Shell Renegotiates with Iraq for Kirkuk Field Rights

Iraqi Oil and Gas Developments
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ISTANBUL (Dow Jones), Oct. 16, 2009

Royal Dutch Shell PLC is renegotiating with Iraq about the Kirkuk oil field, one of Iraq's largest oil producing areas, after it didn't win access to the field in the country's first licensing auction held in Baghdad in June, company sources and Iraqi oil officials said Friday.

"Shell has held talks with the Oil Ministry on Kirkuk recently and both will meet again soon," one company source said.

Shell didn't accept the Iraqi Oil Ministry payment fees of $2 a barrel in June's auction. It wanted $7.89 payment fee for each extra produced barrel.

Shell has asked the Ministry to raise the per barrel fee, Iraqi oil officials said.

The Oil Ministry needs to get the approval of the Iraqi prime minister to allow such increase, they said.

The Shell-led consortium, which included China's CNPC and Sinopec (SHI) and Turkey's TAPO, offered to raise output to 825,000 barrels a day against Iraq's minimum 600,000 barrels a day. Sinopec is now blacklisted by the Oil Ministry because it bought Addax' share in a Kurdish oil field in northern Iraq. Baghdad doesn’t recognize the contracts signed by the Kurds with international companies.

Kirkuk is among eight fields on offer in Iraq's first post-war licensing round, when the only award was to BP PLC (BP) and CNPC for Rumaila.

Companies returned to the negotiating table after contract terms, especially regarding Iraq's 35% tax rate, were clarified, an Iraqi oil official said. They were also encouraged by BP's expectations of a 15%-20% investment return on Rumaila and hope the two neighboring fields will generate the same profits.

Iraq Tuesday awarded Zubair oil field to Italy's Eni SpA (E) and is on the verge of awarding a contract for West Qurna-1 after investors caved in on the Oil Ministry’s payment demands. Both fields were listed in the country's first bidding round.

Lukoil Holdings (LKOH.RS) and ConocoPhillips (COP) are competing against ExxonMobil Corp (XOM) and Shell to win West Qurna-1.

Both have agreed to the ministry’s payment fee of $1.90 a barrel, but each had in June different proposals for production increase. Lukoil proposed to increase production to 1.5 million barrels a day from around 260,000 barrels a day, while Shell proposed to increase to around 2.3 million barrels a day.

Iraq is planning a second bidding round in December when it would auction 10 groups of giant oil and gas fields.

Iraqi oil officials said crude oil production could reach 7 million barrels a day in six years. Iraq is currently producing around 2.4 million barrels a day.  

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

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