26 September 2008
A second bid round for Iraq’s upstream sector, currently being prepared by the oil ministry, promises to transform the country’s oil industry. If all goes to plan, a second set of oil and gas fields would be awarded by the end of next year, hard on the heels of the first eight fields announced this summer — and the Iraqi oil industry will be bustling. That’s good news for world oil markets and the global industry in general. Iraq is one of the last oil provinces in the Middle East, or even in the world, with huge untapped reserves.
National operators like North Oil Co. and South Oil Co. would be transformed, having had no foreign partners since nationalization in the mid-1970s. The benefits of teaming up with the world’s best are huge, but they also face the risk of losing their identity as guardians of Iraq’s national resources. In the race with time to return Iraq to its place on the world oil stage, some argue that there should be no sacred cows — even if this means the two national operators should be diluted and new entities set up.
This makes it a good time to stop and think about Iraq’s priorities. So far, the ministry has set short- and long-term targets for production capacity. But it’s not clear whether this is part of a well-structured policy that defines where the sector is heading or how it should be run. Output targets are not a policy in themselves, nor are successive bidding rounds, unless they form part of a well-considered plan tying all the components together.
Many oil producing countries went through similar processes of transformation as they reopened their doors to international oil companies. Those that succeeded best had strong, modern laws and regulations that clearly defined the roles and responsibilities of state companies versus the foreign partners.
The rapid developments in Iraq underscore the urgent need for a national oil company to oversee the sector and ensure that every step fits into a long-term strategy. More importantly, the speedy opening creates a stronger need for a hydrocarbon law to provide terms of reference for the new partnerships with international oil companies, and to ensure they are stable and beneficial partnerships in the long run.
By ensuring a successful outcome for the first bid round, the ministry would score several points: It would see some 1.5 million b/d of incremental output come on stream within a few years, raising both its revenues and world standing; it would confound critics by awarding contracts through a competitive and transparent process; and it would prove that international companies are willing to commit to long-term deals for a decent fee under service contracts, showing that production sharing contracts are not the only game in town for successful development of Iraq’s oil.
So, what should be the priority at this juncture: a second licensing round with a bumper offering, or a drive to build strong legal and structural foundations for Iraq’s oil sector?
Ruba Husari, Dubai