Iraq Prepares New Gas Field Licensing, Cuts Oilfield Signatory Bonuses Retroactively
Iraq's Oil Ministry has released plans to tender three gas fields—previously part of the first and second licensing rounds—to 15 invited companies and has named Shell, Total, and KOGAS as frontrunners, while also confirming that signatory bonuses for the renegotiated West Qurna-1 and Zubair oilfields have been slashed.
IHS Global Insight Perspective
Iraq will invite 15 oil companies to bid for the Akkas, Siba, and Mansuriya gas fields later this year, and has already named Shell, Total and KOGAS as preferred bidders at this stage, while the ExxonMobil/Shell West Qurna-1 oilfield project and the Eni-led Zubair development are seeing their signatory bonuses slashed significantly now that the election has passed.
Oil companies said that Iraq's financial terms were significantly improved as contracts from the first licensing round were renegotiated in late 2009 and the second (more successful) licensing round was drawing near, although full details of the improvements have remained elusive. Meanwhile, Iraq needs to get some core gas fields onstream, mainly to raise north and central gas feedstock availability for power generation—but pronouncing frontrunners before the tender might prove controversial.
As IHS Global Insight has previously written, lower signatory bonuses—reducing upfront risk exposure—were understood to be under discussion early on in the contract renegotiations at West Qurna-1 and Zubair, although too politically risky to present in Iraq before the election as the government was loath to appear to be giving in to corporate interests.
Gas Trio Re-Offered
Fifteen oil companies—expected to be mainly among the companies that pre-qualified for Iraq's first and second licensing rounds—will be invited to bid for three strategic gas fields in Iraq. The Akkas and Mansuriya gas fields were initially offered as part of Iraq's first licensing round in mid-2009, but failed to be awarded, while the Siba field was initially to be offered as part of the late 2009 second licensing round, but was removed as that round's focus changed somewhat under political pressure to encompass more border-area fields in the north and east.
The Akkas field has been thought for a long time to be the closest to development, with large expectations in 2007 and 2008 that the field would be offered to bidders on a singular project basis, given its relatively fast development and export revenue-generating potential. The Akkas field is located in Western Iraq, on the border with Syria, and has always been seen primarily as an export field, given the proximity to Syrian gas pipelines on the other side of the border and the expense of reaching Iraq's domestic market through the construction of a pipeline traversing the Western Desert into central Iraq. In the 1990s and early 2000s Total and Shell expressed interest in the field, but a consortium of Italy's Edison, Malaysia's Petronas, China's CNPC, KOGAS, and Turkey's state-owned TPAO was the only bidder for the field in the first licensing round, which thus failed to meet the government's maximum remuneration level.
The Siba field has previously been eyed by Kuwait as a source of imports, but after having initially sounded optimistic about a bilateral deal in the post-2003 war environment, the Iraqi government earmarked the field for domestic supplies. Mansuriya in the north could, in theory, be interesting for potential future gas exports across Turkey on to Europe—currently being prepared from some gas fields in Iraqi Kurdistan under the leadership of Dana Gas, OMV and MOL—but domestic demands for gas feedstock for Iraq's power generation, as the rebuilding of the electricity sector gathers pace, are likely to make exports from Mansuriya a relatively distant prospect for now.
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Jumping the Gun
In a staggering pre-judgement of any competitive bidding, Sabah Abdul Kadhim, legal and commercial chief of the Oil Ministry's Petroleum Contracts and Licensing Directorate (PCLD) told Reuters that "we are keen to select international companies with experience with gas and which have gas projects across the world", adding however that "Shell, Total and KOGAS will be at the top of the list because they have good experience in the gas industry and gas operations worldwide". Thus jumping the gun, Kadhim might find himself the centre of criticism, as any suggestions that Iraqi contracts have not been completely competitively awarded (for example, at Shell's South Gas Project) have drawn significant—and often damaging—disapproval. Currently the attempts and negotiations to form a new Iraqi government in the aftermath of the March elections mean that the focus is elsewhere, but the politicisation of the oil industry is likely to return as a new government settles in—and with it attempts by parliamentarians to gain influence over oil policies and supervise the privatisation process. Being mentioned as a frontrunner by one of the licensing round's organisers before it has even started is thus probably not a blessing at all for the companies and could well backfire if they do indeed secure any contracts.
Meanwhile, Reuters is reporting that Iraq's Oil Ministry has also agreed to slash signatory soft-loan bonuses on two of the flagship projects significantly, albeit turning the remaining sums into unrecoverable payments. The long-term soft loan initially required will be cut from US$400 million at ExxonMobil's and Shell's West Qurna-1 project, to US$100 million, while the US$300-million soft-loan signatory bonus to be paid by the Eni-led consortium developing Zubair also will be cut to US$100 million—in both cases being changed into a straight non-refundable signatory bonus, according to Kadhim.
The contracts for the deals in question were signed in January and renegotiated (both mega-fields were initially unsuccessfully offered in the first licensing round) during the latter part of 2009, indicating that there has been an understanding regarding this term improvement since before the definitive signing. As oil companies came back to the Oil Ministry and renegotiated some of their failed first-round bids just ahead of the second licensing round, oil executives indicated that Iraq had relented on its excessively tight terms and helped forge compromises that made the contracts more attractive. Iraqi Oil Ministry personnel and Oil Minister Hussein al-Shahristani, however, maintained that Iraq had not eased terms in any material way, fearing a domestic political backlash ahead of the March elections if the Iraqi government was to be seen as going to oil companies cap in hand and caving in to their economic demands. While little since then has emerged on exactly what had made the contracts significantly more attractive—apart from certain changes to how taxes were applied—rumours of the signatory bonuses being cut prevailed.
Outlook and Implications
The signatory bonuses were always relatively unpopular, demanding that the companies pay large sums upfront at a time when political risk and legal uncertainty ahead of the 2010 elections still loomed large and the fear of political parties winning and later changing or scrapping the contracts as completely illegal could not be ruled out. Hence scrapping them, or lowering them significantly, was always going to have a huge impact on the companies' risk exposure as they approached the planning and waiting time between the early 2010 signings of their contracts and the deadline for full deployment, some time after the likely installation of a new government. For the Iraqi government and Oil Ministry political considerations were always at the heart of their financial negotiations, and the need for secrecy surrounding the concessions that would make deals possible were always clear—and impressed upon their counterparties.
Iraq's gas plans show that the Oil Ministry now is moving forwards with its attempts to tie up some of the remaining loose ends from its first and second licensing rounds. Iraq will need to raise its gas production fast in order to meet domestic demand from its electricity sector as it is rebuilt, and although a lot more associated gas is likely to be produced as the oil mega-projects begin, both Siba and Mansuriya have the geographical capacity to act as early stable producers—and later as buffers—while oil companies decide on how much associated gas they need for reinjection and how much they can spare. In the case of Akkas, however, exports remain the most cost-efficient option, given that the field is much closer to Syrian pipelines then to Iraqi demand and domestic markets. Appearing to jump the gun and declare three companies as frontrunners for the late 2010 auction—even if misinterpreted—might cause both the Oil Ministry and the named companies some level of later aggravation.