12 November 2008
State China National Petroleum Corp. (CNPC) is set to start work immediately on its 20-year service contract to develop Al-Ahdab oil field in central Iraq following a formal signing Monday in Baghdad, making it the first company to break ground in Iraq’s oil sector since the 2003 US-led war there.
The deal was signed by CNPC head Jiang Jiemin and the director general of State Oil Marketing Organization (Somo), Falah al-Amiri, with both companies acting as the contractor in a joint venture where the Chinese state firm holds 75% and Somo holds the state’s 25% equity. North Oil Co. Deputy Director General Hameed Saeedi signed for the state operator, which is named as first party in the contract, sources in Baghdad told International Oil Daily Tuesday. Representatives of the Chinese defense-industrial firm China North Industries Corp., which was CNPC’s partner in the old production sharing agreement (PSA) signed in 1997, were also present at the Baghdad ceremony. The Chinese delegation arrived in Baghdad on a private flight from Dubai and left immediately after the ceremony, the sources said.
Officials from the Chinese company conducted several field visits in recent weeks to survey the area to coordinate logistics, including security arrangements for staff, with the governing council of Kut province, where the field is located, the sources said. CNPC will open a local office in Baghdad as stipulated in the contract.
The $3 billion deal was initialed in late August in Beijing during a visit by Iraqi Oil Minister Hussein al-Shahristani and later received the endorsement of the council of ministers. A final ratification by the cabinet is not excluded, but Baghdad sources said the ministry will not seek parliament’s approval of the final deal arguing it’s a modification of the old PSA. The old agreement received endorsements at the time from the Iraqi parliament when it was first initialed in 1996 and ratification from the cabinet and Saddam Hussein’s revolutionary command council under the former regime in 1997 before it became effective. That contract remained idle due to UN sanctions until the ministry decided to renegotiate the terms in 2006 and convert it into a service type contract.
According to the deal, CNPC will conduct a seismic survey on the field and submit a preliminary development deal to the oil ministry for approval. It is expected to start production at 25,000 barrels per day following the initial three-year development phase and ramp it up to a peak of 110,000 b/d once a final development plan receives the go-ahead and sustain it for at least six years. CNPC will act as the operator of the field until it recoups all its costs and set up a joint operating company with the local operator to take over once development costs have been repaid. Al-Ahdab, discovered in 1979, is estimated to have about 1 billion bbl of reserves.
CNPC’s fee under the contract will be based on a remuneration or “R” factor, calculated as total revenue divided by total cost. It will be as high as $6 per barrel in the early stages of development, when production will be low and spending high, but will decrease as output rises, dropping to close to $3/bbl once the production plateau is achieved. Total remuneration for the contractor will be linked to an internal rate of return of about 18%. Operating costs will be paid out of production.
The Chinese deal has been less controversial than other field development contracts the ministry intends to award under its first bid round due to its vitality for power production in the Shiite-dominated Wasit province. China’s Shanghai Heavy Industries was awarded a contract earlier this year to build a $940 million power plant in al-Zubaydiya in Wasit, to be fueled by oil from Al-Ahdab.
The first of four 280 megawatt units is expected to start up in three years and will be fueled by 15,000 b/d, or 60%, of Al-Ahdab’s initial production. The plant will later run on associated gas from Al-Ahdab, supplemented by gas from southern oil fields.
Other firms involved in renegotiations of old contracts with Baghdad include India’s Oil and Natural Gas Corp. (ONGC) which has an exploration, development and production contract for Block 8 in the Western Desert, signed in 2000, as well as Indonesia’s Pertamina and state Petrovietnam, who signed two contracts in 2002 for Block 3 in the Western Desert and Amara oil field in the south, respectively.
Iraq tendered eight oil and gas fields to international oil companies last summer and is also negotiating a gas deal with Royal Dutch Shell following the signing of a heads of agreement in September.
By Ruba Husari, Dubai
(Published in International Oil Daily Nov. 12, 2008)