LONDON (Reuters) – The oil industry is cautious about Iraq’s decision to offer foreign companies long-term contracts to develop its largest producing fields, with any windfalls seen as distant and likely to go to a select few firms.
Earlier this month, Iraq said it would offer development contracts aimed at boosting output at six fields by a combined 1.5 million barrels per day (bpd).
The plan is aimed at helping the country lift output to 4.5 million bpd by 2013 from about 2.3 million bpd now.
But Iraq’s decision to pay companies a fee for extracting the oil, rather than sell them an interest in fields, dashed hopes of near-term windfalls and may delay big rises in crude production.
“The oil companies don’t like service contracts. They prefer production sharing agreements because they are more lucrative, and also they can book the reserves,” Muhammad-Ali Zainy, senior energy economist at the Centre for Global Energy Studies said.
International oil companies (IOCs) such as Exxon Mobil and Royal Dutch Shell Plc usually operate by either owning a field and paying taxes on production or by having a production sharing agreement (PSA) under which they fund a project in return for a share of the oil.
Under such deals they can benefit when oil prices rise or when technology allows them to squeeze more barrels from the field or cut operating costs.
Also, these deals allow companies to add the field’s reserves to their accounts, a key metric used by investors to assess the value of an oil company and its production prospects.
Service agreements cap profits and usually preclude companies from booking reserves.
“The scope for IOCs to turn a profit looks to be severely curtailed,” said Samuel Ciszuk, Middle East energy analyst at Global Insight, of Iraq’s plan.
BETTER THINGS TO COME?
Industry executives say the main reason oil companies are prepared to consider entering service agreements is because they hope it will position them well to secure better deals at a later stage.
“I think eventually they will go to PSAs but at the moment it’s a difficult sell within Iraq to do anything other than service agreements,” said Robin Allan, Director of Business Development, at Premier Oil, one of the 41 foreign firms Iraq has prequalified to bid.
If this happens, it would be a coup for the industry — Iraq’s proven reserves, at 115 billion barrels, are the world’s largest after Saudi Arabia and Iran — but many doubt it.
Like neighbors Kuwait and Saudi Arabia, Iraq threw out the IOCs in 1970s and a deep hostility to foreign investment in oil endures in the region. Also, some Iraqis believe the U.S.-led invasion of Iraq was launched to secure oil.
“I do not think there will be any rich pickings for the oil companies in Iraq. The delays will be long, the terms will be tough and the operating conditions will be tough,” said John Mitchell, an energy specialist at the Royal Institute of International Affairs.
The uncertainty over whether Iraq will ever offer attractive investment terms means many of the companies which qualified to bid for the contracts may not actually do so.
A spokesman for U.S.-based Hess Corp said the company would wait to see presentations from the oil ministry in August before deciding whether to bid for the contracts.
Despite qualifying to bid, UK gas producer BG Group has ruled out near term investment in the country.
“Iraq does not form part of BG Group’s current strategy,” spokeswoman Jo Thethi said.
Iraq’s experience in negotiating short-term technical service contracts with western companies suggests agreement of the planned long-term deals could be protracted.
The short-term contracts have not yet been signed and oil industry executives said on Monday Iraq has asked the companies to revise their proposals.
The government said it wanted to sign long-term contracts in June 2009 but Christophe de Margerie, chief executive of France’s Total, one of the largest companies qualified to bid said earlier this month he did not expect any deals in 2009.
Toby Chinn, Middle East specialist at consultants Control Risks said the security situation was improving.
However, the oil majors still do not think it is good enough to base staff there permanently, while Baghdad says companies must open offices in Iraq if they want to bid for contracts.
Iraq’s leaders are still trying to secure parliamentary approval for a new draft oil law.
Allan said service agreements would be possible under the existing legal framework but Mitchell said companies would be wary of signing deals without the new law being in place.
Some in the industry fear that sweet deals may be offered to the largest companies, although Iraq’s Oil Minister Hussain al-Shahristani has said no company would get any “privilege” in bidding.
“Our worry is that there’s a lot of pressure on the authorities to award the contracts to the giant multinationals such as Exxon, Shell, Total & BP and I don’t think that’s in the interests of the people of Iraq,” Allan said, adding it would be better to force the majors to partner with smaller players.
Allan said the pressure to go with the supermajors was not overt but added: “It’s there in the corridors.”