5 March 2008
The Iraqi cabinet has given the oil ministry the go-ahead to sign technical support contracts to develop five producing fields with five of the world’s top oil firms, Iraqi sources told International Oil Daily Tuesday.
The companies — BP, Chevron with partner Total, Exxon Mobil and Royal Dutch Shell — have now been invited to a new round of talks in Amman, Jordan, starting on Mar. 14. The Iraqis hope to conclude agreements by April. But company executives say outstanding issues will most likely take until midyear to resolve.
Once draft contracts are finalized, the cabinet would need to approve the financial commitments made by the ministry. The deals, which will include procurement of equipment on behalf of the ministry and technical support fees, are expected to be valued at more than $50 million — the level beyond which the ministry needs cabinet approval. The cabinet will also review final drafts because of the sensitivities surrounding the signing of the first oil contracts in years — albeit just for technical support — the Iraqi sources said.
The two-year contracts aim to offer Iraq a speedy interim solution to the problem of reversing declining output at the four major producing fields in southern Iraq plus Kirkuk in the north until it is in a position to sign long-term agreements. The target is for 100,000 barrel per day increments at each of the Rumaila, West Qurna Phase 1, Zubair, Missan and Kirkuk fields within a year of contract signing, sustained for a second year.
Negotiators from both sides have been struggling to define the scope of work, given the differences between the fields. While some, especially Rumaila and Kirkuk, will require redevelopment, output at others could be increased by installing additional surface facilities or debottlenecking existing infrastructure.
A key issue is how to measure incremental production resulting from the support contracts at a time when output is declining. At some fields, a crucial first phase would be to install instrumentation to measure production and monitor it for the two-year period. Lacking sophisticated instrumentation, Iraq’s North Oil Co. (NOC) and South Oil Co. (SOC) have been using primitive measuring devices to assess both production and exports.
Legal teams are also trying to come up with creative formulas that would allow the firms to procure equipment on the ministry’s behalf without being held legally liable in the event of problems with suppliers. Under the short-term contracts, the ministry wants the companies to provide support defining equipment and material specifications, as well as with design and engineering, and market follow-up. On-site construction would be carried out by NOC and SOC.
Companies’ sources said remuneration — to be split into reimbursement for costs and a fee for services — will involve an “opportunity cost,” given the tight market for specialized labor. Although companies are not against the principle of remuneration in oil — and even welcome it as it offers a bigger potential upside — the Iraqis have yet to decide whether this would be politically acceptable.
Keen to get an early foot in the Iraqi door, majors have been reluctant to conclude service agreements of the type under negotiation, as these turn them into short-term contractors rather than long-term partners in field development. They have been seeking long-term commitments from the Iraqis before taking on the current work.
While some majors would rather forgo technical support fees to avoid establishing the precedent of becoming a contractor, others want Iraq to guarantee they will be allowed to match any terms for a long-term deal offered by another company for the development of fields they have been involved in.
If they undertake technical support contracts on fields where they have been providing support and free advice for the past four years, majors want guarantees that the same fields would not be open in a tender to second-tier companies who could come up with bids considered unrealistic by the majors.
By Ruba Husari, Dubai
(Published in International Oil Daily March 5, 2008)