ISTANBUL/BAGHDAD (Reuters) – As Iraq prepares to pit the world’s top oil firms against each other in a contest for access to prized oil fields, executives are worried they may have to almost give away their services to win risky deals.
The allure of the world’s third-largest oil reserves and the potential for future, more lucrative contracts means competition will almost certainly be fierce among companies with little access to cheap oil elsewhere in the Middle East.
They cannot afford to miss out, even if the first bidding round for Iraqi contracts since the U.S.-led invasion in 2003 carries little immediate prospect of the reward they crave.
“The model contract hasn’t been agreed or explained and the direction this is going in is scaring the hell out of international oil companies who really aren’t sure what the terms will be,” said one senior oil company executive on condition of anonymity.
Iraqi oil officials will meet representatives of 30 international oil firms in Istanbul at a workshop beginning on Thursday to discuss concerns ahead of bidding in June.
Representatives from Exxon Mobil, Royal Dutch Shell, BP, Chevron and Conoco are among those expected to attend.
But doubts range from basic issues about payment and control at the six oil fields on offer to how safe it is for oil firms to send staff into the country after years of violence.
With spending budgets constrained by the slump in oil prices, the risks involved in Iraq and the lack of clarity on contract terms have got oil executives worried.
“In this oil price environment there is less appetite for risk,” said Alex Munton, analyst with consultancy Wood Mackenzie. “And this bid round is happening in a context where major questions in Iraq around the structure of the oil industry have yet to be decided.”
An oil law to define the framework for foreign company investment has been stuck with feuding politicians for years. Oil Minister Hussain al-Shahristani has decided to push ahead with bidding rounds for oil service contracts for some of the country’s biggest oilfields anyway.
The contracts are for 20 years, so oil companies want mechanisms built in that release them from obligations if the legal and political environment changes.
“What if a region we are operating in takes on the power to renegotiate deals? What if the oil law is changed substantially before it passes? At what point can we declare force majeure?” another senior oil company executive said.
With no oil law in place, oil companies were also concerned no authority has the power to ratify long-term contracts.
Companies would live with such eventualities if their potential profits were big enough.
“For international oil companies it is very simple,” said one senior executive at an oil major, speaking on condition of anonymity. “There has to be a balance between risk and reward. And we don’t see that here.”
The contract Iraq is offering is a service contract that pays a set fee to oil companies, which prefer contracts that give them a share in profits and allow them to book oil reserves.
Shahristani has talked about sharing profit oil but Iraqi officials have yet to define how, executives said.
The service contracts proposed by Iraq for the six oil fields on offer have three cost elements for bidding. The first is the cost per barrel of maintaining production at a baseline level. The second is to increase output. The third is for peak output seven years after the contract begins and for the length of time that it can be maintained.
Oil majors say it is unclear how Iraq will weight each category when it evaluates the bids.
“Are they just looking for cost savings? Or are they looking for quality?” a senior executive at another oil major said.
“If it’s just cost then how can we compete with low-ball bids from Chinese or Indian firms with government support and a completely different mandate? They are not driven by profits, they are driven by access.”
State-owned Asian companies hungry to secure future supplies have beaten oil majors in bidding rounds in Africa and elsewhere with cheap bids and pledges to develop infrastructure such as schools and hospitals.
The baseline output target for fields has yet to be agreed, and oil executives say that should vary for each field over the 20-year period.
“Some of these fields may go into decline during that period. You can’t just set an unchanged baseline,” said one executive.