Iraq: Baghdad may yet fulfill its potential

After almost 40 years of exile, international oil companies are about to return to Iraq.

For companies such as BP, Shell, Total and ExxonMobil, Iraq represents the biggest opportunity in decades.

Not since the fall of the Soviet Union led to the revival of Russia’s industry and significant discoveries in central Asia, has such a promising oil frontier emerged.

The companies are among those expected to bid next month for oil service contracts. They hope their work in helping revive Iraq’s tired old fields will lead to being allowed to tap its vast undeveloped reserves.

Iraq has reserves of 115bn barrels, but war, sanctions and underinvestment have meant the country is able to produce only about 2.4m barrels a day, a fraction of its potential.

But the fall in oil prices – to about $60 a barrel, from $147 last July – has left a gaping hole in Iraq’s budget. As a result, politicians in Baghdad have finally become serious about writing contracts that oil companies are willing to accept, even without a hydrocarbons law.

Thamir Ghadhban, chairman of the advisory board to Iraq’s prime minister and a former oil minister, says the coming bidding round will be heavily subscribed and companies will be obliged to begin work within three months of any awards being approved by Baghdad.

Executives warn the process could be delayed, given the country’s past struggles to make decisions about its most precious resource and in view of the fragility of the security situation. However, they say they are as close to returning to the country as they have ever been.

Alex Munton, analyst at Wood Mackenzie, the industry consultant, says the lack of a hydrocarbon law, bogged down by disagreement about how to share the oil revenue, is no longer an obstacle because many of the companies’ concerns have been addressed.

Nevertheless, the companies are taking a leap of faith, especially because the contracts demand a total of $2.6bn in loans upfront, making them riskier than before.

“Having an institution [such as the hydrocarbons law] in place gives greater comfort that things are not going to change in three to five years, when the companies are making investments for 20 years,” Mr Munton says. But, he adds, Iraq was too good an opportunity to forgo.

Indeed, international groups have been short of opportunities to tap easy oil as oil-rich countries have closed their borders to them and relied on their own national companies and on service contractors such as Schlumberger.

“International oil companies are short of reserves and opportunities, and countries control almost 88 per cent of oil reserves. The only real opportunity is Iraq,” Mr Ghadhban said.

But while Baghdad was negotiating with some of the world’s biggest oil companies, many smaller ones decided to bet on Kurdistan, the more stable semi-autonomous region in the north of the country.

Their decisions were risky, because Baghdad retaliated by prohibiting those companies from bidding for work in the southern areas it controls.

But their audacity may also be about to pay off. The Kurdistan Regional Government this month announced it had asked Addax, a small Swiss oil company, and DNO, a Norwegian company, to export 100,000 barrels a day of its oil through the Iraq-Turkey pipeline.

Baghdad agreed, ending a stalemate that had for months hindered companies trying to recoup some of the hundreds of millions of dollars they invested in developing fields in Kurdistan.

Though the deal is still fraught with uncertainty, especially as money from the sale of oil will be controlled by Baghdad, it may work.

Addax and DNO, siding with Ashti Hawrami, the KRG’s determined oil minister, are willing to give it a shot. Jean Claude Gandur, president and chief executive of Addax, says he trusts Mr Hawrami to come up with the money, believing he may already have cut a deal with the finance ministry in Baghdad.

“He fears nothing, he is a man of determination,” Mr Gandur told the FT.

Meanwhile, Mr Hawrami recently may have won himself a big ally. Europe now has a vested interest in seeing exports from Kurdistan, after OMV of Austria and Mol of Hungary agreed to develop two big Kurdish gas fields eventually to feed the Nabucco pipeline.

Nabucco is the centrepiece of Europe’s energy policy and its drive to reduce the region’s dependence on Russia. But construction of the pipeline, which would bring gas from central Asia, has yet to begin, because it lacks suppliers.

The deal now makes Kurdistan’s gas a decisive factor in the success or failure of Nabucco.

That, and Iraq’s desperate need for revenue to fill the gap left by the drop in oil prices, may just speed up exports from Kurdistan, despite the bitter politics.

Together with the vast oil fields in the south, they may help the country fulfil its potential.

The consequences of this reach far beyond the country’s borders. Not only does Europe need Iraq’s gas, but analysts believe the world could again suffer an oil shortage if Iraq fails to develop its huge fields in time to fuel the recovery of the world’s economy.