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A Shell Stunt

After watching Royal Dutch Shell go for the kill on Majnoon oil field, I’m stunned and I’m sure I’m not the only one. I expected companies to try and undercut each other to win one of the fields offered in the second bid round, before the door of Iraq oil closes again. But I didn’t expect them to go way below the maximum remuneration fee the oil ministry was willing to pay for the development of the giant Majnoon. The obvious question is: would the deal be profitable for Shell at $1.39 per barrel it offered compared to Total’s $1.75?

Consider this: Just for the 10 years when Majnoon would be producing at its peak or plateau production of 1.8 million b/d bid by Shell, and after paying the Iraqi partner its 25% share of the profit and then paying 35% tax on the remaining windfall, Shell is expected to make $4.45 billion in net profit. That’s hardly a bad deal for an international major.

More importantly, the $1.39 per barrel fee offered and agreed for developing Majnoon sets a new benchmark following the $1.9-$2 per barrel fees offered by the ministry for the three fields awarded in the first bid round, Rumaila, West Qurna-1 and Zubair.

The second contract for Halfaya oil field awarded Friday to a CNPC-led consortium was not too far with $1.4 per barrel fee bid and won. However, with about half a million barrels to be produced at peak for a minimum of 13 years, the net profit for the duration of the contract is nowhere to be compared with that of Majnoon.

West Qurna-2 will be the last of the giants to be awarded on Saturday and it could yet bring even more dazzling surprises as those who lost on the first three fields of similar size – in addition to Zubair and Halfaya – awarded since June, make a last dash before the curtain finally comes down.

My bet? At $1.2 per barrel fee, West Qurna-2 would still make a decent profit similar to Majnoon at a similar level of production. I bet someone will bid even lower than $1.2 per barrel for West Qurna-2.

2nd Bid Round: D-day

Realism should be of order on Dec. 11 as international oil companies converge on Iraq’s oil ministry headquarters to make their last bid to enter Iraq while the door is still open. The 10 contracts on offer over the two days of Iraq’s second bid round will include the last Iraqi oil fields to be tendered to foreign firms for a long time to come. While still awash with undeveloped fields, Baghdad will not need to develop any extra reserves for the next decade or so while it revamps up its crude oil capacity to new peaks, unseen since the first giant Kirkuk oil field was discovered in 1927. Anything beyond what’s already on offer will make the country and its foreign partners sit on idle capacity, a position not favored by either.

While the first bid round in June was a sort of testing ground, both the Iraqi oil ministry and the companies courting it are expected to approach the second round with a firmer footstep. Oil firms know by now that in order to gain entry, compromises are needed in order to create a win-win situation and they have come to admit that this opportunity does not come cheap. As a result, expect to see cut-throat remuneration fee bids as Big Oil try to undercut each other in order to secure any of the jewels of the Iraqi crown. The Majnoon and West Qurna-phase2 fields top this list. But that alone will not be enough. Based on the scoring formula adopted by the ministry for the evaluation of the bids, they still need to target high – but certainly not inflated – plateau production in order to score high.

But maturity is expected to be especially obvious on the Iraqi side. Lessons were learnt, I was told a few days ago as the red carpet was being laid and plasma screens were being fitted to the walls of the auditorium which will host the event.

First ministry officials have learnt from the experience of the first bid round that different internal rates of return (IRR) need to be applied to different fields in the calculation of the maximum remuneration fee (MRF), instead of the one-rate rule applied to the first bid round. Second, in addition to different IRR ranging between 15% and 20%, other financial indicators need also be integrated in the choice of the MRF in order to reflect a more accurate return on the investment.

So, expect a high level of suspense and drama each time the secret MRF in the “green envelop” is revealed as the day unfolds, followed by the same on Dec.12, and …watch this space for a look at the day after.

December 11th, 2009

2nd Bid Round: The Results – 12 December 2009

- WEST QURNA- Phase 2 OIL FIELD

THE BIDDERS:

1. Total (100%)

FEE BID : $1.72 PLATEAU:1,430,000 SCORE: 69

2. BP (51%) CNPC (49%)

FEE BID: $1.65 PLATEAU: 888,000 SCORE: 66

3. Petronas (60%) Pertamina (20%) Petrovietnam (20%)

FEE BID: $1.25 PLATEAU: 1,200,000 SCORE: 87

4. Lukoil (85%) Statoil (15%)

FEE BID: $1.15 PLATEAU: 1,800,000 SCORE: 100

West Qurna-Phase 2 contract awarded to Lukoil

- Garraf Oil Field

THE BIDDERS:

1. TPAO (60%) ONGC (40%)

FEE BID: $2.76 PLATEAU:200,000 SCORE: 61

2. KAZMUNAIGAZ (45%) KOGAS (45%) EDISON (10%)

FEE BID: $2.55 PLATEAU:185,000 SCORE: 63

3. PETRONAS (60%) Japex (40%)

FEE BID: $1.49 PLATEAU: 230,000 SCORE:100

4. PERTAMINA (100%)

FEE BID: $7.50 PLATEAU: 150,000 SCORE: 29

Garraf contract awarded to Petronas

- Badra Oil Field

THE BIDDERS:

1. Gazprom (40%) TPAO (10%) Kogas (30%) Petronas (20%)

FEE BID: $6.00 PLATEAU: 170,000 SCORE:

Ministry’s Max Remuneration Fee: $5.5

Gazprom accepted the ministry’s maximum remuneration fee.

- Badra contract awarded to Gazprom

Middle Furat Fields

THE BIDDERS:

None

- Najmah Oil Field

THE BIDDERS:

1. Sonangol (100%)

FEE BID:$8.5 PLATEAU: 110,000 SCORE:

Ministry’s Maximum Remuneration Fee: $6.00

Sonangol accepted ministry’s MRF.

Najmah contract awarded to Sonangol

Ruba Husari is an expert on Middle East energy and editor of Iraq Oil Forum , a specialized website on Iraq’s oil industry and politics. She is based in Baghdad. Petroleumworld not necessarily share these views.

Editor's Note: This article was first posted on The Iraqui Oil Forum, on Dec 12, 2009 . Petroleumworld reprint this article in the interest of our readers. Petroleumworld reprint this article in the interest of our readers.

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Petroleumworld News 12/13/09

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