Now that the fourth bid round is wrapped and closed with just one gas exploration block awarded in addition to two oil exploration blocks, it is time for Iraq’s oil ministry to draw lessons from the lackluster bid round and devise new ways to explore the Western Desert, thought to contain much of Iraq’s gas potential.
The first lesson to draw is that upstream companies are not service companies, ready to jump in on whatever terms just because their petroleum costs are paid in addition to the fixed fee. They might have been willing to take that jump for giant and big producing or undeveloped oil fields close to production, because the hydrocarbon risk is null. However, that same justification disappeared when what was on the table consisted of pure desert with scant data and no guarantees for a gas evacuation system ready in time.
The fact that no company was willing to bid on any of the six gas exploration blocks in the west of the country proves it’s not the high or low remuneration fee the ministry was willing to pay that dissuaded the bidders. As a matter of fact, the maximum remuneration fee the oil ministry was willing to offer on those blocks might have been in double digits – if the fee of $10.57-plus it was willing to offer for Block 8 is anything to go by. But it’s the whole concept of bidding a fixed fee on unknown reserves and production that the participating companies rejected out of hand. This applies to Blocks 1 to 6 as well as the oil exploration blocks 7, 11 and 12.
Even the security risk argument fades as, while it could be justified for the north-western Nineveh province blocks, it cannot be the case for the most southern blocks. The security situation in Iraq was much more precarious in 2009 and 2010 when over a dozen contracts were awarded for discovered oil and gas fields.
One tactical mistake committed by the oil ministry was throwing in oil and gas blocks in the same basket. By doing so, it shifted focus from the Iraqi priority of finding and developing non-associated gas to the strategically located oil blocks for the two winning bidders, Kuwait Energy and Lukoil.
Block 9 offered a golden opportunity to Kuwait Energy because of its proximity to its operations base at Siba gas field it’s currently developing, and its high potential as a possible extension of the Azadegan field on the Iranian side of the border, making it unlikely to be subject to a holding period once the reserves are confirmed.
Block 10, the only block to receive three bids due to its high oil potential with defined geological structures, is located close to Lukoil’s West Qurna-2 oil operations. This factor will help reduce exploration costs and, at a fixed fee of $5.99/barrel of oil equivalent on future commercial discoveries, will help compensate for the extremely low West Qurna-2 development fee of $1.15/b, even if future oil discoveries in the block are subject to a holding period by the oil ministry.
Even Block 8, the only gas-classified exploration block to be awarded in this bid round is considered high in oil potential, which might have been its main attractiveness for Pakistan Petroleum, as well as Japan’s Japex, which bid on the same block and lost.
One way of reducing the risks on the gas exploration blocks would have been to award an exploration contract and negotiate the development terms of any discovery once it’s confirmed as commercial. The Director General of the ministry’s contracting and licensing department (PCLD) Abdul-Mahdi al-Ameedi argued in an interview ahead of the bid round that this would have delayed the development of such a discovery due to the lengthy negotiations required.
With this delay now a fact, the only feasible option left for Iraq’s oil ministry for developing non-associated gas resources might be to rely on its own resources – possibly helped by joint ventures with foreign services and engineering companies – to explore for the gas itself and then tender development and production contracts for upstream companies.