Oil Majors to Compete for Iraq's Gas Licensing Auction

BAGHDAD (Dow Jones Newswires), Oct. 19, 2010

After last year's two successful oil licensing auctions, Iraq is inviting international companies to compete once again Wednesday this time for three major gas fields that contain more than 11 trillion cubic feet of proven reserves.

Baghdad has done little to produce gas from its estimated proven reserves of 112 trillion cubic feet--the fifth-most in the region according to U.S. Energy Information Administration data. Iraq, however, is only producing 1.6 billion cubic feet a day of gas, half of which is flared because of lack of infrastructure.

With ambitious power generation targets and longer-term export aspirations, Baghdad is offering Akkas field in the western Anbar province, Mansouriya in Diyala east of Baghdad and Siba in southern Basra governorate.

"Our goal from awarding these three fields is to fuel turbines recently ordered by the electricity ministry," Abdul Kareem Luaibi, the deputy oil minister told Dow Jones Newswires.

But, the competition is not expected to be as aggressive as in the two auctions held in July and December 2009 when more than 32 international firms took part. In this bidding round only 13 international companies have shown interest in participating.

"I am not expecting the gas bidding round to be as competitive as the previous ones," Deputy Oil Minister Abdul Kareem Luaibi told Dow Jones. But he said, "There will be competition and there are companies which are interested in these fields."

According to the 20-year model contract, international firms would have a 75% stake in the joint venture, with state-owned Iraqi operators at the field holding the remaining 25%.

Winning companies will be determined according to parameters already laid out by the oil ministry. They call for an incremental remuneration fee for each barrel of oil equivalent and a production plateau target. The company that charges the least for each produced barrel of oil equivalent and commits to the highest output target would be most likely to win a contract.

If the awards process goes well, the outgoing government of Prime Minister Nouri al-Maliki needs to approve the contracts before it goes. Iraqi politicians have been wrangling to form a government since the country's general elections held in March this year.

The Akkas and Mansouriya fields were offered in the country's first licensing auction, held in June last year. Only one company submitted an offer for Akkas in that bidding round, which was rejected by the oil ministry. None of the competing companies submitted an offer for the Mansouriya field.

A consortium led by Italy's Edison, which was the sole bidder for the Akkas field, was rejected because it sought $38 for each barrel of oil equivalent produced--much higher than the $8.50 maximum remuneration fee offered by the ministry.

The Siba gas field, located in southern Iraq near the border with Iran, was dropped from the list of oil and gas fields in the second bidding round which took place in December.

The 13 international companies which are expected to take part in the auction are: Total, Statoil, Edison, KazMunaiGas, Turkish Petroleum International or TPAO, Japan Oil, Gas and Metals National or Jogmec, Itochu, Kuwait Energy, Oil and Natural Gas or ONGC, Korea Gas or Kogas, TNK-BP, BP's Russian joint venture, Mitsubishi and Eni.

Edison, however, is said to be withdrawing from the race because shareholders think that Akkas project is not profitable enough for them.

Iraq awarded 11 oil deals to international companies during the first and second bidding rounds last year with the aim of boosting its crude oil production to 12 million barrels a day in six to seven years. Iraq is currently producing around 2.5 million barrels a day.

The Iraqi Oil Ministry had further sweetened commercial terms in the final model contract it released earlier last month in an attempt to entice international firms. It has dropped an earlier condition that winning companies should export 50% of the output from these fields.

The ministry has agreed to take or pay for all of the gas produced from these fields. Additional improvement to the 20-year-technical service contract includes a reduction in the annual training commitment to $1 million from $5 million, he said.

In a roadshow for the gas licensing auction held in Istanbul in August, Baghdad dropped demands for signature bonuses. International companies have been paying bonuses ranging between $100 million and $500 million for deals they won in the first and second licensing auctions held last year.

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