Iraq Proposes Better Terms for Second Oil Bid Round

Iraqi Oil and Gas Developments
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ISTANBUL (Dow Jones Newswires), Aug. 25, 2009

Iraq has proposed better terms for contracts in its second oil bidding round than the previous one, Iraqi oil officials and executives from companies involved in talks on the deals said Tuesday.

Iraq has the world's third-largest oil reserves, but despite almost six years of efforts and nearly $5 billion spent to improve the sector, Iraqi production is still well below the 3 million barrels a day prior to the U.S. invasion in 2003.

The fields make up more than two thirds of Iraq's reserves, the world's third largest.

The offer is tempting for international companies but with the international economic crisis, companies worried about taking on huge risks while the country's security situation is still not encouraging.

"It's an improvement compared with the terms of the first bidding round," a senior executive at a large oil company told Dow Jones Newswires.

International companies, including oil majors, baulked at what they said were stiff terms set by the ministry in the first bidding round. In June Iraq put up for auction eight oil and gas fields. Only one, the giant Rumaila field in southern Iraq, was awarded - to a consortium of BP PLC (BPB-LN) and China National Petroleum Corp.

The second bidding round is offering 10 groups of oil fields that total some 15 fields, including the super-giant West Qurna phase 2, Majnoon and East Baghdad.

Iraqi officials met with executives from 45 companies at a one-day roadshow in Istanbul Tuesday to introduce IOCs on the process and acquaint them with the new fields. Representatives from Royal Dutch Shell PLC (RDSA), BP, Exxon Mobil Corp. (XOM), Chevron Corp (CVX), ConocoPhillips (COP) and Lukoil Holdings (LKOH.RS) were among those attending.

"The Iraqis have come out with better understanding than the first bid round," another company executive said. "We are expecting them to further ease the terms."

A major sticking point in the first bidding round were the so-called soft loans totaling $2.6 billion companies were supposed to pay the government for signing deals. In the second licensing auction the oil ministry will ask companies instead to pay $1.6 billion in total for the 10 groups of fields.

Oil Minister Hussein al-Shahristani said the amount had been reduced in order to encourage companies to take part in the second round.

Another change is that international oil companies will be able to operate the fields. The first bidding round had stipulated that Iraqi oil officials would be involved in running the fields.

However, Shahristani said the new contracts will remain as technical service deals, which won't allow international firms to keep any of the oil from the fields they work.

Other terms in the second bidding round are essentially the same as the first. Oil firms will hold 75% of the fields, while the Iraqi oil ministry will hold 25%. That means oil firms can take a larger amount of the increased oil output they pump in order to pay back costs.

Iraq will pay with oil rather than cash. Similar bidding parameters that were applicable in the first bidding round would be implemented in the second, Iraqi oil officials said.

They call for an incremental remuneration fee for each barrel and an enhanced production target above a predefined baseline. The company that charges the least for each extra barrel and commits to the highest increase in output would be most likely to win a contract.

Data packages and model contracts for the second bidding round are expected to be ready after the Istanbul roadshow, said Abdul Mahdy al-Ameedi, deputy director-general of Iraq's Petroleum Contracts and Licensing Directorate. Development of these fields could add a further 2 million barrels a day to current Iraq's production of 2.5 million barrels a day.  

Copyright (c) 2009 Dow Jones & Company, Inc.

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