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US super major ExxonMobil will increase its capital spending by nearly 4% this year to $28 billion as it evaluates new fields around the world, but it cautioned that the global economy remained unsteady.

ExxonMobil, the world's largest publicly traded oil company, also said it had completed initial tests at Iraq's West Qurna field, where it won a 60% stake in the field that is estimated to have 8.7 billion barrels of reserves. It gave no additional details.

The oil giant, who is expected to close on a planned purchase of US natural gas producer XTO Energy later this year, stuck to its range of capital spending between $25 billion and $30 billion through 2014, reported Reuters.

"Our capital spending plans have largely been unaffected by the global recession," chief executive Rex Tillerson told analysts at a presentation at the New York Stock Exchange.

"We plan and execute on the basis that ours is truly a long-term business."

ExxonMobil's shares rose 0.3% to $67.39 in early trading on the New York Stock Exchange

(Upstreamonline.com)

DNO International ASA, the first foreign company to pump oil in Iraq since the 1970s, may invest outside the war-torn country as the regional Kurdish authority and Baghdad officials argue over export payments.

“It’s important for us to look for opportunities in other areas, to have a more diversified portfolio,” Chief Executive Officer Helge Eide said in an interview in Oslo. “We’re looking at eastern Africa, northern Africa and the Middle East onshore. That’s where we have been focusing our new venture activity, with Tunisia being the first opportunity.”

The company last week reported a larger-than-expected loss in the fourth quarter, ending a second year of losses, and revised sales figures after an estimated $133 million in Iraqi revenue failed to materialize. It has spent at least $350 million developing Iraqi assets after signing a production sharing agreement with the Kurdish Regional Government, or KRG, in 2004.

Oman, Egypt

Difficulties in the Kurdish region coincide with efforts from the Baghdad government to develop the world’s third-largest oil reserves and raise capacity fivefold to 12 million barrels a day in the next six years. Companies such as Exxon Mobil Corp., BP Plc and Royal Dutch Shell Plc have signed contracts after two licensing rounds last year.

DNO entered the Middle East in 1998 in Yemen before moving into Iraq after the U.S-led invasion to topple Saddam Hussein. It last year signed a preliminary agreement for a 50 percent interest in an exploration permit in Tunisia with Audax Resources Ltd. The company is also looking at Oman and Egypt, Eide said.

Production was 7,600 barrels a day of oil in Yemen in the fourth quarter, and about 5,900 barrels a day for the local market in Iraq. Before exports were suspended, it produced 31,000 barrels a day for exports from Iraq in the third quarter.

The company plans to invest a total of 360 million kroner ($61 million) this year, which doesn’t include expected payments for Iraq exports. Should exports resume and the payment issue be solved, it will consider making acquisitions outside Iraq, Eide said. We’d “accelerate some of our planned projects and be more active with regards to new ventures in terms of finding new assets in other countries, to be more diversified,” he said.

‘Bumpy Ride’

DNO has “had a bumpy ride” in Iraq, Eide said. It waited two years to get an export permit after starting output. Its operations were temporarily shut by the KRG three months later after the Oslo Stock Exchange forced the disclosure of the authority’s role in arranging a sale of treasury shares in 2008 when DNO needed money. DNO is also fending off a $144 million compensation claim from undisclosed parties that held stakes in its assets at the London Court of International Arbitration.

“If the court rules in favor of the claimants it leaves DNO with very, very, very little cash,” said Trond Omdal, an analyst at Arctic Securities in Oslo, who has a “buy” rating.

DNO and companies such as Addax Petroleum Corp. signed agreements with the Kurdish authorities, which are disputed by the Baghdad government. Revenue was passed to the State Oil Marketing Organization and deposited at the central treasury.

‘Very Soon’

The KRG proposed in January that it allocate part of the sales or that Baghdad compensate the companies directly. Iraq Oil Minister Hussain al-Shahristani said on Feb. 9 that a Kurdish proposal was accepted, without providing details. KRG Prime Minister Barham Saleh said Feb. 15 that exports would start “very soon.”

DNO hasn’t received notification on exports or what payment system will be introduced, Eide said. The company operates three licenses in the area, including the producing Tawke field.

“We hope to retain the terms of the revised contracts signed in 2008,” he said. “We will in the first stage receive 60 percent of revenues from Tawke until we’ve reached a certain level of cost recovery and then we go into standard” terms for both local sales and exports, he said.

Getting payments is crucial for DNO’s expansion to improve its finances. At the end of 2009 it had about 300 million kroner in cash and 478 million kroner in financial assets for sale, including a 12 percent stake in Det Norske Oljeselskap ASA. Eide said they “are continuously monitoring” the bond market where they last raised money in 2007.

Few Bets

“It seems relatively sensible of them to make a few bets in areas that are geologically similar to Yemen, like Tunisia, given that they have the financial capacity to do so,” said Omdal. “There’s a limit to how much further they can go in Iraq, unless they consolidate with some of the other actors.”

The company has also become a target along with other explorers operating in the Kurdish area. China Petrochemical Corp., China’s second-largest oil company, agreed to buy Addax for $7.9 billion in August. A combination between Heritage Oil Ltd. and Genel Energy International Ltd. fell through because of the payment dispute.

Interest in the region has waned since the initial surge in June at the start of crude exports, Eide said.

RAK Petroleum, a closely held oil explorer from the United Arab Emirates, raised its stake in DNO to 10 percent in December. DNO last year rebuffed a RAK offer for its treasury shares. RAK, which is expanding in Oman, has operations and areas of focus that overlap with DNO, Finance Director Pierre Henri Boutry said in an interview last week.

“We’ve only considered them a shareholder, at least until now,” Eide said. “But we are prepared to work with any companies, even if they are shareholders, if they have interesting assets.”

By Marianne Stigset

(Bloomberg)

The revival in Iraq's oil production could keep oil prices low for several years: that is the message from a Royal Bank of Scotland note on the global oil market.

As the last of Iraq's oil contracts have been awarded, RBS predicts that Brent crude could fall back from its current level around $73 to as low as $64 by 2013 and $50 three years later as Iraq production soars.

Iraq is sitting on the world's third-largest oil reserves and with contracts ' containing production commitments - awarded to world oil majors like BP, Shell and ExxonMobil, its oil output could expand fivefold to 11.75m barrels a day by 2017.

'Investors expecting the imminent return of oil price rises fuelled by increasing Chinese demand may be disappointed,' says David Cline, RBS's oil and gas analyst. 'Instead, the rehabilitation of Iraq may dominate oil markets and weigh on prices for much of this decade.'

The outlook still clouded by concerns over the prospects for global growth and sluggish fuel demand, but the RBS prognosis is gloomier than most. The oil futures market is pricing in a rise for Brent crude to $94 by the middle of the decade while other independent forecasters are averaging about $82 a barrel by 2013.

Oil prices ended January down more than 8%, pressured by data showing tepid energy demand in the United States, worries about fiscal turmoil in smaller euro zone countries and a stronger U.S. dollar.

Ironically, added the RBS report, while investors in likes of BP and Royal Dutch Shell will have been cheering as the oil majors won their slice of the Iraqi cake, oil stocks could ultimately suffer from the depressive effect on oil prices.

RBS pointed out that BG Group is better protected than its peers: the company's operations are skewed to gas, rather than oil. It has the best forecast output growth in its sector and its big Brazilian oil and gas finds will be commercial even at prices of $40 a barrel.

Persistent takeover speculation should also provide continuing support to the shares.

The major oil companies report this week, led by Exxon Mobil, which today announced a better-than-expected 23% decline in its fourth-quarter profit on Monday. Exxon said weak demand for fuel during the economic slowdown hurt its refining business.

BP reports results on Tuesday and Royal Dutch Shell follows with its data on Thursday. Shell said on Sunday it shut three oil flow stations in Nigeria's Niger Delta after a key crude oil pipeline was sabotaged.

A consortium led by Exxon Mobil and Royal Dutch Shell on 25 January signed a contract with the Iraqi government to redevelop and expand the West Qurna field – one of Iraq’s biggest oil fields. The Exxon team said it would boost production at the field to 2.325 million barrels a day, up from just 279,000 barrels a day currently. The field has estimated reserves of 8.7 billion barrels. Exxon, which is the operator of the project, has the bigger stake in the venture with 80%, while Shell holds the remaining 20%.

"I am happy to conclude this contract with these two major companies to develop the giant West Qurna oil field," Iraqi Oil Minister Hussein al-Shahristani was quoted as saying by the press at the signing ceremony in Baghdad.

However, Iraq has been witnessing violence-related incidents frequently since the 2003 US-led invasion of the oil-rich country. Rainer Winzenried, a Shell spokesman, told New Europe on 26 January that “security is a concern. It was also in the past when we engaged in Iran.” He noted that the company would take additional precautions and “would not risk of risk the life of employees in the future so we have to be very careful.”

Winzenried reminded that Shell is now involved in three projects in Iraq – two oil fields and one gas field. “West Qurna is the third project. All and all it can become an important part in our portfolio,” he said.

Iraq hopes the contracts will make Iraq among the largest oil producers in the world. Iraq, which relies on the 2.5 million barrels per day it produces for more than 90% of its government revenue and about 60% of its gross national product, landed key deals during its second round of postwar oil auctions in December. On 22 January, Iraq signed a contract with a consortium led by Italy's Eni to develop the giant al-Zubair oil field in the southern province of Basra. The signing follows an agreement reached last year between the oil ministry and Eni to develop the four-billion-barrel oil field.

If the invasion of Iraq was all about exploiting the country's oil, you'd never know it from the structure of the contracts being signed by the likes of ExxonMobil (NYSE: XOM), Total (NYSE: TOT), and BP (NYSE: BP).

In an analysis of the West Qurna 1 license awarded to ExxonMobil and Royal Dutch Shell (NYSE: RDS.A), Dr. Peter Wells (great name for an oil analyst!) puts the government take at $444 billion, or 99% of total revenue. This guy was hired by Toyota Motor (NYSE: TM) to build a world oil supply model, so I will assume he knows his way around a spreadsheet.

Wells assumes a 15% rate of return on the consortium's $50 billion investment in the field, and flat $60 oil. With higher oil prices, the contractors' returns improve, but they never get above 33%. To put that profitability in perspective, EOG Resources (NYSE: EOG) is seeing a 100% rate of return at both its core Bakken oil wells in North Dakota, and the Waskada field in Manitoba.

The economics of these Iraqi technical service contracts, in which the developers get a dollar or two for every incremental daily barrel produced, are not very compelling. Why, then, are so many majors and supermajors willing to take the plunge?

My colleague David Lee Smith put it this way last summer: "It's called getting your foot in the door of a country with an estimated 115 billion barrels of oil." The promise of getting better terms on future deals has got to be the prime motivator here.

For a while I thought that this stampede into Iraq might also be an effort to bolster sagging reserve replacement ratios. Occidental Petroleum (NYSE: OXY) books reserves on some projects where the company has no right of ownership, so I figured that the same rules might apply here. Most media reports conclude that there is no such provision in these contracts, though a Gazprom VP last month suggested the possibility of booking reserves at West Qurna 2. Even if the majors could claim reserves based on their economic interest in these giant fields, however, the revenue split we saw earlier suggests a pretty meager figure.

One last thought is that earning a 15% real rate of return is not the worst deal for these companies. ExxonMobil, for example, has billions in cash and short-term investments sitting there, earning next to nothing. Warren Buffett chose to stick his company's excess cash in a railroad. That's a heck of a lot safer than an Iraqi oil field, but on this scale, the pickings are pretty slim.

The decision by Iraq , to allow international companies to support the development of productive oil fields, is the most important economic decision taken by the government since 2003. The importance of this step is in increasing the production capacity from 2.5 million bpd currently, to 11 million by the year 2017, an increase of nine million bpd. If the price per barrel ranged between 70 and 100 $, additional income for Iraq would increase to 200 $ billion annually by mid decade, compared to about 45 billion currently.

These contracts established through a system of tenders were won by Asian state-owned companies, especially Chinese and Malaysian with a majority shareholding, followed by the two European companies «Shell» and «BP» and the American companies «Exxon Mobil» and «occidental», and Russian, «Lukoil».

If Iraqi achieves the predicted new production level of about 20 million barrels in 2020 it will be producing about 10 % of global oil production per year, putting it in the top three producing countries in the world.

This ambitious project raises an important question: Can Iraq implement this massive program, even in cooperation with international companies? What about the geopolitical risks that surround the country, and the failure of the administrative government to provide security, and more importantly, the absence of a social contract between the ruling classes and the people, and between the people themselves? Is it possible to implement this program card in the estimated dates

In summary the answer is that Iraq will face serious difficulties in implementing the program as planned, according to the assumed timetable. Can Iraq be expected to increase production to about six or seven million bpd by mid-decade? The most important thing, however is that Iraq has launched finally, after much hesitation and difficulties, into the development of its huge reserves.

What are the risks and challenges anticipated? First, there is the inability and corruption of government institutions. Secondly, there is the risk arising from operations by militias and terrorist organizations against oil installations. Government has undertaken to protect the fields, but the security of foreign employees in their offices in Baghdad and Basrah and public roads is the responsibility of the companies themselves who rely on notorious private security companies. In the current circumstances an increase in operations against enterprises and individuals is expected with the presence of thousands of foreigners in Iraq.

And thirdly there is the legitimacy of the agreements itself. The oil ministry has insisted that cabinet approval is enough to pass the agreements, thus avoiding the approval of Parliament. The reason for this is clear, because it's difficult to obtain legislative approval, which would delay the ratification of the contracts. However, the procedure opens the way for future governments to change the contracts or even cancel them. The Chairman of the oil committee in parliament, a coalition of Kurdistan and an ally of the government, threatened actions of this kind in the future.

The fourth economic challenge to the country in the future is in the absence of a clear vision on how to exploit new oil revenues. This lies in the absence of a decision to transfer funds to infrastructure projects or investment projects. There is fear that future governments will continue to expand unproductive bureaucracy, it is noteworthy that the number of employees and retirees of the state apparatus in Iraq exceed some of the major industrialized countries.

Finally, there is the problem of mass production. Companies will try to produce the highest amount possible in the shortest period available to them so as to increase their profits, nor could Iraqi authorities prevent it. This means a flooding of market and declining prices, and an imbalance with the neighboring oil producing countries. Concentrating on a rapidly increased level of production within a short period has its dangers, not only on oil prices, but also Iraq's relations with neighboring countries in cirumstances  that involve multiple and complex problems. Some of these countries can block the construction of new export terminals necessary for this expansion, not to mention aggression and harassment at the border.

Therefore the foreign policy of the country must be linked with oil policy. This is unlikely in the light of anarchy prevailing in the country and government institutions.

In spite of the oil fields allocated to international companies, some 50 additional fields still await development. These are not expected to be delivered to international companies, at least in the foreseeable future. Any new agreements will focus on exploration and drilling in new areas.

Basra Governor, Shaltagh Aboud al-Mayah, held talks on Monday with Russia’s giant oil company Lukoil and its Norwegian ally Statoil on facilitating their work in the development of al-Qarna oilfield.

“Talks were also centered on the need to use Iraqi workers in Basra, and especially in al-Qarna region,” al-Mayah told Aswat al-Iraq news agency.

The Governor asserted that other meetings with the two companies will be held to discuss their needs and plans for the city’s residents.

Lukoil is Russia’s largest oil company and its largest producer of oil. In 2007, the company produced 96.645 million tons of oil; 1.953 million barrels per day. Its international upstream subsidiary is called Lukoil Overseas Holding. Headquartered in Moscow, Lukoil is the second largest public company (next to ExxonMobil) in terms of proven oil and gas reserves. In 2008, the company had 19.3 billion barrels of oil equivalent per SPE standards. This accounts to some 1.3% of global oil reserves.

Basra is 590 km south of Baghdad.

Iraq's oil ministry on Monday completed a major deal with US major Exxon Mobil and Anglo-Dutch giant Shell to develop production at West Qurna-1, the war-torn country's second biggest field.

"The oil ministry signed the contract for West Qurna-1 with Exxon Mobil and Shell," ministry spokesman Assem Jihad said in a statement.

"This contract will increase production from 285,000 barrels-per-day to 2,325,000 barrels-per-day."

West Qurna-1 has reserves of around 8.5 billion barrels, according to oil ministry figures.

A deal with a consortium led by Russian energy giant Lukoil to develop the neighboring West Qurna-2 field is expected to be signed on Saturday, Jihad added.

US super major ExxonMobil and its Anglo-Dutch peer Shell, today signed a final contract for the development of Iraq's 8.7-billion-barrel West Qurna Phase One oilfield

The partners, who will work with an Iraqi state-run oil company, won the right to develop the super giant field in negotiations with the Oil Ministry last year following Iraq's June oilfield auction, the first since the 2003 US invasion, a Reuters report said.

ExxonMobil's regional vice president Richard Vierbuchen and Shell Gas & Power vice president Mounir Bouaziz signed the deal in the presence of Iraqi Oil Minister Hussain Shahristani in Baghdad.

The companies plan to increase output from the oilfield to 2.325 million barrels per day from its current level of 279,000 bpd.

It is one of several deals following two oil contract auctions last year that have the potential to take Iraqi capacity to 12 million bpd - rivaling top producers Saudi Arabia and Russia - from 2.5 million bpd now.

The Iraqi Ministry of Oil on Monday will sign the final contract with a consortium led by Exxon Mobil Corp and Royal Dutch Shell, under which the firms will be allowed to develop the West Qurna-1 field in southern Iraq.

“The contract aims to increase the field’s production to 2.325 million barrels per day (bpd),” a ministry source told Aswat al-Iraq news agency.

Under the contract, the companies accepted the ministry’s $1.9-per-barrel-payment for additional oil extracted above current production levels.

Iraq hopes the contracts signed during the first two oil licensing rounds will help bring the country’s oil production to 12 million bpd in six years, compared to the current production level of about 2.5 million bpd.