Samuel Ciszuk, Middle East energy analyst at IHS Global Insight reveals the potential consequences of the iraqi election for oil companies working in the country.
The ensuing prolonged government-building process will result in a slowdown in talks and decision making as the lame duck government will look to negotiate a new governing coalition.
While IHS Global Insight does not necessarily think that the deadlock will last for as long as until June or July—it may be easier to strike deals more quickly this time than in the 2005 round as many of the parties and lists today better know where they stand in relation to each other—a long negotiation and government-forming period cannot be ruled out.
In the meantime, the start of large-scale investment by energy companies is likely to be postponed, especially as tendencies for political violence to escalate in the possible power vacuum—or renewed rumours of military power bids—are evaluated to reduce companies’ levels of risk. The strong antipathy towards foreign oil and gas investment shown by Iraqi politicians until recently has shown signs of mellowing significantly as it has become increasingly clear that the national oil industry lacks the capabilities and technology for even basic repairs and expansions, although the promised vast export revenue increases within just a few years’ time are likely to have constituted a stronger pull.
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Still, however, the political negotiations between numerous partners over building government coalitions might result in surprises on individual policy issues, as well as on the core issue of who will be the next oil minister, making prudency by foreign companies a good strategy over the coming months.
Lastly, the government-forming process is likely to delay the midstream expansion process significantly, given that a large part of the Oil Ministry’s top-level decision-makers will be involved in the political negotiations. This means that the necessary pipeline expansion to transport oil increments from the expanded oilfields to the export terminals might well face delays and result in oil increment shut-ins as early as during the first half of 2011.
The six-month extension of Shell’s South Gas project memorandum of understanding (MoU) in the past days has given the project a well-deserved breather, but with negotiations seemingly stuck on several core issues, there might be too little negotiation time left with a new government under the new MoU, meaning that a further extension may be required.
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