17 October 2008
Iraq finally unveiled the terms of its big upstream opening. International oil companies now realize that to win a 20-year service contract to rehabilitate and redevelop some of Iraq’s giant oil fields, they need to offer it high production targets at the lowest cost. For committing to spend money on rehabilitation of infrastructure and drilling of wells as well as a new reassessment of recoverable reserves in each field, something that is long time overdue, they will be paid back their capital investment, their operating cost and a remuneration fee that is linked to a weighted index. Since they can choose to be paid in kind and the long term contract guarantees a minimum lifting of oil, they will be able to book reserves. Beyond the revamping of currently producing reservoirs, which form the basis of the proposed contracts, they will also have the chance to develop other non producing reservoirs and even explore for new deeper ones which could form the subject of a new contract with different terms in line with the risk associated with the task. All in all, it’s not a bad contract for the industry which is suffering from the lack of access to reserves on the global level.
Not withstanding the logic or benefit of signing in foreign companies to develop already producing fields on long term contracts, the deal so far is not a bad one for Iraq either. The state holds a majority stake in any partnership with any oil company or consortium and it gets cash starting with the participation fee for each bid. It cashes in on a signature bonus for each of the eight fields on offer which could go up to $42.5 million for a field like Rumaila which is currently producing over 950,000 b/d. It will not disburse any payments in the first two years of the contract as repayment of cost and fees can only be made from incremental oil above the base production. The state will also cash in on tax which companies will pay at a rate of 35% on net profit.
The biggest win for Iraq might be the fact that no contract is awarded without fair and open competition. Majors who were involved in negotiating two-year technical service contracts earlier this year sought and failed to get guarantees that they would be picked to develop the same fields once long term deals are on offer. Now they have to compete against other companies in their league and even companies that are not.
Still, a big question is what will be the role of the regional oil companies like North Oil Co, South Oil Co and the recently created Missan Oil Co., once a local operating division is set up for each field from within these companies, as is envisaged in the initial model contract under consideration. In a bid to stave off criticism of handing over control of the country’s prolific oil fields to foreign operators, Iraqi architects of the upstream opening created a set up that is complex and vague. By granting the foreign investor the role of co-operator, it is not obvious who has the upper hand in running field operations and how responsibilities, including for achieving the targeted output, can be divided between the old and the new.
Opaque formulas might have helped create consensus whenever it was needed in Iraqi politics but such formulas promise disaster when it comes to the oil industry. What Iraq needs to get its oil sector to make the leaps it missed on for years, is clarity.
Ruba Husari, Dubai