Iraq Fails to Entice Bidders for Most Oil, Gas Blocks

Iraq failed to attract partners for most of the 12 oil and natural-gas exploration licenses offered in a two-day auction at which Asian and Russian bidders were more prominent than Western companies.

The Oil Ministry awarded three blocks, two for oil and one for gas, at the auction ceremony in Baghdad. Russia’s OAO Lukoil and Inpex Corp. of Japan won a joint bid to explore for crude in southern Iraq, and Pakistan Petroleum Ltd. won rights to an eastern gas block, Abdul Mahdy Al-Ameedi, the head of the ministry’s licensing department, said today. Kuwait Energy Co. led a group awarded rights to an oil area yesterday.

The licensing comes amid an energy-industry revival that has boosted 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 Saddam 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 was for new exploration.

“Bids were won by companies that are already in Iraq,” Stuart Walley, regional manager for consultant Senergy Oil and Gas, said by telephone from Dubai today. “In some cases their existing knowledge could have helped in assessing the potential, prospectively, of oil and gas in the auctioned blocks.”

Lukoil Wins Block

Lukoil is the operator of West Qurna-2 oil development, Inpex was part of a Japanese group seeking to build a refinery and produce crude at the Nassiriya field, and Kuwait Energy won rights to develop gas fields in a previous Iraqi bid round.

In this week’s bidding, some international companies proved reluctant to commit to costly exploration projects in return for the 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 Plc (BP/) that include Canadian oil sands.

The only Western-based company to bid in the round was London-listed Premier Oil Plc (PMO), which took part in two unsuccessful offers.

Lukoil and Inpex bid a fee of $5.99 per barrel for oil block 10, beating offers from two groups led by Petrovietnam Oil and Gas Group and Kuwait Energy. Pakistan Petroleum Ltd. won rights to area 8, the only gas area awarded, for a fee equivalent to $5.38 a barrel, outbidding a joint offer from Japan’s Japex Corp. and Itochu Corp.

Fees Low?

“The remuneration fees seemed low,” said Walley of Senergy, which advised a company that qualified to bid in the auction. “From an economics perspective, it’s difficult to see how some bids can work. That said, conditions will differ from block to block and upon the rate at which any potential discovery can be moved through to development,” so some areas could be less costly, said Walley, who declined to name Senergy’s client.

Kuwait Energy and its partners, Dubai-based Dragon Oil Plc (DGO) and Turkiye Petrolleri AO, made the only offer to search for crude in block 9 along the Iranian border, bidding $6.24 a barrel.

The Oil Ministry rejected an offer by a Petrovietnam-led group for one oil field because the fee exceeded the maximum the government was willing to pay.

Iraq offered five exploration areas for crude and seven for gas during this week’s auction, its fourth licensing round, in which 47 companies from 25 countries were qualified to participate.

Gas Priority

The ministry is seeking to develop gas as fuel for power plants, which meet less than half of domestic electricity needs.

“Of course, we will prepare for a fifth round, and we have more than 60 blocks ready for bidding,” Oil Minister Abdul Kareem al-Luaibi told reporters after today’s auction. “We will start, God willing, during the next months to prepare the data packages,” he said.

Al-Ameedi, director general of the licensing department, said it was “unfortunate” that the three exploration blocks in western Anbar province attracted no bids.

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

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

Kurdish Agreements

Unlike the central government, authorities in Iraq’s self- ruled Kurdish region have wooed at least a dozen international energy companies by offering production-sharing agreements, which compensate investors with a share of any output. Iraq has refused to recognize such arrangements and barred Exxon Mobil Corp. (XOM) from participating in this week’s auction because the U.S. company agreed to do business in the northern Kurdish area.

The government in Baghdad is at an impasse with Kurdish authorities over how to divide up revenue from sales of Kurdish oil. The Kurds halted shipments on April 1 through a pipeline controlled by the central government. Thamir Ghadhban, an Iraqi government adviser and former oil minister, said May 4 in Istanbul that he was “confident” the dispute would be settled by the end of the year.

Iraq is exporting 2.45 million barrels a day of crude, a level that’s “higher than planned,” Luaibi, the oil minister, said today.

Production has rebounded since Hussein’s defeat and removal in 2003 ended decades of stagnation from wars and sanctions. The Persian Gulf state is now pumping more than 3 million barrels a day, according to OPEC data, and is on track to surpass Iran as the group’s No. 2 producer within months.

Iraq’s output will rise further in July, partly because of a planned increase at the Halfaya oil field in southeastern al- Amara province, Luaibi said.

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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