26 September 2008
Judging by the way preparations are going at the oil ministry in Baghdad, Iraq’s second postwar bid round promises to be even more controversial than the first.
When launched in late June with six producing oil fields and two gas fields, the first offering was slammed by some as selling off the country’s crown jewels. According to plans now being drawn up, Iraqi Oil Minister Hussein al-Shahristani could offer 16 more oil fields to international oil companies as early as October. Critics claim this would effectively place all of Iraq’s oil production in foreign hands.
Discussions are still continuing at the ministry’s headquarters to finalize the list of fields to be offered in the second round. If all preparatory work is concluded, the plan is to unveil it on Oct. 13, when ministry officials are scheduled to meet representatives from 34 short-listed companies for a London presentation on the first tender.
The initial list discussed this week in Baghdad included four major fields and one discovery in Basrah province, including the prized Majnoon and Nahr bin Umar. French major Total negotiated and initialed production sharing contracts (PSC) for these two fields in the late 1990s, but stopped short of signing definitive deals due to sanctions. China National Petroleum Corp. (CNPC) and Russia’s Lukoil did sign deals for the Al-Ahdab and West Qurna Phase 2 developments, respectively. CNPC just concluded a revised service contract for Al-Ahdab, but Lukoil, despite strong lobbying, has failed to revive its deal, which was canceled by the previous regime in 2002.
Baghdad now plans to offer West Qurna Phase 2 under the second bid round, as well as the Subba field and Sindibad discovery on the Iraq-Iran border. Iraqi oil officials have long suspected that Sindibad could be an extension of Iran’s large Azadegan field.
Also on the list of 16 fields are Halfaya, Nur, Nasiriyah and Gharraf in the south; East Baghdad and West Kifl in the central region; and Qayiarah and four fields in Diyala province in the north.
The new offering looks bound to provoke controversy, as divisions still exist within Iraq’s oil establishment over how far Baghdad should open its oil sector to foreign companies. In internal discussions, sources say that some officials have argued in favor of limiting producing fields to short-term service contracts or engineering, procurement and construction contracts, while bringing in foreign help to develop appraised but undeveloped fields under long-term service contracts.
Others have called for a “moment of truth” admitting to the limitations and deficiencies of Iraq’s ability to meet its long-term objectives through its own efforts alone. Objections to the involvement of foreign companies in speeding up Iraq’s recovery, which would see its return as a strong player on international oil markets, stem from “misplaced nationalistic sentiments,” proponents of this line say. Most of the 16 oil fields on the list were offered to international oil companies under Saddam Hussein’s regime, first as PSCs in the mid-1990s and later under a development and production service model in 2000, they add. Production sharing-style contracts have been ruled out by Iraq’s federal government, as a sensitive nationalist issue.
Another controversial issue concerns the fate of Iraq’s state operating companies — South Oil Co. (SOC), North Oil Co. (NOC) and the newly created Missan Oil Co. — after international companies are operating all the oil fields, most likely under field-by-field joint ventures. One proposed option would turn SOC and NOC into holding companies that own the state share in joint ventures. Iraq National Oil Co., if reestablished in the future, would then take over this role, encompassing SOC, NOC and any other subsidiaries.
While exposing divisions, the discussions now taking place on the way forward indicate a new openness in the political process. The oil minister seems determined to build a consensus on each step on the long road of the upstream opening.
Compass Points
• SIGNIFICANCE: The successful launch of a second upstream bid round — hard on the heels of the first tender and before the first contracts have been awarded — would send the signal that Iraq means to do business again, in an open and transparent manner. Baghdad would also score more points in its contest with the northern Kurdish government, which awarded a series of contracts in opaque direct deals.
• CONTEXT: Oil Minister al-Shahristani has the cabinet’s backing to put development of Iraq’s oil fields on a fast track, toward a 6 million barrel per day long-term capacity target. To avert criticism, he chose the service contract model. But nationalist sentiment runs strong in the oil establishment: Some want to see a more balanced distribution between local and foreign companies in operating Iraqi oil fields, or to limit international operations to undeveloped fields.
• NEXT: A final list for the second tender should emerge in the next three weeks. Iraqi sources say it’s likely to be similar to the current version, plus or minus a couple of fields. Baghdad will also issue a new list of international oil companies qualified to participate in the offering.
By Ruba Husari, Dubai
(Published in Energy Compass Sept. 26, 2008)