To Bid or Not To Bid

The first day of Iraq’s oil ministry’s fourth bid round confirmed what many people, including those who worked on the model technical service contract, had expected: conducting exploration and development on the terms offered under these contracts is going to be a hard sale.

Kuwait Energy with its partners, Turkey’s TPAO and UAE’s Dragon Oil, was willing to play by what’s on the table to secure Block 9 because it made commercial sense for this small privately-held company. The block is located on the Iraqi-Iranian border just 20 km from Basrah where the company has already set up operations when it was awarded the development contract for the Siba gas field. Block 9 had previously shown indications of hydrocarbons and speculation is that it could be an extension of the Azadegan field on the Iranian side of the border. Furthermore, its small size at just 900 sq km puts a cap on exploration and development costs, unlike blocks that cover thousands of square kilometers. Its proximity to gathering centers, just 140 km to Al-Fao crude depot and 20 km to the Bin Umar gas facilities, adds to its attractiveness. The $6.24 /barrel of oil equivalent bid by Kuwait Energy and its partners was not haphazard. It was based on the company’s own calculations of the project’s economics, and, according to insiders, just ¢25 below the oil ministry’s maximum remuneration fee. My hunch is that this company has more appetite and would seek to increase further its footprint in southern Iraq.

By contrast, failure to award Block 12, the only other block that received a bid from PetroVietnam and partners UK’s Premier Oil and Russia’s Bashneft, proved the ministry is a victim of its own transparency standards. By insisting on holding a public and fully transparent bid round, it deprived itself of the opportunity to negotiate a compromise midway between its own maximum fee of $5/boe and the one bid at $9.85/boe. At 8,000 sq km, Block 12’s economics were sure to work against the bidder, raising his costs and negatively impacting his remuneration which is tempered by an R-factor.

The outcome of the first day of bidding offers some insight into how the bid round was perceived by foreign oil companies, but the full picture will definitely emerge at the conclusion of day-2. Here is how I would read day-2 bidding as it unfolds:

Blocks 3, 4 and 5 are all gas blocks in an area that is not considered high risk in the same category as Blocks 1 and 2 offered on day-1, which suffer from being in proximity to both unsettled Syria and uneasy Nineveh province. Furthermore, the three blocks on offer on day-2 are in an area where other gas fields have been discovered, namely the Akkas gas field on the Syrian border and the Risheh gas field on the Jordanian side of the border. The same structures could extend further to cover Blocks 3, 4 and 5.

If the three blocks end the day unawarded, the lesson to draw is that exploration for gas will remain elusive under the current terms on offer regardless of how attractive the area or the underground potential is.

Block 8 will offer another perspective due to its proximity to disputed areas with the Kurdistan region. This factor could affect the bidders’ perception of risk. However, if together with the other three gas blocks 3, 4 and 5 which are unaffected by regional risk issues, it ends with no takers, this would confirm further that the unattractiveness of the gas blocks lies less with the risk issue and more with the terms on offer.

Though Blocks 7 and 10 are both oil prone and lie inland within populated areas that are well served by infrastructure, their potential varies significantly. Block 10 is within proximity of known oil structures in both Nassiriyah and Gharaf and within the same operation area of both oil fields currently being developed by South Oil Co. and Malaysia’s Petronas-led consortium respectively. Block 7  is not as well defined in terms of geology and structures. The fate of the two blocks on offer will definitely shed more light at how oil Blocks 11 and 12, un-awarded on day-1, were perceived by the potential bidders.

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