7 November 2008
Despite its disappointment that Iraqi oil fields it had been studying were opened to international bidding, Royal Dutch Shell says it welcomes the transparent process Iraq has chosen for its first landmark bid round. But the Anglo-Dutch supermajor’s upstream chief, Malcolm Brinded, says he needs to see contract terms before assessing whether the service deals have “long-term robustness” in the absence of a nationwide hydrocarbon law.
“It is in some ways disappointing but the important thing is we got some good insights into the fields we studied. At the same time I really understand the importance of a transparent process in Iraq,” Brinded told International Oil Daily in an interview in Abu Dhabi this week.
Shell has been involved in the Kirkuk and Missan oil fields for several years, offering remote technical help on producing reservoirs, equipment procurement and staff training. During talks earlier this year on short-term technical support contracts (TSC), Shell and other major firms pushed for guarantees that the short-term deals would automatically lead to long-term contracts, before the oil ministry scrapped the TSCs.
The almost three dozen international firms prequalified to bid for the eight oil and gas fields now on offer won’t know until next year the precise terms of the fee-based contracts. Baghdad expects to finalize the model contract one month before bids are due, and wants to award and sign the contracts by June, before gaining cabinet endorsement.
Analysts doubt it will be possible to award the multibillion-dollar contracts without legislative approval.
In response, Brinded said issues concerning the contracts’ legality and long-term stability are “always difficult in any country and it’s no more difficult in Iraq than any other country.
“You just have to have a feeling that their contract has certain elements: That it meets the law of the land, that it has the support of those who have been involved in negotiating it and through the authorities in general, and that it has elements of long-term robustness. It’s no good if you sign contracts that you think in the end are not going to be in the interest of the country. It’s tremendously important that it’s seen in the interest of the country and in the interest of the investor.”
Such considerations may apply in countries with a degree of political stability, analysts say, but the fact Iraq is still a country in transition may require more than the traditional guarantees. Brinded is unfazed. “That’s why it’s important that they think carefully about the structure of their contracts,” he said. “You can never guarantee, you always hope that if the contract is well structured and clearly has benefits for both the country and the investor that it will be honored. All countries want to show to the world that they do honor contracts because in the long-term their ability to attract inward investment depends on their reputation for honoring contracts.”
While some majors privately insist that a contract not backed by law is not worth the paper on which it’s written, the Shell upstream chief is less adamant.
“I think we will assess the situation at the time, but I think obviously it would be good if it was backed by the hydrocarbon law. Essentially, it’s the contract structure … a contract structure that looks robust for the long term and a transparent process. Those are very important ingredients, and countries generally recognize the importance of the sanctity of contracts, so the fact that it’s a transparent process is a big plus.”
The June award deadline is highly ambitious and chances are it will slip. This is due to the still-fragile security situation, lack of consensus on the legal procedure for oil field awards, and legislative elections due in late 2009 that mean politicians will be less prepared to push for controversial deals for fear of upsetting their election chances.
Brinded said it is hard to say whether the June deadline is feasible, not least because “there are a lot of steps to take place and in a very volatile world, not just the situation in Iraq. The whole global economic situation is so volatile that I think it may take longer.”
Since signing a heads of agreement for its south gas utilization project in September, Shell has had staff on the ground in southern Iraq surveying gas facilities, as stipulated in its preliminary agreement. The move is considered bold for an international oil firm, particularly one of the majors, which generally avoid sending staff to Iraq. “The numbers of people that we have on the ground and what their roles are will need to be always carefully assessed,” Brinded said.
The advantages of the current set-up are that work on the project, which will involve gathering, processing and marketing currently flared gas, is done in close partnership with South Gas Co. — which has significant operating capabilities on the ground — and Shell is not involved in the upstream, he said.
“Oil will be a different situation but at the same time one needs to look closely at what the partnership arrangements are [then] and what the structure will be.”
The bidding rules announced by Iraq last month have made some companies rethink whether to bid solo or in consortiums. “I’m not going to anticipate our decision,” Brinded said. “We need to think carefully now that we see the rules published. It changes the landscape. I won’t say in what direction, [but] it changes the landscape either way because of the number of situations in which you can be operating. It makes it much more complicated.”
By Ruba Husari, Abu Dhabi
(Published in International Oil Daily Nov. 7, 2008)