Lukoil’s Vagit Alekperov said his company has now changed its mind on West Qurna -1 oil field following a detailed analysis and is now ready to follow in the footsteps of BP/CNPC and sign up to develop the field for a $1.9/bbl remuneration fee, the maximum fee the Iraqi oil ministry was willing to offer oil companies when the first licensing round bids were opened on June 30.
Lukoil is not the only company redoing the sums and concluding that if $2/bbl remuneration fee for Rumaila field development works for the BP/ CNPC consortium, then why not for West Qurna. Other international oil companies are also reassessing the opportunities and balancing risk against return concerning the $2/bbl offered by Iraq for Zubair and Kirkuk.
Coincidentally, this realization comes just as BP/CNPC was initialing the Rumaila contract Oct.8 in Baghdad, ahead of endorsement by the Iraqi council of ministers, something that fellow companies did not believe likely to happen and certainly not so soon. The change of heart might also be motivated by the fact that among the 10 contract areas offered in the second bid round, only two oil fields, West Qurna -2 and Majnoon, are in the league of West Qurna -1, Zubair and Kirkuk.
The Iraqi oil ministry has also done its part offering “clarifications” and ironing out “misunderstandings” that were, presumably, partly responsible for the “mismatch” between the companies’ bids and the maximum remuneration fee offered by the ministry.
So, where do we stand today? Oil Minister Hussein al-Shahristani said at the opening of the second bid round roadshow in Istanbul in August that whatever path the ministry takes regarding some of the fields offered in the first bid round and which are still attracting interest among the bidders, the awards will be made on competitive rather than bilateral basis. This means that the June bidders, or those among them who are now willing to go the extra mile to meet the ministry’s requirements on the maximum remuneration fee, will still be competing in the contest for the best offer.
This means the contest will now focus on the production plateau targeted by the companies, which varied between 650,000 b/d and 2.325 million b/d for West Qurna -1 and 525,000 b/d and 1.125 million b/d for Zubair.
The lower fees the companies are now acquiescing to might require, from their point of view, a higher plateau to maximize the return on the investment in the shortest delay. The major question to Iraq then becomes: what is the depletion rate (production to reserve ratio) the country is willing to accept and what depletion policy, if any, has it set for itself on the long run, despite the short-term pressures to maximize revenue to finance the state budget?