BAGHDAD, (Reuters) – Pipelines shattered by bombs. Oil terminals crippled by suicide attacks. Officials blown up in roadside blasts or kidnapped from their office at gunpoint. Calamities like that are not just the worst fear of an oil executive in a hostile environment; they are the reality of the last six years of chaos, bloodshed and war in Iraq. The world’s biggest oil firms are hoping the past will be no guide to the future when they bid on Monday and Tuesday for six of Iraq’s biggest oilfields and two gas fields in the war-shattered country’s first major tender since 2003. Thirty-two foreign firms will be competing, including Exxon Mobil, Total and Royal Dutch Shell.
The winners will get a foothold in a country with some of the world’s largest remaining untapped reserves, but they will also have to take precautions to protect their investment.
Iraq is one of the world’s most challenging places for energy firms, one western security consultant said, “because the commercial risk is huge and this is still an unsettled place”.
Iraq’s oil wealth is both a blessing and curse – its reserves of 115 billion barrels, the world’s third largest, should allow it to rebuild after years of conflict. But the lure of oil riches also stirs deep rivalries and suspicions.
Many Iraqis believe foreign firms will plunder Iraq’s oil, said Hugh McManners, a spokesman at Erinys, a security firm hired by the U.S. government after the 2003 invasion to rebuild the police force protecting Iraq’s oil infrastructure.
“We can say this negative perception of international oil companies … is used quite ruthlessly by terrorists and nationalist agitators. It’s a good rallying call,” he said.
Violence across Iraq has fallen sharply, but devastating attacks remain common as U.S. combat troops leave the cities this month and hand over security to Iraqi police and soldiers, ahead of a full U.S. withdrawal by the end of 2011.
Since June 20, at least 200 Iraqis have died in bombings.
Diplomats, foreign executives and reporters are still ferried about by heavily armed guards in armoured convoys.
Memories of grainy videos showing western hostages being beheaded will not fade easily, and the threat of kidnapping — either by Islamic extremists or common thugs — is high.
Oil firms have already hired security firms to get advice.
Companies are expected to try to minimize their direct exposure to risk by using service companies and contractors.
They will bypass the dangerous streets of Baghdad by building airstrips near remote oil sites and flying their personnel in and out of the country from there. “Security is a huge expense but then at big oil companies we are used to that. We work in some difficult places, like Nigeria. I would estimate security will add 10-15 percent to the project,” said a senior executive from an international oil company planning to bid but unauthorised to speak publicly.
Outlays on security may be offset by Iraq’s low extraction costs. Some foreign firms have managed to work without problems in Iraq in the recent past by keeping a low profile.
The companies will rely as much as possible on local labour, in part because they hope to fend off problems by co-opting local sheikhs, government officials and neighbours.
Ihsan Abdul Jabar, head engineer at the state South Oil Co., said Basra, Iraq’s oil hub in the south, was ready for foreign firms after shaking the grip of Shi’ite militiamen. “Basra has no more security problems than any major city,” he said.
Yet other risks may weigh even heavier than security.
“The physical security is surmountable,” a consultant said.
More troubling is the unpredictability of Iraqi politics, opaque ministries, and the untested legal environment.
Kurds, who have signed oil deals with firms that Baghdad has rejected as illegal, have in turn condemned the central government’s contracts for fields in the disputed Kirkuk region.
The Kurd-Arab conflict has mired passage of an oil law and there are questions about the legal basis for the contracts. There is also a national election in January.
“If (foreign firms) are going to invest heavily in Iraq, are they likely to see a return for their investment?” the consultant asked. “That’s the big question.”