ISTANBUL,(Reuters) – Sweetened terms for Iraqi oil deals have encouraged international oil firms competing to work on the country’s most prized fields, but executives remain concerned about taking on huge risk for little reward.
Iraq has offered to rework contracts on offer for six of its biggest producing oilfields, after Iraqi oil officials hosted a three-day workshop that concluded on Saturday in Istanbul for representatives of the 32 energy firms in the race for the deals.
The meeting clarified many of the oil company’s doubts, but plenty more remain as executives weigh signing up for a contract model they dislike against the allure of access to the world’s third largest oil reserves.
“Of course you want access, but you don’t want to lose your shirt,” said one senior executive with a major oil company on condition of anonymity. “This is going to be difficult to justify to the chief executive. There was quite a negative aura about the companies here.”
The oil service contracts are flat-fee deals. Big oil companies prefer deals that give them a share of profits and allow them to book reserves. The terms for the multi-billion dollar investments look even poorer in the context of the oil price collapse of the past seven months, which has left oil companies tightening their budgets.
U.S. oil has fallen over $100 to around $38 from a peak over $147 in July, which was just after Iraq announced the first bidding round.
“Every dollar counts now, we’re watching every last one,” said a senior executive from another big oil firm. “I’d say the $30 environment colours the whole picture for Iraq. We will be taking a very hard look.”
Changing terms mean oil firms will have to revise bid offers and this may result in some delays in Iraq’s plans to award the contracts in June, executives said.
“They may delay if there is consensus that a delay would help us prepare bids,” one executive said.
Analysts have said that concerns about security and the political and legal environment in Iraq might encourage oil firms to sign deals and then delay implementing them.
But Iraq would brook no such approach and would cancel contracts if oil firms failed to start work within six months of deals becoming effective, said Abdul Mahdy al-Ameedi, deputy director general at Iraq’s petroleum contracts and licensing department.
“We don’t want any company to just put the contracts in their pocket without implementing them,” Ameedi said.
Sending people to work in a country that they still see as unsafe after years of violence is a tough ask for international oil firms.
“We can send people to visit, with important security measures in place, but not to work,” said Massimo Ignesti, international corporate security manager for Italy’s Eni. “We are constantly evaluating it.”
Iraq aims to boost oil output by 1.5 million barrels per day with the contracts, 60 percent up on current production of around 2.5 million bpd.
But bottlenecks would be a problem for oil firms working simultaneously on Iraq’s giant fields to overhaul infrastructure and boost output. Big oil firms also fear working with the state oil firms will slow them down.
“Actually implementing these contracts is the gorilla in the room,” said one executive. “This would be a massive undertaking even if oil firms were working alone. But under a forced marriage with the state company, in a dilapidated industry, there will be huge pressure on resources, rigs, people, everything.”
Iraq has also failed to address how oil firms would get paid if the country becomes subject to the production quotas of the Organization of the Petroleum Exporting Countries (OPEC). The contract states oil firms will be paid using oil from improved output. But if OPEC cuts force them to trim, there may be no extra oil left.
Iraq is a member of OPEC but is exempt from quotas after years of sanctions and war.