24 August 2007
When Iraq eventually opens again for upstream business, the new rule in town will be competitive bidding — as opposed to former one-on-one negotiations. In effect, this will throw the game open to all for giant fields previously negotiated by international firms, such as West Qurna, Majnoon and Nahr bin Umar. Alliances have already emerged between some companies — including Russian Lukoil and US ConocoPhillips, Chevron with Total, and Royal Dutch Shell with Australia’s BHP Billiton — and more are expected to shape up in the future. These aim at consolidating positions and gearing up for the upcoming competition, even though controversial production sharing agreements (PSAs) might not be on offer.
Iraqi Oil Minister Hussein al-Shahristani told Lukoil on a Moscow visit this month not to expect any political favors from Baghdad regarding its old PSA for the West Qurna field, signed with the former regime of Saddam Hussein. Though disappointed, the Russian firm, with backing from US partner Conoco, is well placed to win any competition for development of the northern part of the West Qurna field known as Phase 2; the first phase involves the southern part being developed by the Iraqis themselves. The Lukoil-Conoco alliance offers financial strength — an important consideration given that the 600,000 barrel per day project’s cost, estimated at $3.8 billion under the mid-1990s contract, is likely to come in close to $8 billion today, industry experts reckon.
Total and compatriot Elf Aquitaine, which have since merged, always benefited from a favorable political relationship between Baghdad and Paris and were invited to bid exclusively in the 1990s for two giant fields, Majnoon and Nahr bin Umar. The two companies separately negotiated detailed contracts for the two fields, but failed to lock these up as firm deals, even though dates were set for signing ceremonies in mid-1997. At the time, both companies were contemplating operating the fields with a stake of 40%, opening the rest to others.
Enter Chevron: In an attempt to reduce the risk of losing the fields to newcomers, Total has forged an ad hoc alliance with the US major, which has sought to build good relations with Iraq since the 2003 war. For its part, Chevron gained a shortcut compared with the six years it took Total and Elf to complete detailed draft contracts and even draft oil purchase agreements. Again, the partnership gives financial muscle, when the price tag of developing the two fields is likely to be at least double the previously estimated $7.5 billion.
The same logic applies to Shell’s approach to BHP. The Australian company enjoyed good relations with the previous regime and was involved in detailed negotiations for the development of oil fields in the Amara area of the southern Missan governorate, including the 4 billion barrel Halfaya field. In forming an alliance with BHP, Shell neutralized a rival in an area targeted by the Anglo-Dutch major in a three-pronged Iraq strategy developed since 2003. Shell’s strategy seeks a presence in the north through detailed reservoir studies for Kirkuk, which could open the way to further development of the giant field; in the south with the Missan area, where it has invested in the training of local oil staff and sent production equipment; and in the gas sector, where it is working on a master gas plan for the Iraqi oil ministry and angling for gas fields in the northeast, in partnership with Turkish companies that were involved in developing a gas export scheme in the 1990s.
Iraqi officials say the draft petroleum law — bogged down in political wrangling — encourages the formation of consortia. They also expect new ones to emerge, motivated either by tactical considerations — to enlist help or reduce competition from those with a technical advantage built in the 1990s — or by a desire to strengthen bidding power by combining technical expertise and financial capacity.
Old alliances may also be revived or restructured. A consortium of Algeria’s Sonatrach and two Indian firms, Oil and Natural Gas Corp. and Reliance Industries, which held advanced negotiations on development of the Tuba field, is considered one such candidate, even though the 1.6 billion bbl field is now in production and would be operated by a recreated Iraq National Oil Co. The Nasiriyah field, with over 4 billion bbl of reserves, is also expected to attract strong interest, as one of 26 fields that Iraq wants foreign companies to operate. Spain’s Repsol YPF and Italy’s Eni were both involved in detailed technical negotiations on that field in the late 1990s. Another to watch is Gharraf, previously targeted by Turkey’s TPAO and Japan’s Japex.
Compass Points
• SIGNIFICANCE: Even though the Iraqi government is in disarray and the fate of oil legislation remains unknown, oil companies are focused on the long term — and still hope the country will open up to foreign investors. To reduce political and financial risk, and better position themselves, some top companies have already forged alliances, and more are expected.
• CONTEXT: PSAs offered in the 1990s to undermine sanctions are unlikely to be available again, as they are now viewed as ceding too much to foreign investors. Iraqi technocrats prefer a development and production contract model, a modified version of buyback. Fields have huge reserves and multiple reservoirs, offer strong production rates, and in some cases have a well established production history — eliminating the technical risk, they argue.
• NEXT: The opening of Iraq’s oil sector is dominated by “if and when” questions, and it’s hard to see the political chaos and rampant insecurity ending anytime soon. Baghdad wants to prioritize a handful of active upstream contracts dating to the old regime. In the meantime, the only serious prospects lie in the Kurdish north — and even there, political risk is high.
By Ruba Husari, Dubai
(Published in Energy Compass Aug. 24, 2007)