There is a bonanza for international oil companies who managed to make an early entry into Iraq. Operators like BP, Eni, Exxon Mobil – and to a certain extent CNPC which managed to convert its 1997 production sharing agreement for the development of Al-Ahdab field into a service contract last year – will have first call on the limited infrastructure capacity to absorb the new crude they will start pumping over the next few years. Those who will succeed in clinching a few deals in December might struggle with bottlenecks in pipelines and export facilities once the fields they are meant to develop come on stream. But it’s mostly a challenge for Iraq to cater for these capacity additions in time. Here, pragmatism will be needed more than anything else.
However, the biggest constraint on the late comers is more likely to be imposed by the government. Once Iraq’s production capacity hits 3.5 – 4 million b/d, Baghdad will most likely try to turn the taps off or at least reduce the flow in order to cope with the pressure from Opec on one hand and from markets on the other. Iraq is no less sensitive than its fellow neighbors to oil windfall and will be desperate for high oil revenues for long years to come.
The model contract that will be used to sign 20-year deals in December has provisions for this. It gives the regional oil company the right to review the proposed level of production as stipulated for in the approved work program, as a result of “government imposed curtailment”. The cuts, the contract states, will be applied “in a non-discriminatory manner” to all of its production.
Companies, who are just as sensitive to the oil price as governments, might have no choice but to accept the compensation offered under the terms of the contract. This includes the suspension of the performance factor adjustment to the remuneration fee during the periods when production rates are decreased, and a mechanism – to be agreed – to fully compensate the companies, such as a revised production schedule or an extension to the term or payment of lost income from volumes not produced during the period of curtailment of production.
The launch of Iraq’s two licensing rounds made up of a mix of producing and non-producing oil fields was not done on the basis of a well-thought long-term plan. It was rather an ad hoc exercise that was initially meant to compensate for the failed exercise of the Technical Support Contracts (TSC) and later to try to offset the lost production as a result of natural decline and plummeting oil revenues once oil prices started nose-diving. That long-term upstream and downstream integrated planning is still needed, today more than ever, to avoid chaos in the future.