Bidders blanch at Iraq's oil terms

Iraq, which is offering up its first undeveloped fields to foreign developers, could lose out on major bidders because of its unusual contract terms.

Iraq's first auction for unexplored oilfields since the second Gulf war could lose out on bidders because of the terms, which one multinational described as "not ideal".

An estimated 10 billion barrels of oil deposits are up for grabs in an auction set for early next year. But the contract model says companies will be paid in dollars rather than being rewarded with a share of the crude they find. Such terms are not designed to motivate drilling, say industry executives.

"They are not conventional terms for exploration. Some people would even say these are not ideal terms for exploration," said Elias Kassis, the managing director for Iraq exploration and production at the French oil giant Total. "We're currently looking at the technical aspects as well as the contractual model to evaluate risk and reward."

This week, Baghdad said it was extending its bidding deadline from January to March to give companies more time to prepare offers.

The oil ministry has cleared 46 companies to bid. These include energy giants such as ExxonMobil, trading houses such as Vitol and state producers such as China National Petroleum Company (CNPC).

Mubadala Oil & Gas, the energy unit of the Abu Dhabi Government-owned Mubadala Development, and Dragon Oil, a producer majority-owned by the Dubai Government, are also in the running.

The unusual contract terms stem from the Iraqi constitution, which requires that the nation's vast petroleum riches remain under control of the government. The usual arrangement for funding the cost of exploration is a production-sharing agreement in which companies are entitled to part of any crude they find in return for taking on the risk of finding none.

Iraq, however, has opted for a "service contract model", which pays companies a dollar fee for every barrel they pump. The Iraqi terms also prevent foreign companies from including Iraqi oil reserves on their books, said Ahmed Mousa Jiyad, the former chief economist of the defunct Iraq National Oil Company.

"The net return for companies in the production-sharing agreements is usually much, much higher than in the service contracts," said Mr Jiyad, who now runs a consultancy in Norway. Iraq, regarded as one of the last countries with large, unexplored oil deposits, has already auctioned blocks where development had begun before the US-led invasion in 2003.

In a 2009 round, Total and its partner CNPC lost out on the immense Majnoon oilfield near Basra to Shell and Petronas.

But a year later, Total won a stake in the smaller Halfaya field as part of a consortium tasked with raising pumping levels from 3,100 barrels per day (bpd) to 535,000 bpd.

The increases are part of Iraq's plan to increase production from today's 2.9 million bpd to as much as 12 million bpd, which, if achieved, would put the country in line with Saudi Arabia, the world's top exporter.

Iraq needs to add much more infrastructure and train nationals to work in the industry if it is to meet its goals, said Mr Kassis.

"You need to build up the network, the facilities, the downstream outlets, and there is something on top of all that - it's the human factor," said Mr. Kassis. "Iraq has a long history in the oil industry, the people with whom we work. But in the way of launching something substantial - that will require a huge amount of human resources whether on the field or in management. You need to have all that."

In spite of the obstacles, representatives from the world's biggest oil companies flooded Amman last month for an Iraqi oil ministry presentation. Mr Kassis said Total was still deciding whether to bid in March. Total is expected to go before a Paris court next year to face charges that it bribed Iraqi officials during the UN's oil-for food programme, which allowed Iraq to sell limited amounts of crude in exchange for humanitarian supplies during years of sanctions.

"Our aim is to further develop our position and relationship with Iraq and over the future," said Mr Kassis. "The story in Iraq did not finish with the previous three rounds and did not finish with the fourth round.

"This is a country with a huge petroleum resource."