Oil Cos Reject Iraq's Contract Terms

BAGHDAD (THE WALL STREET JOURNAL via Dow Jones Newswires), Jul. 1, 2009

Iraq awarded a BP-led consortium the right to develop the giant Rumaila oil field but failed to strike deals for seven oil and gas fields as companies balked at the country's contract terms.

The outcome raised questions about how quickly Iraq could rehabilitate its oil sector, which has suffered from years of war and neglect. The country relies on oil sales for more than 90% of government revenue.

Iraqi officials hailed the sole award for the Rumaila field, believed to have 17 billion barrels in oil reserves. At the same time, that offer will boost oil output from the current 2.4 million barrels a day to more than four million barrels a day, which was the ministry's goal.

"We're very pleased with what we've got, but we'll wait to see what happens next," a BP spokesman said, alluding to criticism from some lawmakers who have questioned the legality of the deals. "We haven't signed any contracts yet."

The Iraqi oil ministry set aggressive pricing for the 20-year technical-service contracts in which companies will be paid a fee for boosting output. The oil ministry typically offered a maximum bonus for any output beyond current levels at $2 a barrel for several fields -- a figure that proved a dealbreaker, according to a number of oil executives.

Company bids ranged from about twice that figure, in most cases, to more than 10 times the oil ministry amount.

"It's a losing proposition," one official at an Asian oil company said of the ministry's payouts. "It's not worth it for us to pursue this."

Oil companies also didn't like the idea of getting paid a set fee for every barrel produced. The industry typically signs contracts which give it ownership of a portion of the oil pumped from the ground. But companies were willing to bid on the unusual fee-for-service contracts because of the enormous size of Iraq's reserves.

Revitalizing old oil and gas fields requires a large upfront investment, and the companies wanted contracts that gave them a chance for a good return. "We're not some nonprofit charity," said an executive at a Western oil concern involved in the process. "The terms on offer were unrealistic."

Under the bidding conditions, the oil firms had to agree to the oil ministry's per-barrel production bonus, and many declined to do so. Because only one field was awarded, Oil Minister Hussain al-Shahristani adjourned bidding early.

Six oil fields and two gas fields were up for bid on Tuesday, marking the opening to Western companies of a sector Iraq nationalized in 1972.

Mr. Shahristani gave the companies that scored the highest points for bidding for each field a chance to resubmit their bids Tuesday evening. The points were based on the company's bonus proposal and its peak-production standard for the field. The Iraqi cabinet will consider revised proposals. It's unclear whether they will hold another bidding process or if the oil ministry will compromise on its terms.

The BP PLC group, which included China National Petroleum Co., submitted a bid of a $3.99 per-barrel bonus. Ultimately, the group accepted the ministry's $2 a barrel payment.

(Russell Gold and Guy Chazan contributed to this article.)  

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