Yesterday we branded the Iraq Oil Ministry’s policy for the fourth oilfield bidding round a gamble, and today that gamble failed.
The first day’s bidding at Iraq’s fourth round auction Iraq’s could generously be described as underwhelming, and more harshly, a dismal indictment of the government’s failure to deliver the business environment or contractual terms the oil industry needs to commit to exploration in the country.
Out of six blocks on offer, only one – block 9 – was awarded, to a consortium of Kuwait’s Kuwait Energy (40%, operator), Turkey’s TPAO (30%) and Dubai’s Dragon Oil (30%). TPAO were keen to participate despite a diplomatic row between Baghdad and Ankara, and a new agreement between Turkey and the Kurdish regional government for an export pipeline directly from Kurdish territory.
The consortium is committed to a signature bonus of $25 million and a $90 million minimum investment in the block, to comprise at least 900 km 2-D seismic (or equivalent in 3-D) and an exploration well.
Kuwait Energy is happy with the win, the company’s third project in the country after signing up for the Siba and Mansuriya gas fields in 2010, with Executive Chairman Manssour Aboukhamseen branding it “a new milestone for the company.” Dragon Oil CEO Abdul Jaleel Al Khalifa announced he is “delighted.”
Block 9 is considered oil-heavy and close to existing infrastructure at Basra, providing scant comfort for a bidding round focused on kick-starting gas exploration and widening Iraq’s oil project map to take in the north-west and south-west. The consortium struck a remuneration fee of $6.24 per barrel of oil equivalent, more than in previous rounds, but less than analyst’s expectations of at least $10.
Delegations from Total, BP, Shell and Lukoil were present but did not bid. Statoil stayed away.
Blocks 1 and 2, nestling against the Syrian border in the Ninewa province, attracted no bidding interest. Security concerns, both domestic and related to Syria’s current turmoil, are thought to have been particular turn offs.
Premier Oil together with PetroVietnam and Russia’s Bashneft teamed up to make the sole bid for block 12, an oil-rich block south of Najaf. The consortium’s bid of $9.85/barrel was rebuffed by the Oil Ministry, which offered $5. The consortium refused.
The Oil Ministry has found it difficult to balance the political necessity of being seen to drive a hard bargain with oil companies with the commercial reality, that amid a wider Middle East production drive and next to terms on offer in existing contracts in the Kurdish region, appetite to explore for oil and gas in south Iraq has diminished.
The Ministry of Oil has an opportunity to turn the auction around tomorrow by raising its $5 ceiling and re-opening bids for blocks 2 and 6. Tomorrow is more likely to be successful as blocks 10, 8 and 7 are likely to arouse some interest, though any overzealous overcompensation for this by the Oil Ministry is likely to kill off enthusiasm from its favoured bidders.
