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.