The Iraqi oil minister talks oil with Ruba Husari in Baghdad:
Q. You launched your first licensing round Jun. 30 with an ambitious schedule to award contracts by June 2009. In view of Iraq’s problems, is this timetable realistic?
HS: It is ambitious, but we are talking about producing fields, where production profiles and other data are already available, and most of the international companies that intend to bid for those fields have a lot of data, so the time required to familiarize themselves is much shorter than if we were talking about non-developed fields. We think one year is enough. We gave the companies six months to prepare their bids and we told them to start preparing from now. Iraq lost big investment opportunities in the last five years as a result of the security situation and political differences. We cannot afford to waste any more time, and we aim to complete this process within a year. We will also launch a second licensing round before the first one is completed. Once the data packages are out in September and while companies prepare their bids, which are due in March 2009, we will have time to prepare for the launch of the second round.
Q. Will the second round be launched in September and which fields will be included?
HS. We haven’t agreed a precise date yet, but we are adamant that we should launch a second and a third licensing round as soon as possible. We have a lot of other producing fields that are in need of development, and there are discovered fields that have never been developed. We also have exploration blocks that were never explored. So there is great scope for work and we are keen to start as soon as possible. We haven’t decided yet on the list of fields to be included in the second licensing round.
Q. Are you foregoing a data room because companies are reluctant to come to Baghdad?
HS. What we mean by data package is actually a data room and not just a compact disc or a brochure. We have signed a contract with international consultants Gaffney Cline to help in this respect, and all the data available on each field and production profiles will be available in a data room where companies can consult it and buy the data they require. The daily follow-up is done by the contracts and licensing department at the ministry. Many companies are already coming to Baghdad. We had Italian, Chinese and Indian companies recently holding talks with ministry officials.
Q. What is the justification for offering producing fields on long-term contracts to international oil companies at a time when you have a lot of greenfields that require huge investment and development?
HS. In the second and third licensing rounds, we will include the greenfields. We started with the giant producing fields because they are maturing and some have been producing for decades. Iraq is in desperate need of modern technologies, not of capital investment, to arrest the decline in those fields and introduce enhanced oil recovery [EOR] techniques to increase the recovery rate. We are talking about fields with tens of billions of barrels in reserves, where if we recover just an additional 1%, it translates into 1 billion barrels of production. We are not able to increase the recovery factor based on our existing expertise and techniques. We do need help from international oil companies. This is also the reason why we chose a service model contract for those producing fields where help is needed just to increase production. Another reason is that the production profile of those fields is known and the surface facilities already exist, so we will be able to increase output from those fields significantly within a short period of time. We expect to increase production by 1.5 million barrels per day within three to four years from the time the contracts are awarded. The ministry has a 10-year plan, according to which Iraq should be producing 4.5 million b/d within five years from the current 2.5 million b/d. We intend to raise our production by 500,000 b/d on our own to reach 3 million b/d until the contracts enter into effect in order to achieve the 4.5 million b/d by 2013. Within 10 years, or by 2017, Iraq’s oil output should reach 6 million b/d.
Q. Will you be offering exploration blocks in the next bid rounds?
HS. Yes — we have 65 exploration blocks spread all over Iraq and they are all listed in the annexes to the draft oil and gas law. We have not yet decided which blocks will be tendered first.
Q. What is the justification for awarding long-term contracts of up to 20 years or more for producing fields?
HS. When we talk about EOR, the term of the contract should be long enough. We are not talking about drilling a few wells here or there, which any service company can do. We are talking about cooperation with big oil companies for a period of time long enough to ensure we increase our production significantly. The term of each contract could be varied depending on the field itself, and we will clarify this later, but we might also realize after further study that a standard contract is best.
Q. Could contract models other than service contracts be introduced for the next rounds?
HS. The position in Iraq at the moment at the ministry and in decision-making centers, including the council of ministers and the legislative council, is to use service contracts.
Q. You have qualified 41 companies, including six national oil companies, but invited only 35 to make bids. Why?
HS. We have 35 companies prequalified to bid, but there are six national companies that did not fulfill all the criteria, especially the financial ones. But because they are backed financially by their own governments, we told them, especially the Turks, that they can enter into joint ventures with others for those fields. They might be prequalified to bid alone in the next rounds.
Q. You were expected to sign technical support contracts [TSC] last month with several majors, but then you asked them to resubmit their proposals based on a one-year contract instead of the agreed two. Are those TSCs still viable?
HS. We launched those TSCs in September or October last year and the idea was that we could sign them at the beginning of 2008 for a duration of 18 to 20 months, to cover the period until we are able to launch a licensing round. Unfortunately, the negotiations on those contracts took longer than they should have. We informed the companies involved that we were keen to sign them by the first quarter, but it did not happen. We then said the second quarter and it still did not happen. Now those contracts are becoming less relevant for helping to increase production before the licensing round. As we launched the bid round on Jun. 30, we informed the companies that the TSCs should not overlap with the long-term contracts because they involve the same fields. There has to be a clause [in the TSCs] that states they automatically become void once the field development contracts are awarded. However, none of the companies have yet presented a final one-year draft contract that we can submit to the cabinet for approval before signing.
Q. So the TSCs have not been canceled?
HS. No, from our point of view they have not been canceled. We are ready to sign any TSC by any of the companies as long as there is no overlap with the field development contracts we announced.
Q. If the licensing round is delayed by several months, would they be able to continue up to a second year?
HS. They will be able to continue for a month or two, but we don’t expect delays beyond that.
Q. The TSCs have been criticized by Iraqis and also US lawmakers because they are no-bid contracts. How do you justify that?
HS. In my opinion, the issue is being used for electoral purposes in the US, and whatever is said there is completely irrelevant as far as we are concerned. We have announced the first public and transparent licensing round in the history of Iraq, but it’s normal that we make a direct call for companies to offer support to Iraqi companies in procuring equipment which will be deployed and operated by us. We chose a number of oil companies and asked directly for technical advice with procurement for a fee that is not more than a few tens of millions of dollars. Iraq will pay for the equipment through letters of credit, and any increase in oil output as a result of those TSCs will go to Iraq and will be marketed by [the State Oil Marketing Organization]. I don’t see anything abnormal in that.
Q. The same criticism could be made of the similar no-bid contract Royal Dutch Shell is negotiating for a project to collect and process flared gas in southern Iraq.
HS. We are pursuing the negotiations with Shell, and we informed them we are ready to meet and finalize the proposed contract when they are ready. The type of contract under discussion is for establishing a joint venture similar to other joint ventures we are currently setting up for drilling and services. Iraq’s share in the joint venture will be with existing facilities that need refurbishing. The new joint venture will refurbish those facilities and add new ones, will buy the raw gas currently being flared at international market prices, process it and then sell it and any liquids back to Iraq at market prices. Iraq has the majority of shares in the joint venture. There are no biddable parameters for this project to make it possible for different companies to bid. A specialized consultant third party will do the valuation of the Iraqi assets in the joint venture. We even encouraged companies who want to bid for gas fields offered in the licensing round to form joint ventures among themselves and to bid as consortia for the minority share [in the licensing round] since the majority share will be held by Iraq.
Q. Would the contracts require approval by parliament?
HS. There are no articles in the draft law or the constitution that require us to submit a contract to parliament for approval. Only international treaties and agreements should be voted [on], but not commercial agreements. Having said that, if the Iraqi parliament decides to legislate a new law that requires oil contracts to be submitted, we will comply. But it will have to start with oil contracts signed by the Kurdistan region to approve them or reject them.
Q. Do you believe there is a chance of reaching agreement with the Kurds over the draft oil and gas law?
HS. You should ask the Kurds whether they are serious about the law or not. We in the federal government believe that the February 2007 draft that has been approved with its four annexes is useful for Iraq if it is respected by all parties. The behavior of the Kurdistan region so far shows it is not committed to this law, and the procedures they followed in signing contracts are in contravention of the procedures and conditions stipulated in the draft law. This is a serious issue. If the Kurds do not stand by what was agreed in this draft, then it has become irrelevant, because the whole point of the law is [for it] to be applied to all of Iraq. Since they unilaterally sign contracts that do not guarantee Iraq’s best interests and without the approval of the federal government, then the oil and gas law becomes useless. As far as we are concerned, prevailing laws enable the oil ministry to negotiate and sign contracts and submit it to the cabinet for approval.
Q. Prime Minister Nouri al-Maliki said in an interview with PIW that a national council for reconstruction will be able to speed up the award of oil contracts and call for direct negotiations once its establishment is approved by the legislative council. What role will the oil ministry play in it?
HS. The council will not be involved in oil-field development contracts unless there is a need for that. I believe the council will deal with megaprojects that have to do with reconstruction, including building new modern terminals and refineries or when it involves strategic pipelines. Oil-field development contracts will follow the procedure in place, and once a contract is done it will be submitted to the cabinet, but it doesn’t take more than a week or two to approve the contract or reject it, so there is no requirement from the council to speed up those contracts. The intervention of the council could be needed for the other projects I mentioned, especially where we required exceptions to overcome the bureaucratic obstacles, especially financial. In any case, it is still too early to talk about the council’s role since the law establishing it and its regulations are still under discussion.
(This interview was first published in Petroleum Intelligence Weekly July 28,2008)