Oil companies look to the future in Iraq

by Timothy Williams

More than six and a half years after the United States-led invasion here that many believed was about oil, the major oil companies are finally gaining access to Iraq's petroleum reserves. But they are doing so at far less advantageous terms than they once envisioned.
The companies seem to have calculated that it is worth their while to accept deals with limited profit opportunities now, in order to cash in on more lucrative development deals in the future, oil industry analysts say.

"The attraction of these fields to oil companies is not the per-barrel profit, which is very low, but their value as an entrance ticket to the oil sector of southern Iraq," said Reidar Visser, a research fellow at the Norwegian Institute of International Affairs who operates an Iraq Web site, Historiae.
"In terms of size and potential, the Basra region remains one of the most attractive areas of future growth for the international oil industry."

Iraq's first stab at opening its oil industry to foreign investment ended in disappointment at an auction in June in which most companies declined to bid. But earlier many of those same companies -- including ExxonMobil and Occidental Petroleum, the first American companies to reach production agreements with Baghdad since the 2003 invasion -- signed deals at much the same terms they rejected over the summer.
Analysts say the deals on three of the country's top fields show that Iraq, after an embarrassing start, may be on a path to joining the world's major oil-producing nations, which could in turn upset the equilibrium in OPEC and increase tensions with the neighbouring oil giants Iran and Saudi Arabia.

Adding to those strains, development rights to 10 other Iraqi oil fields will be offered to foreign companies at a public auction in Baghdad on Dec. 11. However, the auction and the contracts come at an awkward time: just months before national elections that could provoke renewed violence or sweep in a new government that could disown the deals.
In the recent deals, the major oil companies have agreed to accept service contracts, in which they earn a fee for each barrel of oil produced. Yet they vastly prefer production-sharing agreements, in which they gain an equity stake in the oil itself.

Such deals are far more lucrative to oil companies, but for Iraqis they are reminiscent of the colonial era, when foreign companies controlled the country's oil wealth.
"We have shown that we can attract international companies to invest in Iraq and boost production through service contracts," Hussain al-Shahristani, Iraq's oil minister, said recently. "They will not have a share of Iraqi oil, and our country will have total control over production."

But Iraq has also been forced to acknowledge that it cannot hope to revive its decrepit oil industry without the money and the technical expertise of the major companies. Despite strong anti-American sentiments among the Iraqi public, few officials want to refuse American cash.
"We do not have any preferences," said Abdul Hadi al-Hassani, deputy chairman of Parliament's Oil and Gas Committee. "We are interested only in the financial health of the company and in their technical know-how. American companies are well known in the oil sector."

After months of secret negotiations between the Oil Ministry and the companies, two new deals and the completion of a third were announced in recent weeks. A consortium of ENI, an Italian oil company, Occidental and Korea Gas signed a preliminary agreement to develop the Zubayr field, which has an estimated 4.1 bn barrels of oil.
Shortly thereafter came the formal ratification of the only deal reached during the June auction, a partnership between British Petroleum and the China National Petroleum Company for Iraq's Rumaila oil field, one of the largest in the world, with an estimated 17.8 bn barrels of oil. Within days of that deal's ratification, ExxonMobil and Royal Dutch Shell signed an initial contract to develop West Qurna, Iraq's most sought-after field in part because it is believed to have at least 8.6 bn barrels of oil.

The government said it expected production from the three fields alone to vault Iraq's output to 7 mm bpd from 2.5 mm bpd within six years, which would move it from the world's 13th largest producer to the fourth, according to Department of Energy statistics.
"Iraq is now on its way," Mr Shahristani said after the announcements. Oil industry analysts said that there appeared to have been little change from the contracts offered in June.

But the major oil companies appeared to have rethought their positions and decided that despite what they considered paltry returns, they could not afford to be left out of Iraq's riches. A foot in the door now, they reasoned, might lead to better contracts.
"The recent award of Zubayr and West Qurna serves to illustrate a wider acceptance that, in order to secure these strategically important developments, compromise is required," Colin Lothian, a research analyst for Wood Mackenzie, an energy industry adviser, said.

In the West Qurna field, for example, the ExxonMobil-Shell partnership agreed to accept $ 1.90 for each barrel of oil it produced above the field's current production level, precisely what the government demanded in June and less than half the $ 4 a barrel the oil giants wanted.
"It's fair to say that there are many people negotiating now who would not have taken $ 2 before," said Shell's chief financial officer, Simon Henry, on Oct. 29, days before the preliminary agreement was announced. However, while the companies have pledged to invest billions in Iraq, few here believe much of that will actually be spent until the country successfully concludes national elections and attains a period of relative peace.

Iraq has the third largest proven reserves of oil in the world, with about 115 bn barrels, but it does not rank in the top 10 producers. If and when its oil production rises toward seven mm bpd or more, Iraq might find itself in conflict with OPEC, which maintains production quotas for its members. Iraq has been exempt from the quotas since sanctions were imposed in 1990, Iraqi officials said.
Iraqi officials say there is no justification for imposing a quota on their production, saying they have been underproducing for years, allowing others to enjoy higher quotas.

"The production from these three fields will surely threaten other oil-producing countries and will show the world that Iraq can match Saudi Arabia's production," said Mr Hassani.
"Our share has been taken by other countries, and we will gain our share again from the countries that took it."