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Iraq's Second Oil Bidding Round Needs Higher Fees to Succeed

Aug. 24 (Bloomberg) -- Iraq, which awarded only one oil field contract in June because of disagreements over fees, needs to pay more to attract foreign bidders in the second round of licensing, according to former state officials and analysts.

International companies vying for the untapped deposits, including Majnoon, Iraq’s largest undeveloped field, want higher returns for working in a country lacking security and an oil law. Contracts to be awarded in November may be delayed until after a January election and revised if the government changes.

“Even if contracts are awarded, their implementation depends on how the Iraqi situation evolves,” Leila Benali, director of Middle East and Africa at Cambridge Energy Research Associates, said in a phone interview from Paris. “Contracts may not be ratified, there could be several legal or operational problems. There are many stumbling blocks.”

Iraq, which holds the world’s third-largest oil reserves, is offering 10 projects covering more than a dozen oil fields for development in its second oil-licensing round since the 2003 U.S.-led invasion. Unrestrained by OPEC quotas, it wants to increase crude revenue to help rebuild its war-ravaged economy.

Officials will share field data and discuss contractual terms with pre-qualified companies in Istanbul tomorrow, before receiving and evaluating bids at a later date. The undeveloped fields are estimated to contain 41 billion barrels-worth of oil, more than a third of Iraq’s total reserves, according to the U.S. Energy Information Administration.

Iraqi Elections

In the absence of an oil law, Iraq’s Oil Minister Hussain al-Shahristani has said that only cabinet approval is necessary for contracts in the licensing rounds to be legal. Oil executives are concerned that a potential change in government in January may alter any contracts signed this year.

“The central government doesn’t have full control of the country so even if they get a contract, oil companies will wait before sending foreigners to Iraq,” said independent oil consultant Thamir Uqaili, who wrote a study on Iraq for the Centre for Global Energy Studies in 2007.

“Not much will happen before the elections, you need to see which members of the government come back,” he said.

Shahristani has come under attack from parliament for failing to raise oil production faster and because of concern that service contracts awarded to foreign companies won’t benefit Iraq. Lawmakers have yet to approve a hydrocarbons law governing contracts with international companies and exports from the autonomous Kurdish region in north Iraq.

First Bidding Round

Iraqi oil production has averaged 2.4 million barrels a day this year, the same as in 2008 and 2001, according to Bloomberg estimates. It collapsed to near zero during the 2003 invasion.

More than 20 companies, including eight of the world’s top 10 non-state oil producers such as The Hague-based Royal Dutch Shell Plc and ConocoPhillips in Houston, submitted bids for $16 billion worth of technical service contracts for six producing oil fields and two gas fields offered in the first oil licensing round in June.

London-based BP Plc, Europe’s second-largest oil company, and Beijing-based China National Petroleum Corp. won work on the Rumaila field, the only contract awarded out of eight Iraq offered.

To win the contract, they agreed to cut their fees after development costs to $2 a barrel, from $3.99. Foreign companies will be paid for their services, rather than owning rights to the oil itself. Oil futures traded in New York exceeded $74 a barrel at the end of last week, their highest price in 2009.

Maximum Fee

Remaining bidders refused to lower their initial proposals to meet the maximum fee Iraq’s government was willing to pay, revealed on the day of the round. The second bidding round will be centered on so-called greenfield oil projects, which are newer, rather than extensions to older fields.

“Most fields won’t go for less than the $2 a barrel offered in the last round, even though greenfield projects are easier” to develop, said Falah al-Khawaja, an independent consultant in Amman, Jordan, who worked in the Iraqi oil industry for four decades. “I hope companies are offered more money, otherwise Iraq is cutting off her nose to spite her face. It should be more pragmatic really.”

Oil companies require a premium for working in one of the world’s three most dangerous countries, while the government considered only the economic value of the resources, according to Tariq Shafiq, director of London-based consultant Petrolog & Associates.

“Oil company offers must have been loaded with risks associated with above-the-ground parameters -- political, security and legal conditions -- while the ministry doesn’t consider that such conditions warrant abnormally high remuneration,” said Shafiq, a former vice chairman of the national oil company who helped write Iraq’s draft oil law.

West Qurna, Majnoon

Iraq is estimated to hold 115 billion barrels of proved oil reserves, according to government statistics compiled by BP. The West Qurna-Phase 2 and Majnoon fields, the largest two in the second licensing round, may hold 12.9 billion barrels and 12.6 billion barrels, respectively, according to U.S. government estimates. The oil ministry plans to boost production to about 6 million barrels a day by 2015.

BP, which will be attending tomorrow’s roadshow in Istanbul, aims to sign a contract to raise production from the Rumaila field by year-end and start work in early 2010, Chief Executive Officer Tony Hayward said in July. Rumaila, near Iraq’s southern border with Kuwait, was the biggest project on offer in the first round. The work may unlock as much as 20 billion barrels of recoverable oil, Hayward said.

Iraq selected several companies in April as potential bidders for the second round. Russia’s largest oil producer OAO Rosneft, Angola’s Sonangol EP and Kazakhstan’s KazMunaiGaz National Co. were among those qualified at that time. Others attending the roadshow include Shell and Turkish state energy company Turkiye Petrolleri AO.

To contact the reporter on this story: Ayesha Daya in Dubai adaya1@bloomberg.net

Last Updated: August 23, 2009 19:01 EDT

Iraq's Second Oil Bidding Round Needs Higher Fees to Succeed -  Source

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