Iraq Starts First Auction of Oil, Gas Exploration Rights

Iraq failed to attract partners for all three natural-gas blocks it offered on the first day of an auction of exploration licenses, awarding rights to only one of the six oil and gas areas put up for bidding.

Kuwait Energy Co., Dragon Oil Plc (DGO) and Turkiye Petrolleri AO won a license to explore for crude in a plot along the Iranian border, Oil Ministry officials said in Baghdad yesterday, the country’s first sale of energy-exploration rights since the 2003 ouster of Saddam Hussein. The two-day auction of rights to 12 blocks resumes today.

The bidding is the next step in an energy-industry revival that has lifted Iraq into third place among the 12 members of the Organization of Petroleum Exporting Countries, nine years after the U.S.-led invasion that toppled Hussein. In its three previous bid rounds since 2003, Iraq auctioned rights to produce at oil fields already discovered or in operation, whereas this week’s is for new exploration.

“Expectations were low going into this as the terms were so fundamentally unsuitable, but I am slightly surprised by how bad the turnout was,” said Samuel Ciszuk, a consultant at KBC Energy Economics in Walton-on-Thames, U.K.

International companies proved reluctant to commit to costly exploration projects in return for a per-barrel fee they would receive under the service contracts on offer. Iraq holds the world’s fifth-largest crude reserves, according to data from BP (BP/) Plc that include Canadian oil sands. The ministry is seeking to develop gas deposits as fuel for power plants, which meet less than half of the nation’s electricity needs.

Photographer: Junko Kimura/Bloomberg

Iraq's Oil Minister Abdul Kareem al-Luaibi siad, “We aim from this round to produce free gas to meet the internal consumption and export the surplus and to increase the oil reserves.” Close

Iraq's Oil Minister Abdul Kareem al-Luaibi siad, “We aim from this round to produce... Read More

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Photographer: Junko Kimura/Bloomberg

Iraq's Oil Minister Abdul Kareem al-Luaibi siad, “We aim from this round to produce free gas to meet the internal consumption and export the surplus and to increase the oil reserves.”

‘Not Flexible’

“Service contracts are just not flexible -- to have a set fee when you don’t know what’s underneath the ground or how big the reservoir is,” Ciszuk said. “Production sharing agreements would be the classic option for an exploration round.”

Companies that win bids won’t own the resources they may find. The service contracts Iraq is offering entitle its partners to a fee for each barrel of crude produced, whereas oil companies tend to prefer production-sharing agreements under which they are compensated with a share of the output.

Oil production has rebounded in Iraq since the regime change in 2003 ended more than two decades of stagnation from wars, economic sanctions and underinvestment. The Persian Gulf state is now pumping crude at more than 3 million barrels a day, according to OPEC data, and is poised to overtake Iran as the group’s No. 2 producer within months.

Auction’s No-Shows

More than a third of the companies that could have bid yesterday didn’t send representatives to Baghdad, hurting the prospect for awards, Abdul Mahdy Al-Ameedi, director general of the ministry’s licensing department, said after the auction.

“We hope to award as many blocks as we can, but this will be a mere wish as it depends on the competing companies,” Al- Ameedi said. Of 25 companies that bought data packages for fields up for bid yesterday, only 16 sent officials to the auction, he said.

BP, Royal Dutch Shell Plc (RDSA) and Total SA (FP) didn’t bid. Iraq’s proposed terms in this bidding round, such as compensation for exploration risks, are unattractive, Arnaud Breuillac, Total’s senior vice president for exploration and production in the Middle East, said May 29 in Abu Dhabi.

Second Attempt

Iraq offered exploration rights in six areas yesterday and plans to conclude bidding on the remaining six today. The blocks offered yesterday -- numbered 2, 9, 6, 12, 1 and 11 -- included three with gas and three with oil. The ministry will offer gas blocks 2 and 6 again today to give companies that weren’t present yesterday a chance to bid, Al-Ameedi said.

In yesterday’s round, the Kuwait Energy-led group won rights to block 9, in southern Iraq near the border with Iran. The group bid to produce oil for a fee of $6.24 a barrel.

A separate group made up of Petrovietnam Oil and Gas Group, Premier Oil Plc (PMO) and OAO Bashneft bid for block 12 in southwestern Iraq. Their proposed fee of $9.85 a barrel exceeded the government’s maximum allowable amount of $5 a barrel and wasn’t accepted.

Oil Minister Abdul Kareem al-Luaibi said in a speech in Baghdad before the bidding began that 47 companies from 25 countries had qualified for the round. Production foreseen from the 12 areas would result in revenue of $5 trillion over the next 20 years with 94 percent of income going to the state, he said.

“Iraqi production is not just a function of its geology, which is of course very attractive, but a very important function of its political backdrop over there - institutions, the infrastructure,” Amrita Sen, an analyst at Barclays Plc in London, said in an interview on Bloomberg Television’s “The Pulse” with Guy Johnson. “And there are still a lot of impediments over there, so it’s going to be a very gradual increase in its production from here.”

In an earlier oil-bidding round in June 2009, the ministry awarded only one of eight areas on offer, assigning rights to the Rumaila field, the country’s largest, to BP. It negotiated contracts later for the seven unawarded fields.

To contact the reporters on this story: Kadhim Ajrash in Baghdad at kajrash@bloomberg.net; Khalid Al-Ansary in Baghdad at kalansary@bloomberg.net

To contact the editor responsible for this story: Stephen Voss at sev@bloomberg.net

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