Iraq Starts Countdown for Contract Awards

14 October 2008

Iraq’s oil ministry on Monday launched a competition among 35 international oil companies for six of Iraq’s most prized oil fields and two undeveloped gas fields under 20-year service contracts, which Iraqi Oil Minister Hussein al-Shahristani said he expects to be “finalized and presented to the Iraqi cabinet for ratification before the end of June.”

Prequalified companies for Iraq’s first bid round, including all the majors as well as many national oil companies, will compete based on fees they will charge Iraq for helping to stop the decline at producing fields and add incremental output as well on production targets they will seek to achieve, Iraqi officials said following a meeting with oil company executives Monday to outline the bidding process and contractual terms.

Tender protocols and data packages will be made available to the participating companies by the end of the month, one ministry official told International Oil Daily following the one-day briefing. Following that they will be required to pay a participation fee for each field they intend to bid on ranging between $250,000 for the two non-producing gas fields on offer and $500,000 for the giant producing fields.

According to the timeline announced, the ministry will hold contractual and technical workshops in early 2009 and will receive comments on the draft contract from the companies up to late March. The final tender protocol will then be sent to all bidding companies, which will be expected to submit bids between May and June 2009, ahead of the awards.

The 35 companies invited to the London road show include 34 firms that had been announced earlier this year in addition to Turkey’s TPAO, which was added later after Premier Oil was dropped from the initial list after it failed to satisfy the technical criteria for prequalification.

Companies bidding for the six oil fields of Rumaila, West Qurna-phase 1, Zubair, Missan, Kirkuk and Bai Hassan will be classified in three categories, the head of the ministry’s petroleum licensing and contracting department, Natiq al-Bayati, announced at a press briefing. One category of companies will be allowed to bid on all oil fields save the two giants of Rumaila and Kirkuk, which will be reserved for a second category of companies with operations globally producing more than 500,000 barrels of oil equivalent per day. A third category includes companies that do not qualify to operate fields but will be able to participate in consortiums led by operators. Consortiums will be limited to three bids only. A fourth category defines companies qualified as gas operators.

Iraqi officials said companies awarded contracts would be expected to sign the final agreement within three weeks of the award in order for the council of ministers to ratify the final deal. All would be expected to open offices in Iraq within 90 days of the effective contract date. “Current conditions in Iraq do not represent a force majeure condition,” al-Bayati said.

Foreign companies will be expected to pay corporate income tax at a rate of 35% on net taxable profit, the Iraqi official said.

Under the service contract, companies will pay a signature bonus of $10 million plus a sliding $50 for each barrel above current baseline production depending on each field’s expected plateau. The remuneration fees, which will be payable in cash or oil, will be split into a maintenance fee and an incremental fee. Both fees are part of the biddable parameters. The nonproducing gas fields’ biddable parameters are a fee for each million cubic feet to be produced and production target rates.

Remuneration under the service fee will be deferred until the incremental production comes on line for the oil fields, which is expected to be within 24 months of the effective contract date or once incremental production hits 10% above baseline production. Remuneration will start on first production for the gas fields.

The service contract will be signed between a foreign company or a consortium of companies and a state partner based on a 51% majority stake for the Iraqi entity, with current regional operators state North Oil Co., South Oil Co. and Missan Oil Co. acting as the client. The regional operators will create a field operating directorate for each field within 30 days of the effective date of the contract, which will take control of the operations. A joint management committee will ensure supervision and control of the field operations.

Iraq’s oil ministry is keen to sign the first service contracts to send a message that production sharing contracts, a taboo in postwar nationalist Iraq, are not the only game in town. Al-Shahristani said the model service contract will be made public once it’s finalized.

By Ruba Husari, London

(Published in International Oil Daily Oct.14, 2008)

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