Iraq Government Says Oil Contracts Bid Out for Techical Services

BAGHDAD (Wall Street Journal via Dow Jones Newswires), June 30, 2008

Iraq's Oil Ministry announced on Monday that companies chosen to participate in bidding for technical service contracts include major energy firms, but those deals pale in comparison to the most lucrative prizes for oil exploration and new production, which are being awarded to major western oil companies.

Those technical service contracts are separate from shorter-term, controversial consulting contracts that the ministry is negotiating with companies like ExxonMobil and Royal Dutch Shell. The Oil Ministry said such consulting agreements are needed in the interim because it will take about a year for the bids for the technical service contracts to be rewarded.

These consulting contracts have drawn criticisms that U.S. advisers steered the Iraqi government toward these companies and has fueled sentiment in the region and in Iraq that the U.S. invasion was based on oil interests.

However, Iraq's Minister of Oil, Hussein Shahrastani contends that no contracts have been signed and added it was a "normal thing" to ask the largest and most experienced oil companies to help Iraq when it needs it. "When a person needs a doctor, you ask who the best doctor in the field is," he said.

However, Shahrastani said the western companies are demanding special consideration for future oil deals and the Iraqi government is reluctant to agree and thus no contracts have yet been signed.

Shahrastani said U.S. politicians should stay out of Iraq's oil industry and Iraq, as a sovereign nation, has the right to sign contracts with whichever company it wishes. "Nobody has a right to interfere in our business," he said.

The bidding companies see these technical service and consulting contracts as a way to get their foot in the door of Iraq's potentially lucrative oil industry, say company and Iraqi government officials. Iraq has the world's third-largest known oil resources, with 115 billion barrels in reserves. Iraq now produces more than 2.5 million barrels of oil a day, compared to 1.9 million barrels a day produced last year.

The hydrocarbon legislation, which will set up the framework for foreign investment in the oil sector among other regulations, isn't expected to be considered by parliament until the October legislative session at the earliest. One of the most contentious points focus on the scope of the authority between the Kurds and the central government in signing contracts for development and other issues.

Last week, U.S. Sen. Charles Schumer, D-N.Y., and several other senators asked the Bush administration to block deals between the Iraqi government and the world's largest energy companies, saying it would increase sectarian conflicts.

For the technical service contracts, announced that Royal Dutch Shell, BP, Exxon Mobil and other major energy companies will be eligible to submit proposals aimed at reversing the decline and increasing production at six oil fields and two gas fields across Iraq. They were chosen out of a field of 120 companies in a process based on their technical capabilities and experience, and the process for choosing the winners will take place in open bidding next year.

The winning bids will be chosen in April and will be based on how much the companies propose increasing production, how many jobs it will create for Iraqis and how much training the companies can provide for local staff. It's not yet clear how much the contracts will be worth but the ministry has estimated each oil field will be worth about $500 million.

The technical service deals will eventually increase production by 1.5 million barrels a day and the ministry hopes to reach 4.5 million barrels by 2013. The technical contracts target aging oil fields that have seen production decline over the years. Iraq's oil industry has suffered from years of neglect and dilapidated infrastructure. For example, at its peak, the South Rumaila oil fields produced almost 1.5 million barrels of oil a day but now production is down to 600,000 barrels a day.

These companies are waiting for Iraq to pass an oil law that will spell out the legal and financial details of investing in the oil sector, which will then allow for exploration and new production - the most lucrative segment of the oil business. But the legislation has been bogged down for more than a year, largely because of differences among the Kurds and Baghdad officials over who has control over signing contracts for development and other issues.

"Iraq is definitely losing an opportunity because we aren't moving fast enough," Shahrastani said in an interview. "And that's why weren't not waiting around for the oil law to be approved to move forward with trying to increase our production."

Last Saturday, Kurdistan regional government Prime Minister Nechirvan Barzani said a committee would be formed to try to find an agreement regarding the oil law. The group will include Barzani, Iraqi Prime Minister Nouri al-Maliki, and other government representatives, and will meet this week in Baghdad.

Maliki's fight against Shiite militias in Basra and elsewhere has led to more willingness on the part of Sunnis and Kurds to cooperate on thorny issues such as the oil law. The Kurds have negotiated 20 separate oil deals with companies like Hunt Oil in production sharing agreements that have not been authorized by the central government.

This has drawn sharp criticism from the central government, including Shahrastani who contends, "It's a clear violation of the rules."

Copyright (c) 2008 Dow Jones & Company, Inc.

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