29 August 2008
China National Petroleum Corp.’s (CNPC) new 20-year service contract to develop Iraq’s Al-Ahdab oil field — the first oil deal signed since Saddam Hussein’s overthrow in 2003 — preserves some of the choicer elements of its 1997 production sharing agreement (PSA). But both sides offered concessions in a bid to bring the negotiations launched last year to a conclusion, Iraqi sources involved in the talks told International Oil Daily Thursday.
Under the deal signed Wednesday, CNPC will have a 75% stake in the joint venture set up for the work, with Iraq’s North Oil Co. (NOC) on 25% — the same as under the old PSA. NOC’s carried interest will be in the form of assets and local costs.
The new long-term model service contract being developed by the oil ministry for awards under the first licensing round is more likely to stipulate a 51% stake for the national entity, up from the original 25%, Oil Minister Hussein al-Shahristani said when the round was launched on Jun. 30. The model contract is being finalized with help from UK consultants Gaffney Cline & Associates.
Iraqi sources say one reason Iraq may have compromised on the national entity stake is that, unlike the six oil fields offered under the first bid round, Al-Ahdab is not a producing field. The field was discovered in 1979 with reserves of around 1 billion barrels, and four wells were drilled there in the late 1970s and early 1980s. It lies 60 kilometers south of Al-Kut and forms part of the central oil fields that also include East Baghdad and Balad.
The new service contract has an investment price tag of some $3 billion, versus $660 million for capital expenditure and $600 million for operating costs under the old 22-year PSA. Iraqi sources say the Chinese state giant argued during the negotiations that investment spending on Al-Ahdab should be five times greater than the 1997 estimate, while the ministry said it should be three times higher. CNPC also argued that the total should include a “security cost.”
CNPC will recoup its investment and be paid a fee on a sliding scale. The fee will be based on an “R” factor, calculated as total revenue divided by total cost. The fee will be as high as $6 per barrel in the early stages of development, when production will be low and spending high, but will decrease as output rises, dropping to close to $3/bbl once the production plateau is achieved. Total remuneration for the contractor will be linked to an internal rate of return of about 18%. Operating costs will be paid out of production.
The contract stipulates the date by which CNPC will recoup all costs, after which it will cease to be the operator and a joint operating company will be set up to take over. The date will be either when CNPC has recouped all its costs, or when the “R” factor reverts to one, whichever comes first. A joint management company will be set up from the start, even when CNPC is sole operator.
While the ministry accepted CNPC’s investment suggestion, it succeeded in pushing the peak production target from 90,000 barrels per day under the old contract to 110,000 b/d. After an initial three-year development phase, 25,000 b/d of output will start up in the fourth year and production will continue for the 20-year length of the contract. The 110,000 b/d peak is expected to be sustained for at least six years.
Iraqi sources said the ministry had been under pressure to reach a deal with CNPC after China’s Shanghai Heavy Industries was awarded a contract a few months ago to build a $940 million power plant in the Shiite-dominated Wasit province to be fueled by oil from Al-Ahdab.
The first of its four 280 megawatt units is expected to start up in three years, when about 15,000 b/d, or 60% of Al-Ahdab’s initial production, will be required.
The plant will later run on associated gas from Al-Ahdab, supplemented by gas from southern oil fields. The 1,120 MW plant will require an estimated 350 million cubic feet per day of gas, well over Al-Ahdab’s forecast gas output.
By Ruba Husari, Dubai
(Published in International Oil Daily August 29, 2008)