Iraq's historic auction on June 30 of contracts to develop major oil fields has not gone according to plan. So far, only BP (BP) and Chinese partner CNPC have struck a deal on Rumaila, Iraq's most important field. Seven other oil and gas fields went begging as the world's biggest oil companies shied away from tough Iraqi terms and political and business risks. "This is very, very disappointing for the Iraqis," says Samuel Ciszuk, an analyst at IHS Global Insight (IHS) in London.
The Iraqis certainly hoped for more. Their consolation is that if the Rumaila project succeeds, it will be hugely important to the country. A revived Rumaila field would more than double Iraq's oil production, currently around 2.5 million barrels per day. The aim is to bring the field, which lies under palm groves in steamy southern Iraq, not far from the Kuwait border, to 2.85 million barrels per day, making it one of the most prolific in the world. Currently it is producing just under 1 million barrels per day.
So why weren't deals reached on other fields? Though the likes of Royal Dutch Shell (RDSA) and BP have assiduously cultivated the Iraqis and tried to win their confidence through training and other help since the fall of Saddam Hussein in 2003, the Iraqis are almost paranoid about being taken for a ride. They drove a hard bargain, forcing the companies into the role of service contractors—not the equity investors they prefer to be. Edinburgh energy consultant Wood Mackenzie estimates that BP will need to spend $15 billion to $20 billion developing Rumaila, including a $500 million signing bonus. The Iraqis will pay BP only a skinflint $2 per barrel for every barrel the British oil giant produces at Rumaila above around 1 million barrels per day.
ExxonMobil, ConocoPhillips Rejected
BP wanted to be paid $3.99 per barrel, and ExxonMobil (XOM), whose overall bid the Iraqis preferred, wanted $4.80. But BP landed the deal by agreeing to the Iraqis' demands, while Exxon walked away. "It is economically viable but with a very narrow profit margin," says Wood Mackenzie analyst Alex Munton. (The Oil Ministry's official statement concerning the bids can be found here.)
Other fields attracted no bids at all—or the gaps between what companies bid and what the Iraqis wanted were huge. For instance, for Bai Hassan, a 2.3 billion-barrel field farther north, a group led by ConocoPhillips (COP) wanted $26.70 per barrel for their work. The Iraqis would stump up only $4.00.
The auction results are likely to increase frustration in Baghdad with the stagnation of Iraq's oil industry, the crown jewel of the economy. Because of political infighting, lack of security, and division about whether it needs foreign help, Baghdad is missing out on tens of billions of dollars in revenue by not taking the steps it needs to get production up.
Kurdish Region Success
Meanwhile, the Kurdish enclave in northern Iraq is pursuing a very different course and upstaging Baghdad by scoring big successes in starting up its own oil production. With an attractive investment regime that pays oil companies 10% to 15% of the profits, the Kurds have lured exploration bids from smaller oil players not afraid of alienating the Iraqi government, which does not recognize the Kurdish contracts. In just a few years independents such as Norway's DNO (DTNOF.PK), Turkey's Genel Enerji, and Swiss-based Addax Petroleum (AXC.L) have developed the Tawke and Taq Taq fields.
The oil men think they could be on to something big. For instance, Heritage Oil (HOIL.L), a U.K.-listed firm based in Jersey and headed by Tony Buckingham, a former diver and security provider, recently discovered a field called Miran, which it estimates may have 2.3 billion to 4.2 billion barrels of oil.
Until recently, the operators in the landlocked Kurdish region could get their oil out only by tanker trucks. But on June 1, Baghdad began allowing exports, starting with 90,000 barrels per day from the Taq Taq and Tawke fields, through the northern pipeline that ends at Ceyhan in Turkey. The money will go to Baghdad, and how the companies will be paid has yet to be completely worked out. But Mehmet Sepil, Genel's CEO, says, "I don't have any doubt I will be paid."
The activity in the Kurdish-controlled north has even spawned a small merger and acquisition boom. On June 25, China's Sinopec (SNP) agreed to acquire Switzerland's Addax, which has Kurdish production, for $7.2 billion. Earlier, on June 9, Heritage agreed to merge with Genel for $2.4 billion in Heritage stock. "This is the creation of a regional giant," says Heritage CFO Paul Atherton. "It is all about first-mover advantage."
At the June 1 ceremony opening the pipeline for Kurdish oil, Ashti Hawrami, Natural Resources Minister of the Kurdistan Regional Government, said he planned to ramp up the region's production to 1 million barrels per day in four years. He also chided Baghdad, saying its poor field management alone had cost Iraq $60 billion. "This must not be allowed to continue," he said. It's hard to disagree.