Iraq Oil Auctions

The Republic of Iraq, a 169,234 square mile western Asian country and home to over 31 million people, has been a media buzz phrase since the United States coalition invaded in 2003.

The anti-war coalition fuelled rumours that oil was a motivating factor in the decision to invade the country, chastising US President George W. Bush  for his supposed sub-plot in the highly debated “War on Terror.”

In 2003, US Department of Energy (DOE) and Energy Information Administration (EIA) figures indicated that Iraq possessed in excess of 112 billion barrels in proven, economically producible oil reserves. The Federation of American Scientists raised these stakes and suggested a total closer to 215 billion barrels would be more accurate, although today the DOE figures are more widely accepted.

These figures place Iraq as the second largest country for petroleum reserves, behind Saudi Arabia. The EIA also states that roughly 90 per cent of the country remains unexplored as a result of the years of war and political tensions it has suffered.

By 2008, Iraq was the 13th largest oil producer in the world, with nine high-profile ‘super fields’ yielding over five billion barrels.

30 Years of Waiting
Fast-forward to October 13th 2008, when the worldwide major oil players meet in London for their chance to re-enter the lucrative country in three decades.
Companies including BP, BG, Chevron and Royal Dutch Shell attended the event hosted by Iraq’s oil minister Hussein al-Shahristani. Six of the nation’s biggest oil fields and two large gas field contracts were up for grabs.

Journalists were barred from the meeting, with Ali-Al Bayati, the Iraq Embassy Councillor, insisting that he had no idea where it might even be taking place. But despite this covert approach, it wasn’t long before industry representatives expressed their concerns and frustrations at the ambiguity of the details put being forward by the event’s organisers.

The auction of these oil fields in northern areas such as the Diyala and Kirkuk provinces also prompted concerns of tension between these Western companies and the Kurdistan Regional Government.

The move to offer 82 per cent of Iraq’s proven oil reserves certainly made an impact, but did it secure foreign investment in the nationalized Iraqi oil industry to the extent that the country had hoped for?

Negotiations were stalled in September, just 11 months later, after Iraqi officials claimed that they were taking too long for the work on these fields to be completed within the time frame originally allotted to do so.

IRJ takes a closer look at the difficulties posed by Iraqi oil law, the televised oil auctions of early July 2009, the concerns of western oil giants and Iraq officials alike, and the effects of continued tensions between the central Iraq government and the region of Kurdistan.

The Iraq Hydrocarbon Law: an Ongoing Debate
Media reports suggest that the decline in the Iraqi oil industry output began back in 1990 after the nation’s failed invasion of Kuwait. Trade embargos were imposed and Iraq’s oil production output plummeted from 3.5 million barrels per day (bpd) to an estimated 300,000 bpd.

Official Iraqi oil expectations predicted a recovery with figures climbing to 3.5 million bpd by 2000, however, by 2002 the country had clawed back to an output of just 2.5 million bpd. A poorly managed infrastructure and the United Nations rejection of Iraq’s request for equipment to rebuild their dwindled oil industry were blamed.

In May 2007, a piece of legislation known as both the Iraq Oil Law and the Iraq Hydrocarbon Law surfaced. It was motioned by the Iraqi Council of Representatives, the 275 seat-strong majority elected body of representatives for the country, and is set to define future management and development terms for the Iraqi oil industry.

The proposed Iraq Oil Law has received a very mixed response. Western commentary has tended to be very positive, whilst those opposed to de-nationalization fear that this spells an end of government control which could prove greatly detrimental to the economy of the country.

“The package includes an oil and gas sector framework law and three supporting laws that would outline revenue sharing, restructure Iraq’s Ministry of Oil, and create an Iraqi National Oil Company. Both the Bush Administration and Congress consider the passage of oil and gas sector framework and revenue sharing legislation as important benchmarks that would indicate the current Iraqi government’s commitment to promoting political reconciliation and long term economic development in Iraq,” an April 2008 Congressional Research Services (CRS) report for congress states.

According to the EIA, the United States has pledged $2.05 billion dollars to the Iraq oil and gas industry in order to aid modernization since March 31st 2009.

“According to reports by various U.S. government agencies, multilateral institutions and other international organizations, long-term Iraq reconstruction costs could reach $100 billion or higher, of which a third will go to the oil, gas and electricity sectors. In addition, the World Bank estimates that at least one billion in additional revenues needs to be committed annually to the oil industry just to sustain current production,” the EIA continues.

In June 2007 the Iraqi oil workers union went on strike to demonstrate their opposition to de-nationalization.

The Iraq National Oil Company—the state-owned operator of the country’s oil industry since 1972—would relinquish exclusive operational control of much of the nation, retaining just 17 per cent. Foreign oil companies have been excluded from the region since the nationalization was completed, but this could all be set to change.

The move towards passing this legislation and encouraging much-needed foreign investment continues. In December of 2008, an undisclosed senior Iraqi government official indicated that the Iraq Hydrocarbon Law should be passed by spring 2009, but this has not yet been implemented.

Currently, the 2005 Iraqi Constitution is said to contain language which essentially guarantees a big future play for foreign companies.

Talking Televised Auctions
The next attempt at Iraqi oil field auctions took a slightly different tact; live television.

On June 29th 2009, over 30 companies including BP, Exxonmobil, Total and Royal Dutch Shell gathered to bid, but soon further tensions arose.

It wasn’t long before several of the major bidders were officially in dispute with the Iraqi government over the terms of these 20 year contracts. Just one in the 32 approved bidders remained in agreement and a deal was struck.

Each field auctioned was given a minimum production level by the Iraq oil ministry. Figures indicate that most of these were very close to the current levels of production for each of the oil fields.

The terms of the contracts stipulated that winning bidders would not receive payment for any work completed under this minimum production level. Bidders stated that they wanted to receive payment for each single barrel that they produced surplus to the minimum production level. They also requested predictions of how much they would realistically be set to produce.

This seemed straightforward enough and the Iraqi auctioneers selecting a winning bidder based upon these terms. However, that was not the final word.
The auctioneers had a red envelope. Inside was the maximum amount that the oil ministry would pay for each field, regardless of the dizzy heights production might reach under the care of these major international oil players.

The single winning bid, by BP in partnership with the China National Petroleum Corporation (CNPC), is a 20 year production contract for the Rumalia field, located between Kuwait and Southern Iraq. Exxon was the first to be offered this field, but declined the auction’s maximum payment offer. Originally, BP was looking for four US dollars per barrel, but agreed to two US dollars per barrel and accepted the contract.

BP said they would be able to profitably run the Rumalia field by using their own expertise and CNPC infrastructure.

According to BP CEO, Tony Hayward, during an interview with Bloomberg at the time of the auction, the Rumalia field is a 65 billion barrel resource. He said that 12 billion barrels had already been pumped, and BP expected to produce around 15 billion more.

“We should be able to do this in a very low-cost and efficient way,” Hayward told Bloomberg.

“We’re looking at returns in Iraq that are compatible with returns we earn across the rest of our portfolio.”

It all seems simple enough, but that is still the only successful contract signed.

On Wednesday July 1st, the Iraqi oil ministry announced that it was reviewing new bids submitted by foreign companies. This announcement, made to the press by an official from the office of Iraqi Prime Minister Nuri al-Maliki, followed oil ministry requests for the televised auction bidders to reconsider their offers.

Media reports claimed that the failure to secure winning bids was a huge embarrassment for Hussain al-Shahristani. However, reticence from the major players invited to the auction had emerged prior to the event taking place.

On June 26th 2009, The Daily Telegraph newspaper ran a story titled ‘Iraqi oil contracts to be auctioned in live TV 'game show.'’ In the piece, the paper spoke with an unnamed executive from ‘a top-three global oil giant,’ who had some choice words to say about the televised event.

“It's like a Eurovision song contest or a game show for energy companies," he told the paper.

"A lot of work has gone into preparing our bid but I think on the day we are going to see the process may be quite fluid. If some companies find themselves disappointed in one contract they may have to make deals with other partners on the spot."

Another bone of contention surrounding the July contracts up for bid was the “soft loans,” which winning bidders were asked to pay to the Iraq government as part of signing the deals. These loans, totaling $2.6 billion dollars were raised as a major issue by various company executives speaking to the media after the event took place.

On August 25th that same year, Iraqi oil officials and company executives announced that talks had allowed them to generate new terms for an impending second round of contracts with ten groups of a total 15 fields on offer.

"It's an improvement compared with the terms of the first bidding round," a senior executive from one major oil company told Dow Jones Newswires.

The second round of soft-loans appeared to have been amended to a total of $1.6 billion US dollars, and al-Shahristani told the press that this was done to encourage bidders to take part once again.

The first round rule which stated that the fields could be operated by Iraqi oil officials only was also changed, but al-Shahristani said that this did not mean that foreign companies could keep the oil they produced; contracts remained as technical service deals only.

These moves to rejuvenate foreign interest in the latest round of contracts were made to support Iraqi targets for six million bpd production by 2015.

China, Kurdistan and Beyond
Late in June, Sinopec (previously the China Petroleum and Chemical Corporation) made a $7.24 billion dollar acquisition of Addax Petroleum Corp, of Switzerland. Though the takeover was approved by the Iraqi government, the fact that Addax was active in the semi-autonomous Kurdistan region of Iraq quickly caused Iraq’s oil ministry feathers to ruffle.

"The Oil ministry is committed to not dealing with any oil company that signs oil contracts (with the Kurdish Regional Government) without the approval of the central government and Iraqi Oil Ministry," Abdul Karim Louaibi, Iraq’s Deputy Oil Minister said to Reuters on August 26th.

The ministry threatened to bar Sinopec from the upcoming second round of bidding. Kurdistan has been quick to develop foreign company dealings on its oil fields, but this has not been well received by the central government of Iraq.

Media reports have even indicated that the choice to televise the July auction was a move by the Iraqi government to heighten their profile in the oil market in the wake of fears that Kurdistan’s recent developments have overshadowed their potential for future foreign investment.

Dating back to 2008, al-Shahristani said that he does not consider any deals signed between Kurdistan and foreign oil companies to be legal.

"No contracts signed by any regions in Iraq will be recognized by the government of Iraq. Companies will not be allowed to work on Iraqi territory unless their contract is approved by the central government in Baghdad," the Alternative Foreign Press reported him as saying.

Herein lies another hurdle for foreign companies taking part in the Iraqi oil auctions; the troubled Iraq-Kurdistan relationship.

The Kurds have expressed frustration and difficulty surrounding their rights to local oil reserves for some time. In 2006, the region drafted the Kurdish Petroleum Law. On July 9th 2007, the Kurdish Regional Government (KRG) held their first reading of the proposed law to the Kurdish Regional Assembly.

Tensions between the Republic of Iraq and Kurdistan have continued. More recently, on September 27th, an Iraqi MP called for a report into the Kurdish minister's potentially illegal purchase of shares in the Norwegian oil giant DNO International.

Ashti Hawrami, the Kurdish minister for natural resources, denied involvement or that he benefitted from a DNO transfer of shares.

True to their word, Iraq has now banned Sinopec from taking part in the next wave of auctions as a result of the company’s refusal to relinquish its Kurdistan oil contracts.

In September, Joe Biden, the US Vice president, met with Iraqi leaders including Prime Minister Nuri al-Maliki, to push for a progress update on their passing of the Iraq Hydrocarbon Law. Then, on September 17th, he did the same in Arbil, Kurdistan, to coax Kurdish leaders to move forward too.

An unnamed official, speaking to the media, said that Biden "made clear that the next round of bidding on oil concessions should be made on more generous terms to attract more outside interest," and that with only one deal passed to date, "even one other deal would mean 50 to 60 billion dollars in additional investment in Iraq, 600 million dollars in additional annual revenue, and tens of thousands of additional jobs.”

The debate for passing the Iraq Hydrocarbon Law continues, as does tension between the central Iraq government and Iraq, the development of terms for the next wave of auctions, and foreign interest in this resource-rich nation.

There are many underlying political, historical, national and international factors in this equation, all with the capability of altering the landscape, to its detriment or otherwise, of the oil industry in Iraq and the future of investment in the country.

The next round of auctions could help to clear the fog. Equally, the passing of the Iraq Hydrocarbon Law would establish a platform from which foreign acquisition of oil contracts could be assessed. Iraq has suffered, thrived and continues to develop its oil industry. Let’s hope that the conclusion to this tricky situation is not too far away.