Since Iraq's oil fields were nationalized in 1972, the global oil industry has been locked out of the war-torn country, whose 115 billion barrels in reserves are the third-largest cache in the world. An auction on June 30 in Baghdad was finally supposed to set the terms by which Iraq and the oil majors together would revive the badly neglected fields of southern Iraq and reap huge profits.
So far, though, only BP (BP) and its partner, China National Petroleum Corp., have struck a deal. The two companies have agreed to triple the output of Rumaila, the most important field. The rights to seven other oil and gas fields, meanwhile, have failed to attract buyers.
The big oil companies balked at the tough Iraqi terms for splitting the proceeds. "This is very, very disappointing for the Iraqis," says Samuel Ciszuk, an analyst at IHS Global Insight in London. As the auction ended, Oil Minister Hussain al-Shahristani said that deadlocked negotiations over several fields would now be referred to the Cabinet. Al-Shahristani didn't respond to an e-mail asking for comment.
Why wasn't the auction more successful? The majors have been trying to win the Iraqis' confidence by training oil engineers and offering other help since Saddam Hussein fell in 2003. Yet fierce nationalism and fear of political backlash have made Baghdad extremely wary of being taken for a ride.
So the Iraqis drove a hard bargain. Wood Mackenzie, the Edinburgh-based energy consultants, figures BP must spend $15 billion to $20 billion overhauling Rumaila, including a $500 million signing fee to the government. The Iraqis will pay BP a skinflint $2 per barrel for the oil the British produce beyond the field's current output of 1 million barrels per day. That's a low offer from Baghdad considering the risks: BP wanted $3.99 per barrel. ExxonMobil (XOM) asked for $4.80 before it walked away. Under Iraq's terms the majors would be treated as contract employees, not the full-fledged equity partners they had hoped to be.
The odd thing about the situation is that some Iraqis are already cutting plenty of oil deals. The Kurds in northern Iraq are offering oil companies that invest in their region a shot at discovering big fields and keeping 10% to 15% of the profits.
Baghdad does not recognize the Kurds' right to draw up such contracts. Yet smaller oil players, unafraid of murky situations, have moved in. Independents such as Norway's DNO International, Turkey's Genel Enerji, and Calgary-based Addax Petroleum have developed the new Tawke and Tac Tac fields in Kurdistan, which together may have several hundred million barrels. Britain's Heritage Oil recently discovered a field it estimates may have 2.3 billion to 4.2 billion barrels. 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's chief financial officer, Paul Atherton. On June 25, China's Sinopec agreed to acquire Addax for $7.2 billion.
Baghdad, though officially opposed to Kurdish deals, may be changing its tune. It has given the Kurds permission to ship oil to the outside world by connecting to a pipeline that runs through neighboring Turkey. In return, Baghdad gets a major share of the revenue from the piped oil.
At the ceremony opening the pipeline, Ashti Hawrami, natural resources minister of the Kurdistan Regional Government, announced ambitious plans to increase Kurdish production to 1 million barrels per day. He also chided Baghdad for managing the country's oil fields poorly. "This must not be allowed to continue," he said.