8 August 2008
More than nine months after they were first launched, Iraq’s technical support contracts (TSC) — the first commercial agreements with Big Oil since nationalization in the 1970s — are in limbo.
The official view from Baghdad is that the short-term deals are losing their relevance due to protracted negotiations and the possibility that they will overlap with the award of long-term service contracts under the recently launched bid round, which covers the same fields. However, that licensing round risks being derailed as Iraqi technocrats struggle to define bidding terms, finalize a model contract and organize a data room for an initiative that’s unlike anything conducted in the past four decades. In sum, Iraq risks remaining closed to the international oil industry for longer than Iraqi politicians anticipate.
Oil company executives were stunned in late June when, instead of the long-expected invitation to fly to Baghdad Airport for a final signing ceremony, they received letters from the Iraqi oil ministry asking them to resubmit their TSC proposals with a shorter term. Iraqi Oil Minister Hussein al-Shahristani told Energy Compass last month in Baghdad that he expected the majors to submit new one-year draft contracts for the deals for five major oil fields, down from the two years originally negotiated, to avoid conflict with the long-term contracts. He suggested the term could be extended on an ad hoc basis if the long-term deals were delayed.
Industry observers and even some Iraqi technocrats question the logic behind the ministerial edict. In essence, the TSCs are intended as a stop-gap measure to allow Iraqi engineers to upgrade facilities at producing fields with remote help from the majors, until proper redevelopment plans are prepared and carried out with full outside assistance. The deals focus on procurement and advice by the oil companies and would not involve any long-term commitment by Iraq. As such, they are not as controversial as the long-term deals, which will be scrutinized by nationalists opposed to any close involvement by Big Oil in Iraq’s oil sector.
The fee-based TSCs were negotiated by BP, Chevron with Total, Exxon Mobil and Royal Dutch Shell and aim to raise oil output by a combined 500,000 barrels per day at five producing fields: Rumaila, West Qurna Phase 1, Zubair, Kirkuk and Missan.
One Iraqi technocrat involved in the TSC negotiations admitted that even as the request was made to resubmit drafts to replace the already initialed versions, few believed the offer would be taken seriously. For starters, he argued, the ad hoc extension of TSCs would not be feasible, as the scope of work would be limited to what was defined in the signed contract. The companies’ fees would also vary according to whether their services were required for one year or two, and could not be calculated month by month, he said. And given the delays in procurement and supply of equipment and material that have plagued Iraq’s oil industry in recent years, purchase orders could not be any shorter than one year.
Despite the slow pace imposed by summer holidays, executives from the majors are revising their earlier submissions. Some have already started reworking details of the purchase orders and asking suppliers about tighter delivery schedules. Others are trying to convince the oil ministry to revert to the two-year drafts. One reason for this perseverance is their reluctance to lose the opportunity to establish a foothold in Iraq. The bid round, although it offers greater potential for the longer term, has yet to materialize with proper data or clear terms. The 35 prequalified bidders have yet to be informed of who can bid for what projects out of the six oil fields and two gas fields at stake.
Another TSC for the Luhais field — added later to the five original fields — is also on hold for different reasons, ministry officials told Energy Compass. A consortium of US Anadarko, trader Vitol and the UAE’s Dome has been pursuing Luhais for several years. Since it is not included in the bid round, the term of the TSC remains two years. But Iraqi officials are concerned that the initialed document submitted in June carried Vitol’s name instead of Anadarko’s as head of the consortium. Vitol has limited upstream experience and does not meet the prequalification terms set by the ministry, they say.
Compass Points
• SIGNIFICANCE: Production capacity at Iraq’s major oil fields, especially Rumaila and Kirkuk, is declining fast and TSCs offer a quick, albeit temporary, remedy. The government gave the oil minister the green light to sign the deals, and there is general recognition among the major political parties and parliament that they are urgently needed. But the lack of technical expertise at the ministry, political interference, and indecisiveness at the higher echelons has put progress on hold — undermining Iraq’s credibility.
• CONTEXT: In the chaos of the five years since the US-led invasion, Iraq was considered too unsafe for foreign companies to send in staff. As the government makes security gains and Iraqis experience a small degree of normality, many in Iraq believe the time has come to put the country back on the global oil map. Challenges include the departure of skilled oil staff and the paralyzing influence of competing political factions and individuals, often at a lower level.
• NEXT: The fate of the TSCs is in the balance. Even if companies resubmit draft contracts, it’s unlikely that much can be done to arrest declines at the major fields pending the award of long-term contracts. Some hope for opening the sector is being pinned on a national council for reconstruction — approved by the cabinet, but not yet created.
By Ruba Husari, Dubai
(Published in Energy Compass August 8, 2008)