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Iraq to auction oil fields in bid to become major producer

BAGHDAD
Petroleumworld.com, Dec 10, 2009

Major foreign oil firms will converge on Baghdad on Friday for an auction of 10 oil fields as Iraq bids to ramp up output dramatically and become one of the world's biggest crude producers.

The December 11-12 bid round comes just days after a spate of bombings rocked Baghdad and killed 127 people, underlining the fragile security situation in a country still recovering from years of war and sanctions. The oil ministry insisted, however, that the attacks would not affect the auction.

Iraq relies heavily on oil sales for economic growth and government revenues, and ministers will be hoping the bid round generates positive headlines ahead of a general election slated for March 7.

"It (the auction) is of enormous importance," Alex Munton, Middle East Analyst at research group Wood Mackenzie told AFP. "It has the potential to make a very substantial addition to Iraq's production capacity."

"You're talking about some of the largest fields in the world -- opportunities like this simply don't exist anywhere else."

The biggest oil fields on offer in the bid round, which follows a similar auction in June, are the giant West Qurna-2 and Majnoon fields, which have estimated reserves of 12.9 and 12.6 billion barrels of oil respectively.

Some 44 foreign energy companies will also have an opportunity to bid on two other major fields -- East Baghdad and Halfaya -- which have reserves of 8.1 and 4.1 billion barrels.

Majnoon is situated in southern Iraq, near the Iranian border, while West Qurna-2 is slightly further west and Halfaya further north.

Among the companies involved are energy giants BP, ExxonMobil, Chevron, Total and Shell, along with multiple Chinese and Indian firms, a sign of those countries' rising oil demand.

"International oil companies have realised by now that the second bid round is their last chance to get into the country," said Ruba Husari, the Baghdad-based founder and editor of www.iraqoilforum.com.

"As a result there will be a big competition."

The auction kicks off just three days after five co-ordinated bombings struck Baghdad on Tuesday, mostly targeting government ministries, the third such attack since August.

Oil ministry spokesman Assem Jihad insisted, however, that the attacks would not derail the new bid round.

"Preparations for the auction are ongoing," he told AFP. "The explosions will not have any effect on the procedures or the auction. In fact, there is an even stronger insistence that we hold the auction."

This year marks the first time foreign energy firms have had the opportunity to plant a foot firmly in Iraq since nationalisation of the Iraq Petroleum Company was begun by the Baath party in 1972, seven years before now-executed dictator Saddam Hussein took power.

Successful companies will be paid a fixed fee per barrel, not a share of the profits, and the fee will only be paid once an agreed production threshold is reached.

The first bid round in June ended poorly as only one deal was reached at the time, with BP and China's CNPC, because of a perceived low return on investment offered by the Iraqi government.

Since then, however, two other foreign consortia have agreed to the tough terms and signed agreements with Baghdad, which wants to boost production to seven million barrels of oil per day (bpd) within six years, from the current level of 2.4 million barrels.

In the longer term, oil minister Hussein al-Shahristani is targeting 10 to 12 million bpd, which would rival Saudi Arabia in terms of overall output.

"The June auction proved that Iraq is open for business but only on its own terms," Husari told AFP. "The fact that it desperately needs foreign help does not mean it’s not giving anything away."

The upcoming bid round differs from the earlier one in that most of the fields on offer this month are not producing any oil at present, whereas most of the projects available in June involved increasing existing output.

Iraq has the world's third-largest proven oil reserves of 115 billion barrels, behind only Saudi Arabia and Iran. Oil sales provide 85 percent of government revenues.

However, there has been little exploration or development of fields in the past three decades because of wars and an embargo imposed on Iraq in 1990 following Saddam's invasion of Kuwait.

The country is also waiting on a key hydrocarbons law, discussion of which has been delayed until after the elections.

The proposed law, which would regulate the sector and divide responsibility between Baghdad and Iraq's provinces, has been held up for three years due to disagreements between MPs from the country's various communities.

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