign oil companies. At first glance, the contract periods appear competitive, though Iraqi officials warn that they may be for less than 12 years, depending on the field. Iran, in comparison, offers five-year buybacks. “The Iraqis know that competition is high and if they are to succeed, they have to offer better terms,” says an industry source.
The contract period is divided into three phases: development, hand-over, and sustained production. During the development, the contractor would be operator, though Baghdad would like to see an Iraqi company, such as the State Oil Marketing Organization, take a 10%-15% equity stake.
The rate of return available under the Iraqi buybacks – the key measure of their attractiveness – is subject to negotiation, though a fixed return on capital expenditure is on offer. Analysts say companies will need to make more than 20% of capex, including banking and political risk insurance charges – slightly better than the terms available in Iran – to be persuaded to put their money into Iraq.
Even then, it remains to be whether the new Iraqi contracts will prove sufficiently sweet to attract the oil industry’s big guns. Some Western executives believe that the major oil companies – which Iraq wants in its upstream – will not be lured into Iraq by anything less juicy than the 23-year production sharing contracts (PSCs) Iraq has signed with Russian and Chinese consortiums. “Iraq’s crown jewels will not be handed to newcomers,” says an executive at one major oil company. “The Iraqis have been courted by different sorts of companies, most of which don’t have the experience or the financial means for risk taking.”
Iraq is also trying to shift Western Desert exploration contracts to buyback terms, but Western sources say there will be no takers, given the risk involved.
TotalFina and Elf have negotiated, but not yet signed PSCs for the Bin Umar and Majnoon oil fields, respectively. It is understood these contracts will not be converted to buyback terms.
Separately, BP Amoco and Sonatrach said this week they would press ahead with development of the $2.5 billion In Salah gas project. BP Amoco has drilled five appraisal and four exploration wells since signing the contract in 1995. First gas flows are expected in 2003, plateauing at 10 billion cubic meters per year. Some 8 Bcm/yr in sales have already been lined up.
Speaking at a London conference, Haltalli could not precisely define the new agency’s role, but said Sonatrach would no longer have to deal with “politically tinged” affairs. For foreign firms, the main questions are whether the new agency will favor the state or external investors, and whether it will cut or add to red tape.
Ruba Husari, London
(Published in Energy Compass, 25 February 2000)