25 April 2008
India’s state Oil and Natural Gas Corp. (ONGC) and Indonesia’s Pertamina recently opened talks with Iraq’s oil ministry about renegotiating exploration contracts signed with the Baath regime before the war in 2003, Iraqi officials told International Oil Daily Thursday.
The two companies met with Iraqi ministry officials in Amman last week to adapt the deals to the new model contracts — called Service Exploration and Production Contracts (SEPC) — the ministry is introducing for exploration deals. Financial terms will also have to be renegotiated to take into account the new scope of work, as well as cost and oil price increases since the original deals were signed, the Iraqi officials said.
Article 40 of Iraq’s draft hydrocarbon law — which still has to be agreed by political parties before being put to a parliamentary vote — stipulates that the oil ministry has to review all contracts signed with the former regime “before the law enters into force to ensure harmony with the objectives and general provisions of the law.” To become valid, new contracts have to be approved by the Federal Oil and Gas Council, to be set up under the draft legislation.
ONGC was the first company to sign an upstream deal with Iraq in November 2000 under the new exploration, development and production contracts that replaced production sharing contracts (PSC). The contract for the 8,000 square kilometer Block 8, at the southern tip of the Western Desert, was part of Iraq’s drive to lure Asian and “friendly” countries to trade with Baghdad outside the UN oil-for-food program.
The 16-year deal included a five-year exploration phase, with a possible two-year extension. It stipulated that development would be in three stages, in which ONGC would be sole operator for the first five years before handing operation over to the Iraqi national oil company over the next two years. In the final phase, the Iraqi company was to be sole operator, though ONGC could obtain a technical service contract running for up to 15 years, with a provision for an extra two-year extension of any of the development phases.
Remuneration and cost recovery were both to come out of field production — up to 10% for the former and 50% for the latter. Incentives included an option to lift up to 25% of production for 15 years after handover at market prices. Under the old model contract, companies were not allowed to book reserves.
Under the new SEPC, the exploration period has also been set at five years with a possible two-year extension, but the development and production phases have a 20-year cap. The model contract also stipulates payment to the government of signature, discovery and production bonuses, in addition to a 12.5% royalty.
By the time of the US-led invasion in March 2003, ONGC was in the process of gathering new data and processing old data. In early 2003, it presented a technical report to the oil ministry that set out its proposals for field work, and the ministry approved the exploration program. On the eve of war, ONGC was preparing to move equipment to the block and to tender for seismic work.
ONGC, India’s biggest upstream producer, is a long-standing player in Iraq. It discovered the Abu Khema field in Block 8 in 1974, although the find was deemed noncommercial. Before the war, it was also talking to the oil ministry about a development contract for the Tuba oil field as part of a consortium that included fellow Indian firm Reliance Industries and Algerian state Sonatrach.
Pertamina signed a similar contract in 2002 for Block 3 in the Western Desert, next to the Saudi border. The deal was ratified at the end of 2002, but the Indonesian firm never started work.
Companies from Russia, Turkey, and Europe were also negotiating for exploration blocks in the Western Desert before 2003, but none signed on the dotted line. The only other exploration contract signed before the start of war but not ratified was with Russia’s Stroitransgas for Block 4.
State China National Petroleum Corp. resumed negotiations last year on a PSC for the Al-Ahdab field it signed in 1997 with the goal of turning the deal into a long-term field development service contract. State Petrovietnam’s development and production contract for the Amara field, signed after 2002, would also require renegotiation. Russia’s Lukoil, meanwhile, has been pushing for the reactivation of a PSC for the West Qurna field — signed in 1997 but abrogated in 2002 — so far without much luck.
By Ruba Husari, Dubai
(Published in International Oil Daily April 25, 2008)