Iraq Sweetens Oil Field Terms, Attracts Interest

ISTANBUL (Dow Jones), Oct. 19, 2009

Iraq is sweetening the terms for companies bidding for its prized oil fields as it attempts to avoid the failure of the first bidding round -- and it appears Monday to be working.

After only one project out of a possible eight was awarded in the first auction in June, the Iraqi oil ministry is now showing foreign companies, including the world's majors, more flexibility. It has also improved terms for international oil companies that submitted offers at the country's first licensing auction, but didn't win contracts.

As a result, a line of bidders is forming for the remaining assets. The new ministry's policy has convinced a number of companies to re-negotiate West Qurna-1 and Zubair, which Baghdad failed to award during the first auction.

In June, China National Petroleum Corp. and BP PLC were the only companies to secure one of Iraq's prized oil fields, Rumaila, marking the first time foreign companies have been allowed to invest in the country's oil sector since 1972. Friday, the $15 billion contract was approved by Iraq's Cabinet and Dhiaa Jaafar, head of Iraq's largest producing firm, the South Oil Co, said final signature is expected within a few days.

The biggest problem in June was the gulf between the maximum price the Iraqi government would pay investors to develop the fields, and the minimum price oil firms were prepared to accept.

It's no surprise that the government is amending the auction conditions; the development of these oil fields is crucial to generate revenues from oil sales to rebuild Iraq's war-hit infrastructure. Iraq, which sits on the world's third largest oil reserves, produces around 2.45 million barrels a day while its proven reserves are estimated at 115 billion barrels.

The country's second postwar bidding round is scheduled to be held Dec. 11 and 12 in Baghdad.

"There is unique opportunity for international oil companies to work with us to develop these oil fields," said Thamer al-Ghadhban, top energy advisor to Iraq's prime minister said Monday.

Ghadhban, formerly twice the Iraqi oil minister after the U.S.-led invasion in 2003, said he expects the second auction for rights to develop oil fields in the country to attract more companies.

Some changes have been made to the contract terms presented to companies at the roadshow held in Istanbul in August. Similar to the Rumaila contract, 35% taxes will be collected only from "would-be" profits, he said.

"The good thing about the second bidding round that is that everything is well clarified," said an executive from a large European firm.

The new contract model specifies the difference between discovered and undiscovered reservoirs. "If a contracted company discovered a new reservoir, we can agree on a new payment fee for each barrel produced from that given reservoir," Abdul Mahdy al-Ameedi, head of the ministry's Petroleum Contracts and Licensing Directorate, or PCLD, said.

The production plateau for each field in the second bidding round, which includes the super giant Majnoon and West Qurna-2 in southern Iraq and East Baghdad near the capital, has to be reached between years 7 to 13 after development starts, he noted. In the first bidding round, output plateau had to be reached in the seventh year of development.

A final model contract will be presented to companies in two days, Ameedi said.

Similar to the first bidding round model contract, the new contract document gives a 20-year service contract, with oil firms taking a 75% stake in the joint venture and the government holding the remaining 25%.

Already, competition is hotting up for rights to develop West Qurna-1 after four separate consortia led by Russia's oil giant Lukoil, U.S. ExxonMobil, France's Total SA , and China's CNPC submitted revised offers.

"These offers will be considered by the ministry and within the next two weeks we will award West Qurna-1" to one of the four consortia, Ameedi said.

However, a person familiar with the negotiations said that Lukoil has proposed a higher production plateau than ExxonMobil, with the latter proposing to hike West Qurna 1's output to 2.1 million barrels a day.

Italy's biggest oil and natural gas company Eni SpA was awarded last week Iraq's Zubair oil field in southern Iraq with estimated reserves of 4.4 billion barrels a day.

Japan's Nippon Corp., leading a consortium of Japanese companies including Inpex Corp. and JGC Corp., is meanwhile at an advanced stage in talks to win the Nassiriyah oil field in the southern Dhi Qar province in the country's south. The oil ministry will meet with Nippon on Nov. 1 to finalize the deal, estimated at $8 billion, PCLD's Ameedi said. "Nippon is the best bidder for Nassiriyah," he added.

Eni, another runner for Nassiriyah, said Monday it is likely to withdraw from the bidding for the field, leaving Nippon's consortium the only runner. The possibility of Eni bidding for the southern Iraqi oil field is "very low," Eni's Chief Executive Paolo Scaroni said.

Iraq concluded Monday a two-day meeting held by the Ministry in Istanbul to brief international companies on the second bidding round for the country's oil and gas assets. Some 44 international companies have been prequalified by the Iraqi oil ministry to run for the 11 groups of oil and gas fields in the second bid round, including Total, Chevron Corp., ExxonMobil, Royal Dutch Shell PLC, BP, and CNPC.

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