14 March 2008
After struggling for five years to restore crude oil production to prewar levels, Baghdad is taking a pragmatic look at ways to involve international oil companies in developing its resources, sidestepping an internal debate over whether production sharing agreements (PSA) — the model preferred by Big Oil — are suited to Iraq.
While discussions are ongoing with international oil companies, and between the Iraqi oil ministry and the cabinet, a number of hybrid model contracts are emerging, blending components from existing types. These are designed to suit Iraq’s current period of political and economic transition, but should define the future shape of oil development.
At 2.5 million barrels per day, Iraqi oil production is still hovering below the levels recorded on the eve of the 2003 war, with no new development of producing reservoirs or new fields. Iraq is missing out on revenue potential from record prices, which have fueled economic booms in neighboring countries. Moreover, the country remains politically deadlocked over crucial legislation that would define long-term oil policy.
The first hybrid model — involving technical support contracts (TSC) — is being constructed by Iraq’s oil ministry and oil majors in discussions over short-term technical support at five major oil producing fields. The companies — BP, Exxon Mobil, Chevron with partner Total, and Royal Dutch Shell — would offer technical support over a two-year contract period in field management and equipment procurement and delivery, for a fee. The unusual arrangement has thrown up legal issues, including liability in the procurement process. It would also see the companies act as contractors, an unorthodox role they do not much like. While some are contemplating foregoing payment to avoid setting a precedent for this role, others regard the short-term arrangements as the first stage in multiphase field redevelopment plans they have worked on remotely for several years. In the two years covered by the deals, the oil ministry wants to add 100,000 b/d each at the Rumaila, Zubair, West Qurna Phase 1, Missan and Kirkuk fields.
A second model is being put together for contracts to be awarded in Baghdad’s first upstream tender since the war, which would be launched sometime this year to redevelop the major producing fields and tap new reservoirs there. Again, the model is also a mix of existing types, designed to serve national interests while still attracting international oil companies.
While the semiautonomous Kurdistan Regional Government has awarded almost two dozen PSAs in northern Iraq, the federal government does not yet have an official policy on contract models. A draft hydrocarbon law discussed last year stated that the types of contracts allowed in Iraq would be determined by a federal oil and gas council.
Pending passage of new legislation, the cabinet and oil ministry reckon they have the authority to award long-term service contracts under existing law, while modifying terms to make them attractive to international oil companies. Although still requiring formal cabinet approval, the model emerging from discussions would allow a foreign company to run an oil or gas field for long periods — at least 20 years in the case of large fields — albeit in joint operatorship with a local entity. This differs significantly from the Iranian buyback model, in which companies are required to hand fields back to the national oil company following commissioning. The Iraqi model would also differ from typical service contracts by allowing companies to book reserves. This could take the form of payment in oil, which would also allow companies to benefit from price upside.
According to Iraqi sources, BP and Shell have already presented the oil ministry with detailed plans showing it would be possible to double production at the southern Rumaila fields and Missan complex (Buzurgan, Fauqa, Abu Ghirab) within a few years. South Rumaila currently produces about 700,000 b/d and North Rumaila 450,000 b/d, while levels at Missan have been raised from 80,000 b/d to 120,000 b/d in the last six months using free advice from Shell.
Separately, Shell has also proposed that it start working on the first phase of an Iraqi master gas plan it prepared in 2006, involving the capture of about 500 million cubic feet per day of flared gas in the southern fields. There, too, a custom contract would have to be designed from existing models.
Compass Points
• SIGNIFICANCE: If all the stars align — contract terms, security on the ground, political support — Iraq could open up properly to Big Oil in the next couple of years. Near-term technical support contracts (TSC) would pave the way, adding a combined 500,000 b/d of capacity. Long-term deals would then aim at adding 1.5 million b/d within five years of signing, to an official target of 4.5 million b/d.
• CONTEXT: The dilapidated oil sector requires heavy foreign involvement for Iraq to regain its stature as a major producer, officials admit. In the absence of a consensus on PSAs, special contracts are being carved to match Iraq’s exceptional circumstances. TSCs would not require approval by parliament. If the oil law remains stalled, the cabinet might submit long-term contracts to the legislature to be voted into law — the process applied by Saddam Hussein’s regime, whose law still prevails.
• NEXT: The oil ministry is pushing majors to initial the first set of TSCs in the next few weeks but the companies believe it will take until midyear to finalize legal documents. For long-term deals, the ministry hopes to launch its first bid round by the summer, covering the same five fields plus Qayarah and Akkas in northern Iraq, and possibly Subba-Luhais in the south. First, the cabinet must approve the choice of fields, tender parameters and contract terms.
Ruba Husari, Dubai
(Published in Energy Compass March 14, 2008)