Page last updated at 23:02 GMT, Wednesday, 8 July 2009 00:02 UK

Firms challenge Iraqi oil auction

By Mark Gregory
Business reporter, BBC World Service

Iraqi oil and gas auction
Saddam Hussein part-nationalised Iraq's energy sector in the 1970s

Several major Western oil corporations are in dispute with the Iraqi government over contracts to run six oil and two gas fields.

The contracts were offered in a televised auction last week.

Only one of the 32 approved bidders for the contracts, which include Shell, BP, Exxon and Total, has agreed to the oil ministry's terms.

The government has asked the rest to reconsider resubmitting their bids for the contracts that are left.

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

Taking a risk

With only one contract in place so far, energy analyst Alex Munro sees the agreements as a cautious first step.

US Marine covering the face of Saddam Hussein's statue with the US flag in Baghdad
The US-led invasion in 2003 left the country's oil industry in chaos

"The model that Iraq has introduced is a service contract that doesn't give the companies a share of the oil that's produced," says Mr Munro.

"It pays them a fee," he adds.

"From that standpoint, the terms vary from other areas in the world, where the companies have an entitlement to physical barrels that are produced and can then benefit from upward changes in commodity prices, or even changes in rates of production, offering greater returns on the investment."

David Horgan, managing director of the Irish oil company Petrel Resources, thinks the deals on offer could be risky for them, especially given the uncertain business climate in Iraq.

"You're asking people to give you money without ownership title and with quite a lot of uncertainty about when, or even if, these deals will be ratified and implementable," he says, "whether there'll be sufficient co-operation from the Iraqi executives and workers to make these things work."

One reason Western oil firms are prepared to go back into Iraq on such unfavourable terms is competition from the Russians and the Chinese.

"Even if the Western companies act on commercial grounds and hold their fire, the fear is that the Chinese or the other national oil corporations will gazump them," said Mr Horgan.

"That fear of competition has led to the conclusion that the risks of staying out of Iraq are greater than the risks of going into Iraq."

Black gold

An engineer walking past the chimneys at the Barjisiya oil field
Iraqi oil is cheap and easy to extract

Iraq has the third-largest proven reserves in the world. Unlike most other untapped alternatives, its oil is cheap and easy to extract.

"These Iraqi oil fields could be developed at a few dollars a barrel," said Manuchar Takin of the Centre for Global Energy Studies.

"In other parts of the world, we are talking about $20 or $30 a barrel.

"Like the Arctic, West Africa or outside Brazil, or the Gulf of Mexico, oil is being produced, but at much higher costs and complicated technology."

The potential is huge, but the Iraqi oil industry is currently in very poorly state.

"Iraq's oil industry has been under national control since nationalisation in the mid-1970s and during that period, there's been very little interaction with the international oil sector," said Alex Munro, who is an Energy Analyst at Wood MacKenzie Consultants.

It was weakened by decades of conflict and international sanctions against Saddam Hussein, and then things became even worse in the chaos that followed the Iraq war in 2003.

The Iraqis are under terrible stress, even to maintain their current production, and that's really quite depressing
David Horgan

Oil installations and pipelines were frequently attacked by insurgents.

Mr Horgan, who has been involved in Iraq for many years, points out that daily output is still below the pre-war level.

"Iraq's production is languishing at just 2.4 million barrels, it was about three million barrels under Saddam Hussein at a time of record sanctions and during a period of wars and civil strife," he said.

"Now the production has fallen 20% from that low level and the pressure in the short run is for it to fall further because, just as a lot of the infrastructure is rusting, the human infrastructure is also rusting."

Desperate state

Iraq's state-owned oil companies are desperately short of modern equipment, cash for investment and young trained staff.

"The Iraqis are under terrible stress, even to maintain their current production, and that's really quite depressing because 10 years ago, when we first got involved in Iraqi oil, we were thinking that production would be tripling or quadrupling," said Mr Horgan.

"We weren't thinking it was going to be falling in this period."

The Iraqi economy depends on oil, which provides 95% of government revenue and the bulk of national income.

They controlled the price and production, so there is that legacy and sensitivity
Manuchar Takin

The economic case for bringing in international energy companies to revive the oil sector has always been clear.

But it has taken a very long time to come together, mainly due to political issues and the fact that foreign oil companies are not popular in Iraq.

"Oil companies in those days with their concessions, acted like a state within a state," said Mr Takin.

"They were an arm of the Foreign Office, an intelligence sector of Britain or others, and the share of the revenue that those concession holders received was huge.

"They controlled the price and production, so there is that legacy and sensitivity," he added.

What the international energy companies ultimately want are lucrative exploration rights to Iraq's probably huge, but as yet undiscovered, oil deposits.

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