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Disappointing fourth oil and gas auction
for Iraq
5.6.2012
By Joel Wing —
Ekurd.net |
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Iraq's OIl Minister Luaibi addresses the press
during the first day of the auction Photo: Reuters
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Read more by the Author
Map of oil and gas fields offered in 4th auction
round May 30-31, 2012 AFP
Executive from Russia's Lukoil places a winning bid
on the second day of the auction, May 31, 2012.
Photo: Reuters.
Executive from Kuwait Energy places what would turn
out to be a winning bid for an oil field in Basra,
May 30, 2012. Photo: Reuters
June 5, 2012
In May 2012, Iraq held its fourth oil and gas
auction. The government was hoping to earn several
million dollars in signing fees, and develop new
areas of the country, but the results were
lackluster at best. Only three of the twelve fields
were successfully bid on, highlighting the flaws in
the process. Iraq was largely looking for
exploration work, with contracts that limited the
ability of companies to develop any oil they found,
and it lacks the infrastructure to produce gas
either. That meant there was little chance for the
bidding companies to make money off of them. For all
of those reasons, it could have been predicted that
the fourth auction would end as a disappointment.
Iraq’s Oil Ministry offered twelve oil and gas
blocks for auction last month. The fields had a
potential to add 29 trillion cubic feet of natural
gas and 10 billion barrels of oil to Iraq’s
reserves. The blocks were spread across Ninewa,
Anbar, Najaf, Qadisiyah, Babil, Muthanna, Diyala,
Wasit, and Dhi Qar, areas that were largely without
major deals beforehand. The auction was also aimed
at developing Iraq’s reserves rather than
production, which had already been achieved with its
previous three rounds. 47 companies were
pre-qualified, and out of those, 39 paid the
participation fee.
Baghdad was hoping to raise around $235 million from
signing fees and other charges if all the fields
were sold off. The auction took place on May 30-31,
resulting in only three successful negotiations. On
the first day, three oil and three gas blocks were
offered, with only two being bid on. One oil field
in Basra got a successful offer by a consortium made
up of Kuwait Energy, Turkey’s TPAO, and Dubai’s
Dragon Oil. Petro Vietnam and Russia’s Bashneft were
interested in another block, but could not come to
terms with the Oil Ministry. The next day, Pakistan
Petroleum won a bid for a gas block that went from
Diyala to Wasit. Russia’s Lukoil and Japan’s Inpex
also won a contract to an oil field that went from
Muthanna to Dhi Qar provinces. The poor results were
a large disappointment for Iraq. It achieved none of
its goals from raising large amounts of money to
gaining the interest of companies in new, largely
unexplored oil and gas fields. These problems were
visible months before the auction occurred.
From the beginning, analysts and oil executives
voiced their concerns about the fourth bid round.
Many of the fields were for gas, but there had been
a recent upturn in production and discoveries around
the world, which made Iraq less attractive. Major
oil companies were also much more likely to simply
explore for new reserves around the fields they
already operated in southern Iraq, than bid on
unexplored areas in more remote areas. The main
point of contention was the contracts offered by the
Oil Ministry. The Iraqi government had service
contracts again, like it did in the previous bidding
rounds. Those paid companies a set fee when they
reached a certain production level, and did not
allow them to include the oil and gas reserves found
on their books, which would increase their standing.
Foreign firms were willing to accept these limits on
their profits, and strict terms when major fields in
southern Iraq were offered in 2009, but not so with
those put up for auction in 2012. That was due to a
number of factors. First, the contracts said
businesses could immediately exploit any gas they
found, but Iraq lacks the infrastructure to do so.
That meant the businesses would have to build almost
all the pipelines and facilities,www.ekurd.net
expending huge costs before they could see any
profits. At the same time, the contracts said the
government had the right to put off any oil
production for several years, by paying the
companies compensation fees for not doing so. While
Iraq desperately needs natural gas to fuel its power
plants, it is already awash in oil. Sometimes it
produces more oil than its pipelines, storage tanks,
and ports can handle, and has to cut output as a
result. Because of all those limitations, and the
fact that some of these fields were offered in areas
where insurgents were still active such as Anbar,
Ninewa, and Diyala, analysts believed that Baghdad
should offer $10-$20 per barrel in remuneration fees
to cover their risks.
The Oil Ministry was never going to accept such high
amounts however. The only real concession Iraq was
willing to give the foreign interests was the
elimination of the requirement that they enter into
joint ventures with state-run companies. Despite all
this, Iraq tried to work with the foreign firms,
which led to several delays from the original start
date of November 2011, to January 2012, to March, to
April, and finally May. That many hold-ups should
have been ample warning to the authorities that the
fourth bid round was not going to go as planned. The
deals offered were simply not good enough to get a
wide range of interest, and the result was the few
successful deals made.
Despite this, some Iraqi officials tried to put a
positive spin on things, while others disagreed. The
head of the contracting department within the Oil
Ministry insisted that the fourth round was a
success, because it had winning bids on 25% of the
blocks offered. The Ministry also immediately
announced a fifth round with another 10-15 fields up
for auction, which would focus upon gas. Not all
were so upbeat however. The head of the legal
section at the Ministry said that the terms proved
to be too tough for companies, and wanted them
changed in the future. His opinion seemed more
relevant. The government was obviously looking for a
better response to its offerings, and another
similar round would probably have a lukewarm
reception as well. Companies have to have more
avenues to make a profit to make it worthwhile to
them.
Iraq made a miscalculation with its fourth auction
for oil and gas fields. It was hoping that the
promise of large undiscovered oil and gas deposits
would bring in an array of foreign investors, but
there were some major deterrents. The combination of
remote sites and strict contracts that severely
limited the ability of companies to make a profit or
even exploit any gas or oil that they found meant
that it was a losing combination for Iraq. There was
no way that many firms would agree to do just
exploration work when they couldn’t even count what
they found in their books, because of the service
contracts that the Oil Ministry are wed to, and the
lack of infrastructure where the fields were.
Another similar round would not do much better
unless Iraq was willing to re-write its terms. For
now at least, Baghdad would be better off
encouraging corporations to explore for oil and gas
around the fields they are already operating on for
logistical and financial reasons, than trying to get
them to look into new and more remote areas of the
country.
Sources:
Associated Press, “Only 3 of 12 lots sold in Iraqi
energy auction,” 5/31/12
Aswat al-Iraq, “4th energy round ends with 3 blocks
awarded,” 5/31/12
- “Dates for fourth oil bids postponed,” 10/10/11
Dow Jones, “27 Firms Show Interest In 4th Oil
Bidding Round,” Iraq Business News, 7/10/11
Dunlop, W.G. and Faraj, Salam, “Iraq announces new
energy auction after lackluster sale,” Middle East
Online, 5/31/12
Hafidh, Hassan, “Iraq Delays Energy Bidding Round To
April:Official,” Market Watch, 1/4/12
- “Iraq to begin preparation for oil new bid round,”
Dow Jones, 1/8/11
- “UPDATE: Iraq Amends New Bid Round Terms To Favor
Companies-Source,” Dow Jones, 2/20/12
Ibrahim, Haider, “Fourth round of drilling licensing
to target gas not oil,” AK News, 4/9/11
- “Iraqi Oil ministry launches fourth round of oil
licenses,” AK News, 4/25/11
- “Oil and Energy Committee: ‘postpone oil
licensing,’” AK News, 5/1/11
Jacobs, Caroline and Boselli, Muriel, “UPDATE
3-Total latest oil group to shift Iraq focus to
Kurdistan,” Reuters, 2/10/12
Lando, Ben, “4th bid round delayed, Exxon still
qualified,” Iraq Oil Report, 1/30/12
- “ANALYSIS: Iraq’s fourth bid round evolves with
Kurdish oil dispute,” Platts, 5/29/12
Mackey, Peg, “REFILE-Iraq unveils oil, gas
exploration auction details,” Reuters, 4/20/12
Neuh, Florian, “Iraq oil bid delay seen as
positive,” The National, 2/1/12
Rasheed, Ahmed, “Iraq set to auction new oil, gas
blocks,” Reuters, 5/28/12
- “UPDATE 2-Iraq parliament panel wants to halt 4th
energy auction,” Reuters, 5/16/11
- “UPDATE 4-Tough terms dampen Iraq’s energy
auction,” Reuters, 5/31/12
Reuters, “Iraq to invite energy firms to 4th bid
round,” 4/17/11
Salaheddin, Sinan, “Iraq sets January 2012 for its
4th energy auction,” Associated Press, 4/25/11
- “Iraq’s daily oil production exceeds 2.7 million
barrels,” Associated Press, 1/2/11
Smith, Patrick, “Analysis: Iraq’s oil projections
wildly optimistic,” AK News, 5/15/11
Al-Tamemi, Noor, “Iraqi oil ministry prepares for
fourth licensing round,” AK News, 3/20/11
UPI, “Iraq boosts oil output, offers new blocks,”
5/11/11
Al-Wannan, Jaafar, “Oil ministry announces
amendments to new oil contracts,” AK News, 9/29/11
Yee, April, “Bidders blanch at Iraq’s oil terms,”
The National, 10/14/11
- “Dragon Oil wins exploration rights in Iraq,” The
National, 5/31/12
Joel Wing, with an MA in International Relations,
Joel Wing has been researching and writing about
Iraq since 2002. His acclaimed blog, Musings on
Iraq, is currently listed by the New York Times and
the World Politics Review. In addition, Mr. Wing’s
work has been cited by the Center for Strategic and
International Studies, the Guardian and the
Washington Independent. You may visit his Blog
Musings On Iraq at musingsoniraq.blogspot.com
Copyright © 2012 ekurd.net
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