International firms want to get a foot in the door – but for many, the risks still outweigh potential profits.
By Jane Arraf | Correspondent of The Christian Science Monitorfrom the July 7, 2009 edition
Baghdad - International oil companies trying to get their foot in the door on some of the richest undeveloped oil fields in the world are grappling with a wide array of factors including lingering security fears and concerns that Iraq's climate for foreign oil investment is still shifting.
A historic oil auction on June 30, the same day as the withdrawal of US combat troops from Iraqi cities, awarded only one contract after other foreign companies decided that the risks outweighed the profit Iraq's oil ministry was offering.
A consortium led by British Petroleum and China's CNPC won the rights to the "super giant" Rumaila field after agreeing to just half the profit per barrel they'd proposed.
Rumaila is in the south of Iraq, which has been relatively calm, and which has the majority of Iraq's oil reserves. Altogether, the six oil fields on auction contain more than 43 billion barrels of oil.
A gas field in troubled Diyala Province attracted no bids at all, while bids on others asked up to 10 times the profit the ministry was offering on the contracts to increase output.
"Some of the oil companies are not very comfortable with the security situation, and this is why they didn't offer acceptable bids," Oil Minister Hussein Shahristani told reporters after the auction.
Under the terms of the contracts, international oil companies are barred from using private foreign security firms, says Abdul Mahdy al-Ameedi, deputy head of the Petroleum Contracts and Licensing Directorate at the Ministry of Oil.
Mr. Ameedi says security will be handled by an arm of the Oil Ministry responsible for the field in question – either the South Oil Co., North Oil Co., or the Maysan Oil Co., in south-central Iraq.
"Our petroleum oil police have the responsibility to train and arm local people from any town where the field is located," says Ameedi.
The Rumaila field also straddles the Iraq-Kuwait border. Iraqi officials say they expect to be able to come to a unitization agreement with Kuwait, in which experts determine how much share of production belongs to each country.
"For the time being, we have made some progress in that but we did not finalize the agreement," says Ameedi.
Saddam Hussein used the pretext of Kuwait taking more than its share of oil from the Rumaila field as one of his justifications for invading the neighboring emirate in 1990.
The political uncertainty over Iraq's investment climate is also taking its toll. The Oil Ministry developed the auction process to ensure transparency after a controversy over no-bid contracts last year.
An oil law intended to entrench the legislation for foreign investment and create a national oil company has been mired in cabinet for more than a year.
"We set tough contractual terms with foreign oil firms, but all that is to make it clear to all Iraqis we are keen to safeguard Iraqi oil revenues," Mr. Shahristani told reporters after the bidding last week.
Oil minister under attack
The oil minister, a former nuclear scientist imprisoned by Mr. Hussein, has come under political attack for alleged mismanagement of the oil industry, both from politicians who believe he is selling out Iraq's oil wealth and those who believe that he moved too slowly in taking advantage of higher oil prices last year.
The Iraqi budget crisis sparked by falling prices has affected every sector of the country's economy, including freezing expansion of the defense forces.
Iraq has an estimated 9 percent of the world's crude oil – and some of its lowest rates of production. And a decade of trade sanctions, the past six years of war, and plunging oil prices have left it without enough cash to develop its vast oil and gas fields or fund the reconstruction it needs.
Iraq's current oil production – about 2.5 million barrels a day – is at about the same level as it was before the US invasion in 2003, which followed a decade of trade sanctions that devastated Iraq's oil industry.
Having proved its point that the country's oil wealth might temporarily be for rent – but not for sale – some officials said the oil ministry might be more flexible in the next round of bidding this year.
"We said to Shahristani, 'You should not be so strict – we need as much production as possible, and you are pushing them [companies] away,' " says one senior Iraqi official who asked to remain anonymous. "It has to go through a transparent bidding process, but I think they will be more flexible."