Iraq fails to award most oil contracts

Bloomberg

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Iraq failed to award most contracts it offered Tuesday in a bidding round aimed at attracting foreign partners and their cash, leaving the country seeking new ways to develop the world’s third-largest oil reserves.

The OPEC producer fell short of its goal to assign development rights for six oil and two natural gas fields in the bidding round. A service agreement for the Rumaila oil field won by a BP -led group was the only contract awarded.

The Middle Eastern country wants to increase production more than 60 percent from the fields on offer, potentially raising $1.7 trillion in profit over 20 years for the country, Oil Minister Hussain al-Shahristani said in a speech broadcast on live television at the start of the round Tuesday.

Wide discrepancy 

"What a fiasco," said Rochdi Younsi, an analyst at Eurasia Group in Washington, D.C. "It shows the discrepancy between Iraq’s expectations and what companies were willing to offer."

Companies including Exxon Mobil and Royal Dutch Shell failed to meet Iraqi terms as the government asked bidders to cut their fees during a bidding ceremony, parts of which were shown on state television.

BP and China National Petroleum Corp. won the development contract for Rumaila, the largest of the eight fields in Tuesday’s bidding round, as the country rejected bids for other licenses in its first international tender for more than 30 years.

A total of 22 companies, out of 35 that Iraq pre-qualified to take part in the round, made 15 bids for $16 billion worth of technical service contracts. Iraq invited international oil companies back into the country after kicking them out in 1972, when the Baath Party nationalized concessions.

Iraq failed to agree with companies for six sites, including the Kirkuk and West Qurna oilfields, and received no bids for the Mansuriya natural gas field, the second it offered.

"Iraq wanted to squeeze the margins as much as possible for investors, and they squeezed too much," said Samuel Ciszuk, an analyst at IHS Global Insight in London.

The most Iraq offered to pay to develop an oil field was $4 per barrel of additional output for Bai Hassan, with the lowest remuneration fee $1.90 a barrel for West Qurna.

A ConocoPhillips-led group, the only bidder for Bai Hassan, offered to develop the oil field for $26.70 a barrel and refused to agree to the terms sought by the government.

The BP-led group beat a bid from Exxon and Malaysia’s Petronas for Rumaila after improving their offer by cutting oil production costs to be paid back over the life of the contract.

The group agreed to develop the field at a cost of $2 a barrel after recovering investment, lower than the prices that BP and Exxon initially bid, the ministry said in a statement.

The technical service contract will run for 20 years and can be extended for another five, CNPC said in a statement on its Web site Wednesday.

"We’re satisfied with Rumaila," Asim Jihad, a spokesman for the Oil Ministry, said by telephone after the close of bidding. "It’s a big field and we gave the contract on our terms."

The BP group agreed to boost output at Rumaila, which now produces 956,000 barrels of oil a day, to a plateau of 2.85 million barrels of oil a day. BP’s initial bid for the remuneration fee was $3.99 a barrel.

Iraq is struggling to raise output and revenue from crude sales after six years of conflict and prior sanctions destroyed the economy and infrastructure. The government aimed to boost oil output to 4 million barrels a day within five years, using extra output from the fields in the round, from about 2.4 million barrels now.

During Tuesday’s bidding round, groups led by Italy’s Eni and China National dropped their proposals to develop the Zubair oil field in southern Iraq. Shell abandoned a bid to develop the Kirkuk oil field, together with China Petroleum & Chemical Corp. and Turkish Petroleum Corp. Exxon and Shell withdrew their offer to develop the West Qurna field in the country’s south after being asked to reconsider their bid. Total and groups led by Lukoil, Repsol and China National also bid for West Qurna.

The fields set to be awarded collectively produce a total of about 2 million barrels of oil a day, al-Shahristani said at the start of the licensing round. Iraq later this year plans to hold a second auction round for 11 oil and gas fields.