After several delays, Iraq’s central government is just a week away from the first award of exploratory oil contracts in the country outside the Kurdish region since the fall of Saddam Hussein’s regime in 2003.
The fourth bidding round, to take place tomorrow and Thursday, will see the oil ministry put up 12 oil and gas blocks for auction across Iraq, several of which are in remote and impoverished areas which still have poor security and remain blighted by mines and ordnance.
Baghdad is hoping that, once developed, the blocks will add 29 trillion cubic feet of gas and 10 billion barrels of oil to Iraq’s national reserves. However, in trying to strike a balance between political necessity and commercial reality, Baghdad has taken a gamble that oil companies will sign up to a form of contract several industry voices have said is unsuited to the work required.
The level of enthusiasm for the blocks on offer is uncertain. 47 companies have been pre-approved for the auction, of which 39 paid participation fees, though the relatively low cost of the process means this is not a reliable barometer of interest.
Statoil has already ruled itself out, and ExxonMobil was barred after signing for six exploration blocks in the Kurdish region of Iraq, some of which are in disputed territory. Interfax has reported that Lukoil says is out of the running. Industry watchers think Total is unlikely to bid. Total’s CEO has grumbled about the terms on offer relative to the Kurdish region.
In addition to security issues, the final form of the exploration, development and production service contract (EDPSC) is far removed from what oil companies see as an acceptable model under which to invest in exploration, even after extensive negotiations and amendments to the contract since its initial publication, and taking into account the obvious subsurface promise of the blocks under bidding.
Baghdad has retained its fee-per-barrel remuneration model, notwithstanding that speculative concessions more usually see the grant of production sharing contracts akin to those granted by the Kurdish regional government, which give oil firms an equitable stake in oil produced and the ability to book reserves.
The EDPSCs also include a cost control mechanism which nets exploration, production and other costs against production, in a bid to avoid overcharging and ‘gold-plating’.
In return, oil companies are likely to set their bids at around ten times the rates settled in previous bidding rounds, which saw Russia’s Lukoil take on West Qurna 2 for just $1.15 per barrel produced before tax.
Baghdad dropped a requirement that a state oil firm partner in the contracts, and will allow oil companies to use gas at site for free for local power generation and operations. Whether this, combined with other concessions, is enough to ensure sufficient quality of bidders is unclear.
Iraqi oil analyst Ruba Husari also reports that the prices used in the calculation of revenue have been raised, with the latest EDPSC setting the price of dry gas price at 50% of the export oil price and the price of natural gas liquids as equal to the oil price, instead of 25% and 60% respectively in the previous draft.
An unacknowledged motivator for Baghdad’s willingness to concede on some elements of the EDPSC is the terms on offer in the Kurdish region, where attractive production sharing contracts have been used to attract over 45 independent oil companies, and more recently, supermajors. Counting against the Kurdish contracts are the high acquisition costs to acquire PSCs from incumbents and uncertainty over production revenue.
Gas development looks most promising, as companies will be able to export gas at prevailing rates under bilateral deals struck with the government. Six of the 12 blocks are slated to be primarily gas-rich. Oil, however, may be kept in the ground for up to seven years at the government’s option, with provision for compensation in during that time for expenses incurred.
According to Iraq Oil Report, the EDPSC also include a provision allowing Baghdad to cancel should a signatory sign a PSC deal with the Kurdish regional government. This provision was not included in previous contracts, putting Baghdad in a quandary as it looked to punish Exxon for signing deals with the KRG. Baghdad lacks a clear legal mandate to credibly threaten to cancel the supermajor’s contract at West Qurna 1, a measure Exxon could be willing to mire in international arbitration.
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