Iraq: Debating the Model

5 September 2008

Since launching its first postwar licensing round in late June, Iraq’s leadership has been struggling to reach a consensus on what commercial terms would best protect long-term national interests while offering quick and efficient solutions for an oil industry worn down by years of war, sanctions and scant resources. The main issue arising from the internal debate is who should operate oil fields — the national oil company or foreign contractors — and how they should divide interests in any partnership.

When it comes to operating Iraq’s oil fields — whether those now being offered under long-term service contracts or other fields in future tenders — the subject becomes politically loaded and highly sensitive. Some Iraqis, at home and abroad, consider bringing in international companies to operate Iraq’s most prized fields the equivalent of ceding control over national oil wealth to foreign firms. Where Big Oil is involved, the issue draws even more fire. Others, who recognize the need for foreign help, reject the proposed 20-year term for contracts and argue for a shorter period.

Iraq desperately needs foreign expertise to introduce new field and reservoir management techniques and bring operations up to date after more than three decades of Iraqi-only operations, during which the sector was cut off from technological advances. Production capacity, especially in the major producing fields of Kirkuk and Rumaila, has been declining steadily for years. Iraqi oil officials admit that without urgent remedies, long-term recovery of resources will be compromised. But to win approval for the introduction of foreign oil companies and reach a consensus, they need to insure that a revived Iraq National Oil Co (INOC) or existing entities North Oil Co. (NOC) and South Oil Co. (SOC), which will operate the fields until INOC is created, get the upper hand in managing Iraq’s oil.

Among the proposals put forward, one calls for limiting long-term partnerships with international oil companies to mature producing fields where drastic measures are needed. Fields simply requiring rehabilitation would use foreign firms in an advisory role, while engineering companies would execute work under NOC or SOC management. Another proposal would only involve engineering contractors at producing fields, with international oil companies enlisted for long-term development of non-producing fields.

For the first postwar tender, covering six oil and two gas fields, Iraqi Oil Minister Hussein al-Shahristani initially proposed that a state entity hold at least 25% in joint ventures with foreign companies. However, the matter was far from settled: After his statement met a chorus of complaints, the minister told Energy Intelligence in July that Iraq should control the operations.

Iraqi oil ministry officials have been debating whether the state entity should maintain 51%, or even up to 55%, especially where producing fields are concerned. A higher share would require Iraq to fund its share of costs, which could involve billions of dollars of investment, given the number of fields it intends to tender.

If the national entity does take a majority stake, projects could avoid complications such as a joint operating company. Instead, the state company would continue to operate the fields, with support from the foreign contractor on technical and managerial matters, including the rehabilitation and upgrading of existing infrastructure, and introduction of enhanced oil recovery. Those supporting this option argue that NOC and SOC proved their capabilities throughout Iraq’s challenging years of war and sanctions. To do otherwise, they argue, would risk marginalizing and antagonizing Iraq’s national oil industry.

The debate moderates where undeveloped fields and exploration blocks are concerned. Here, many are willing to accept a minority stake for the national entity in order to make full use of foreign expertise under a joint operating company. That option would also allow better transfer of knowledge to a new generation of Iraqi oil workers.

Iraq is set to hold a road show Oct. 13 to present terms for the first bid round. As things stand today, the model contract — a technical service contract for producing fields — is more likely to assign a 51% participating interest for the national entity and 49% for the foreign companies. That should guarantee political support.

Still to be decided is who would act as operator. One idea on the table is for NOC and SOC to set up subsidiaries for each field, which would then enter partnerships on a 51-49 basis. Staff working the fields for SOC and NOC would be transferred. By law, NOC and SOC are operating rather than holding companies, so a legal solution would be required to define exact roles and responsibilities.

Compass Points

SIGNIFICANCE: For Iraq’s first upstream opening since nationalization to succeed, relations with international oil companies must be clear and well defined to insure long-term contractual stability. The current debate will shape the conditions under which foreign companies will operate in Iraq, although officials believe the model for the first opening will probably not be the only one used in the long run.

CONTEXT: Oil Minister al-Shahristani is under pressure to deliver. He can benefit from political consensus on the need to press forward in developing Iraqi oil with outside help, but needs to build a similar consensus on the process of awarding contracts. Without this, Iraq risks standing still for years.

• NEXT: Iraqi officials have less than six weeks until the October road show to hammer out details of the offer. Other deals are being agreed on the sidelines — after China clinched a revised contract for the Al-Ahdab field, Royal Dutch Shell could sign a heads of agreement for a southern gas project if the cabinet gives the go-ahead next week. All eyes would then turn to al-Shahristani as he meets 34 prequalified companies in London.

By Ruba Husari, Dubai

(Published in Energy Compass Sept. 5, 2008)

Leave a Reply