Page last updated at 14:34 GMT, Tuesday, 30 June 2009 15:34 UK

Oil companies reject Iraq's terms

Iraqi oil contract auction
Some bidders have rejected the oil ministry's terms

Only one of the bidders for the eight contracts to run oil and gas fields in Iraq has accepted oil ministry terms.

Six oil fields and two gas fields were available in a televised auction that was the first big oil tender in Iraq since the invasion of 2003.

BP and China's CNPC agreed to run the 17 billion barrel Rumaila field after Exxon Mobil turned it down.

Iraq has asked the rest of the companies to consider resubmitting bids for the other seven contracts.

The oil ministry is offering 20-year service contracts.

Other fields have failed to find buyers, either because there were no bidders or because terms were declined.

Thirty-two oil companies had been approved as potential bidders.

Red envelope

For each field, the ministry specified a minimum production level, which was close to the amount that is currently being produced.

Occidental Petroleum
Korea Gas Corp
Exxon Mobil
Royal Dutch Shell
Turkish Petroleum Corp

The bidders will not be paid for anything up to the minimum production level - but they say how much they want to be paid for each barrel produced above the minimum, and also predict how much oil they will be able to produce.

From that, the auctioneers pick a winning bidder.

However, there is another twist. In a red envelope, the auctioneers have the maximum amount that the oil ministry is prepared to pay.

Those amounts were significantly less than the oil companies were asking for, so the winning bidders were asked to cut their prices.

In the case of the Rumaila field, Exxon Mobil declined to accept the ministry's maximum payment, but BP and CNPC, which had originally asked for $4 a barrel, agreed to do the work for $2 a barrel.

They will also be able to charge the ministry for the costs of the work they have to do on the production facilities.

The contracts are subject to approval by the cabinet.

Other winning bidders declined to accept the ministry's maximum payments.

Raising production

Before the auction, Iraqi officials said companies from nations involved in the 2003 invasion would be neither favoured nor disadvantaged.

The auction was originally planned for Monday, but had to be delayed because of sandstorms in Baghdad.

"Our principal objective is to increase our oil production from 2.4 million barrels per day to more than four million in the next five years," Oil Minister Hussein al-Shahristani told Iraqi public television.

Iraq has the world's third-largest proven oil reserves, with 115 billion barrels, of which the fields up for auction account for about 43 billion barrels.

But there has been some controversy about the auction, with members of the Iraqi parliament objecting to not having the chance to approve the deals.

Parliament has not yet passed an oil bill. Some observers have suggested that the decision to award service contracts, instead of the more common production-sharing contracts, was taken to make it easier to proceed without such a bill being passed.

Under a production-sharing contract, an oil company would recoup its costs and then be entitled to a proportion of the oil extracted, instead of being paid a fixed fee for each barrel.

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