Iraq hails auction but oil giants shun risky sites

Iraq’s oil minister began counting the money from the country’s second post-war oil auction that was shunned by most international companies.

The two days of bidding produced deals on only seven of the 15 oil fields on offer. Of those, four were in the stable southern Shiite heartland while two in the north went to the only company that expressed interest, Angola’s Sonogal.

The last was in central Iraq, in a province where violence has remained low.

The auction was key for Iraq. Its oil bidding in June – the first in more than 30 years – largely failed, with only one giant field awarded out of eight offered. The hope was for a better showing this time.

The deals are critical for boosting Iraq’s oil exports – and bringing in revenue to help rebuild after the 2003 US-led war and decades of neglect and international sanctions under Saddam Hussein.

Iraq has not been able to raise output to even close to pre-2003 levels and is limping along at roughly 2.5 million barrels a day using technology desperately needing an overhaul. That is well short of Iraq’s goal of joining the ranks of other OPEC heavyweights and reaching 12 million barrels a day in six years.

Yesterday Russian private oil giant Lukoil teamed up with Norway’s Statoil ASA to snatch the crown jewel of the auction, the 12.88 billion-barrel West Qurna Phase 2 field in southern Iraq.

It was something of a coup for Lukoil, which won the contract in 1997 under Saddam, only to see the dictator rescind the deal five years later.

The US companies at the auction, including Exxon Mobil, stayed on the sidelines except for one failed bid by Occidental over the two days at the heavily fortified Oil Ministry.

The auction came after bombings on Tuesday around Baghdad killed at least 127 people in a sobering reminder of the challenges the Baghdad government faces with the looming withdrawal of US forces.

“It is a big victory for Iraq,” oil minister Hussain al-Shahristani said after the final field was auctioned.

“It is a big achievement for Iraq to win such contracts at the current prices.”

He estimated the two bidding rounds could eventually bring in €136bn a year – more than three times Iraq’s current annual budget, which is 90% built on oil revenue.

Mr al-Shahristani and prime minister Nouri Maliki have staked their political futures on promises of boosting oil output and improving security.

The size of the windfall, however, may be a case of wishful thinking.

Iraq exports between 1.8 million and two million barrels a day in any given month, and is not even included in the output restrictions on members of the Organisation of the Petroleum Exporting Countries.

None of the US supermajors like Exxon Mobil or Chevron submitted bids.

“We just decided not to bid,” Richard Vierbuchen, president of Exxon Mobil Upstream Ventures (West), said.

Companies such as Exxon Mobil and Britain’s BP are crucial for their technical know-how, which analysts say trumps that of some Russian or Chinese companies that have made aggressive inroads in Iraq.

The auction offered oil companies their biggest slice of Iraq’s oil yet, about a third of its 115 billion barrels in reserves.

With a lesson learned from the June event, Iraq appeared to be more flexible in its terms. The government offered companies more operational control over the fields while still focusing heavily on the price it was willing to pay them for each barrel produced.

Companies must accept 20-year service contracts and receive a flat fee per barrel produced for their services instead of production-sharing contracts, which are much more lucrative.

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