14 September 2007
International oil companies, big and small, flocked to Dubai over the past two weeks to hear Iraqi oil officials expound the riches of their oil fields. Few needed convincing of the country’s potential: After all, where else in the world are there 110 discovered reservoirs in almost 80 oil fields, with less than half developed, mostly partially? Yet their mood was dampened by the simple fact that when it comes to future investment terms, confusion reigns.
Senior executives from majors including Exxon Mobil, Chevron, BP, Royal Dutch Shell and Total, which have been talking to Iraq’s oil ministry for the past few years, and midsized oil companies such as Occidental or Marathon Oil, which have had few dealings with Iraq, all had one question in mind when they met with Iraqi oil officials: What happens next?
Big Oil has big expectations. BP and Shell, for starters, have presented the ministry with major development plans for the producing Rumaila and Missan complexes, promising much-needed jumps in output with relatively little effort and investment. In a reservoir study of the giant North and South Rumaila fields finalized last year, BP offered to double output at the 1.2 million barrel per day capacity field by deploying artificial lift, installing submersible water pumps and cleaning water flows.
Shell, which focused its studies on the southeastern Missan fields of Buzurgan, Jabal Fauqi and Abu Ghirab, has been seeking ministry approval for a low-cost, high-impact project. For investment of $100 million, the Anglo-Dutch major told Baghdad it could double capacity at the three fields to 200,000 b/d. This would involve a two-stage process, taking capacity initially from 100,000 b/d to 170,000 b/d, and then adding 30,000 b/d for the target. How? Simply by conducting workovers at existing wells and adding modern surface equipment.
Total and Chevron, for their part, have a multibillion-dollar development plan ready for the two giant fields of Majnoon and Nahr bin Umar.
Yet at the two weeks of conferences and sideline meetings in Dubai, insiders say, companies received no answer to their requests for guidance, other than instructions to wait. “Even when it comes to simple solutions to their troubled fields, no one is in a position to make a decision,” one executive complained.
Iraqi Oil Minister Hussein al-Shahristani offered little clear direction. The draft hydrocarbon law should be debated in parliament “sometime soon,” he told a conference this week, but no date has been set. If the law is significantly delayed, he said, the ministry will proceed with discussions on the development of producing fields.
There is no legal vacuum in Iraq, al-Shahristani insisted, since “the old law is the prevailing law.” This, he said, means the ministry can sign development contracts, and indeed plans soon to issue some tenders for existing fields.
Clarifying his comments to Energy Compass, the minister said the old law requires production sharing contracts to be submitted to parliament, but allows the ministry to proceed with service contracts “for the supply of equipment.”
Natiq al-Bayati, the director-general of the ministry’s new contracts and licensing department, said service contracts would involve a modified buyback model, involving 15 to 20-year deals with fees paid in cash or in kind. They would preserve some element of risk and reward. He also confirmed that the ministry is considering a first licensing round “with a few exploration blocks and fields” to test companies’ appetites.
In the meantime, the semiautonomous northern Kurdish region continues to line up investors, this week adding US Hunt Oil — a midsized, established player — to its slate of small, independent explorers. Hunt signed a production sharing contract, the model sought by foreign companies, which Baghdad is still debating whether to allow.
With the relatively secure Kurdish region clearly open for business, oil companies face a dilemma. If they sit and wait for Baghdad to get its house in order, they may see others sweep up opportunities in the north — and they could end up with nothing. But if they sign up in the north, they risk upsetting Baghdad and losing opportunities for bigger reserves in the south. Major oil companies are prepared to hold tight, but others — including midranking US companies — are giving the Kurdish area serious consideration. Adding to the temptation, the Kurds are offering attractive terms now, while the eventual contest in Iraq proper would likely be fierce, as well-connected majors and aggressive Asian national oil companies pour in.
Compass Points
• SIGNIFICANCE: Despite all the chaos and delay, oil companies remain seriously interested in Iraq, as the only oil province in the Middle East, if not the world, seeking international capital and expertise to develop giant discovered fields. But frustration is mounting.
• CONNECTION: The Iraqi oil establishment has become dysfunctional, mirroring the wider state of the country. Ministry officials offer divergent and sometimes contradictory lines, a factor dismissed by the oil minister as a symptom of the “new Iraqi democracy.” Similarly, the state of the ministry reflects Iraq’s wider security problems: Many experienced technocrats have fled or been killed, leaving more junior officials in charge.
• NEXT: The near-term focus has moved clearly to the northern Kurdish region. Authorities there should announce new contracts with higher-caliber companies, while existing players will attract acquisition interest from companies prepared to pay a premium for a quick entry. Baghdad will complain, but for now will offer little to tempt investors by comparison.
By Ruba Husari, Dubai
(Published in Energy Compass Sept. 14, 2007)