(Bloomberg) -- International oil companies could boost production in Iraq beyond current targets if production contracts were changed to give more incentives for investment, according to BP Plc and Royal Dutch Shell Plc.
Companies working in the country have proposed that the government change contracts from the current service-fee model to be closer to production sharing agreements, Michael Townshend, BP’s regional president for the Middle East, told reporters in Abu Dhabi on Tuesday. The suggestions were made earlier this year amid talks about development budgets needed to operate Iraq’s oil fields next year, he said.
Shell would need “a different commercial balance” to achieve full potential for its development of the Majnoon oil deposit, Maarten Wetselaar, the company’s executive vice president for integrated gas, told reporters in Abu Dhabi. “It’s a bit of an affront to its potential to only produce 225,000 barrels a day from it, you could double or triple that by investing in it.”
The slump in global crude prices of more than 40 percent in the past year has cut the Iraqi government’s income as it battles Islamic extremists that have seized parts of the country. After decades of conflict and sanctions that choked investment, Iraq is one of the nations with the greatest potential to boost production, but also faces some of the most serious challenges in mobilizing the necessary investment, the International Energy Agency said Tuesday.
Companies working in Iraq are currently paid a fee, either in cash or with barrels of oil, based on meeting output targets. Production sharing agreements, used in some other OPEC members such as Angola, would give companies a direct stake in crude pumped. Reviewing existing contracts would help Iraq to better meet its obligations to pay international partners and give companies more incentive to maximize output, said Robin Mills, an analyst at Manaar Energy Consulting in Dubai.
“The government should consider revamping the oil companies’ contracts by stretching out the period over which the projects have to pay off their costs and by raising the level of remuneration for the companies over the longer term,” Mills, who consults on projects in Iraq and previously worked as a geologist for Shell, said by phone Tuesday. By cutting development spending Iraq risks output next year, he said.
BP operates Rumaila, Iraq’s largest deposit. Production from the southern field will average 1.3 million to 1.35 million barrels a day this year. Output next year depends on spending approved by the government, which has asked foreign companies to decrease their 2016 budgets due to the drop in crude prices, Townshend said. Total capital expenditure on the field will be about $2.5 billion this year, with BP responsible for about half of that, he said.
“It’s difficult to see a massive ramp up next year” in Iraqi crude production, Townshend said. Talks about a budget for next year at Rumaila are “a work in progress.”
Iraq may not be able to reach substantial agreement on new contracts given security concerns, Patrick Pouyanne, chief executive officer of Total SA, told reporters Tuesday.
“At $50 a barrel, Iraq needs most of the money from oil to finance its security forces and its own societal needs,” Pouyanne said. “So today in Iraq it’s not the time to discuss big contracts, but we’ll see.”
The government sees an opportunity to reach an agreement to decrease the 2016 budgets of foreign oil companies, Oil Minister Adel Abdul Mahdi said Oct. 28 in Amarah, Iraq.
Iraq, the second-largest producer in the Organization of Petroleum Exporting Countries after Saudi Arabia, pumped 4.3 million barrels a day in October, according to data compiled by Bloomberg. The country produced about 2.4 million barrels a day at the end of 2010 and plans to boost capacity to 6 million in 2018.
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