LONDON Mar 07, 2007 (Dow Jones Newswires)
Austria's OMV AG (OMV.VI), central Europe's biggest oil and gas company, said Wednesday that it is in negotiations with the Iraqi government and the country's northern Kurdish Regional Government about signing possible exploration contracts.
"We started discussions about two months ago with the central government and the Kurdish authorities," OMV Chief Executive Wolfgang Ruttenstorfer told Dow Jones Newswires in an interview.
Ruttenstorfer said the talks were about exploring for oil and natural gas in the war-torn country but declined to elaborate on their progress.
OMV, with annual revenue of around EUR19 billion, or $25 billion, is the first substantial publicly traded energy company in Europe or the U.S. to acknowledge active negotiations with Iraqi officials about energy deals.
The news comes days after Kurdish Regional Government Minister of Natural Resources Ashti Hawrami told Dow Jones Newswires in an interview that he expected the KRG to sign energy deals this year with 10 mostly U.S. and European companies.
Ruttenstorfer said Iraqi gas could supply the giant Nabucco pipeline once foreign investment and infrastructure is injected into Iraq's dilapidated energy sector.
The proposed pipeline will wheel gas from the relatively underexplored Caspian and Black Sea regions some 2,100 miles to Europe, which wants to reduce its reliance on Russian imports.
"Some years down the road," Ruttenstorfer said, Iraq "could be a supplier to Nabucco."
Ruttenstorfer said the costs of Nabucco were "definitely substantially higher" from previous estimates of around $6 billion but said the project was still economic.
He said rising prices for labor and raw materials like steel have driven up costs but declined to specify the new cost estimate for the project.
Nabucco is expected to have a total capacity of 31 billion cubic meters, or about 1.1 trillion cubic feet, of gas a year by 2020, about 4-5% of total European gas demand by that date.
The project is slated to start service by 2011-2012.
Ruttenstorfer said the five-company, OMV-led Nabucco consortium had formally asked the European Commission recently for exemptions from European rules that would require Nabucco to provide access to all gas parties at regulated prices.
The operators want unregulated deals for an initial 10- to 20-year period so they can recoup the costs of building the pipeline and make a healthy profit.
Ruttenstorfer said he believed the drive by the E.U. Commission to increase competition in its energy markets by separating ownership of gas and power distribution networks from supply and generation shouldn't include strategic pipelines like Nabucco.
"Unbundling is fine as far as regional distribution is concerned," he said, "but please do not go as far as unbundling big supply and transit pipelines because there will not be enough incentive to build them."
He added that long-term gas supply contracts, which the E.U. Commission frowns upon, are essential for projects such as Nabucco because they take years to build and many more for operators and financiers to recover the costs and make a healthy return.
OMV, Hungary's MOL (MOL.BU), Turkey's state-run Botas, Bulgaria's Bulgargas and Romania's Transgaz SA Medias each have a 20% stake in Nabucco, but the group is looking for a sixth company to help finance the project.
French oil giant Total SA (TOT) and state companies in Azerbaijan and Ukraine have recently expressed interest in joining the consortium.
Ruttenstorfer wouldn't characterize how the search for the sixth partner was going but he did say the consortium wasn't currently in discussions with Iran or Russia about taking an equity stake in the project.
Russia and Iran, the world's number one and two gas reserve holders, respectively, are in negotiations with the consortium about supplying gas to the pipeline.
Ruttenstorfer acknowledged the two countries possible participation in Nabucco came at a politically sensitive time, with the Islamic Republic in a long-running standoff with the U.S. and European nations over its nuclear program and European concerns over the reliability of Russian gas supplies.
But he rejected the notion that Iran and Russia should be excluded from the project and said OMV was also in discussions with the U.S. about Nabucco's development.
"We do our business within Austrian, European, and United Nations laws .. but we do consider the political implications ...we have been in discussions with the U.S. side," he said.
Concerns in Europe about the region's reliance on Russian imports have been driven by Russian decisions to briefly cut gas flows to Ukraine in early 2006 and to Belarus early this year over contract disputes that resulted in lower gas shipments to Europe.
Russian gas is expected to account for well over 50% of total European imports in the decade ahead, from 44% today, if current consumption patterns continue.
OMV has received gas from Russian state gas giant OAO Gazprom (GSPBEX.RS) for nearly 40 years and the company has oil and gas operations in Iran.
OMV expects to begin commercializing a small amount of oil in Iran in the next two years, Ruttenstorfer said.
Copyright (c) 2007 Dow Jones & Company, Inc.
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