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Iraq's Oil Ministry has agreed to slash signature bonuses on two oilfield development deals secured by oil companies but is turning them into unrecoverable payments rather than soft loans, an official said on Wednesday.

The signature bonus for the 8.7-billion-barrel West Qurna Phase One oilfield to be paid by Exxon Mobil and Royal Dutch Shell will be cut to $100 million from $400 million, said Sabah Abdul Kadhim, head of the legal section of the ministry's petroleum contracts and licensing directorate.

The bonus for the 4-billion-barrel Zubair oilfield won by Italy's Eni (ENI.MI) and its partners Occidental Petroleum Corp and South Korea's KOGAS will be $100 million also, compared to $300 million previously, he said.

The deals are among a series signed this year and last year that have the potential to catapult Iraq into third place from 11th among global oil producers, with its capacity possibly rivalling top producer Saudi Arabia's.

Potential capacity of 12 million barrels per day compared with 2.5 million bpd now would give Iraq the billions of dollars it needs to rebuild after years of war and economic decline.

12 April 2010 - AlertNet

Posted on November 14, 2009

Last week, ExxonMobil became the first U.S. oil company in 35 years to sign an oil-production contract with the government of Iraq.

Do these contracts represent a "victory" for Big Oil in Iraq? Yes, but not one as big as the companies had hoped for (at least, not yet).

Before the United States and Britain invaded Iraq in March 2003, their oil companies were shut out of oil-production contracts being negotiated by the government of Saddam Hussein. Today, more than six years of war later, Saddam is gone, and the U.S. and British oil companies are not only in on the oil contracts, they have managed to sweeten the terms.

However, organized resistance by Iraqis and people around the world has thus far succeeded in denying Big Oil its Big Prize: passage of the Iraq Oil Law, alternatively called Iraq Hydrocarbons Law, which would grant far greater control over Iraqi oil to foreign companies on terms much less favorable to Iraq than the current contracts provide.

If the negotiations proceed on their current path, foreign companies will produce the vast majority of Iraq’s oil. How much control they will exert, and who will reap the greatest benefits (and endure the steepest costs) is yet to be determined.

Before the Invasion

In January 2000, 10 days into President George W. Bush’s first term, representatives of the largest oil and energy companies joined the new administration to form the Cheney Energy Task Force. As part of its deliberations, the task force reviewed a series of lists titled "Foreign Suitors for Iraqi Oilfield Contracts" naming more than 60 companies from some 30 countries with contracts in various stages of negotiation.

None of contracts were with American nor major British companies, and none could take effect while the U.N. Security Council sanctions against Iraq remained in place. Three countries held the largest contracts: China, Russia and France -- all members of the Security Council and all in a position to advocate for the end of sanctions.

Were Saddam to remain in power and the sanctions to be removed, these contracts would take effect, and the U.S. and its closest ally would be shut out of Iraq’s great oil bonanza.

After the Invasion

The invasion of Iraq dealt handily with the problem of U.S. and British exclusion. ExxonMobil, Chevron, BP, ConocoPhillips and other major oil companies met with the Iraqi government on countless occasions, and the Iraqis tried to make deals.

But the oil companies, backed aggressively by the Bush administration, steadfastly insisted that contracts would only be signed after the Iraq Oil Law was passed. They nearly prevailed on several occasions, but organized resistance in and outside of Iraq has continually stymied the law’s passage.

Several forces have conspired to bring the oil companies to the negotiating table today.

Most recently and significantly, Iraq’s Parliament has refused to even consider the law until after the January 2010 elections. It is quite likely that a new government hostile to the interests of foreign (particularly U.S. and British) oil companies could come to power in those elections, making passage of the law much less likely. The deals being offered today would be the best the companies would be likely to get.

President Barack Obama and his administration have been vocal and active proponents of the law’s passage. However, this administration’s allegiance to the oil industry is not as steadfast as that of its predecessor.

The Obama administration’s push for passage of the law comes at the same time that it pursues withdrawal of all but a residual U.S. troop presence. It is hard to underestimate the added negotiating weight brought by 150,000 members of the U.S. (and until very recently British) military. Bush announced his most public declaration for passage of the Iraq Oil Law at the same time that he announced the surge of an additional 20,000 U.S. troops into Iraq. The pending loss of its most potent negotiating stick has clearly made the oil companies’ more willing to deal.

Secretary of State Hillary Rodham Clinton may have best put forward the administration’s position at the U.S.-Iraq Business and Investment Conference on Oct. 20, explaining: "A comprehensive hydrocarbon law is vital for regulating the [Iraq] oil sector. Parliament has delayed this vote until after January, but steps can be taken in the interim; for example, by holding transparent, credible auctions on oil and gas fields as we are seeing ..."

In other words, 'we know you want the law, but Parliament isn’t biting, and we’re not keeping 150,000 U.S. soldiers in Iraq indefinitely for you to get it. So, sign the d*** contracts.'

And finally, under immense pressure, the Iraqi Oil Ministry also has steadily been sweetening the deals.

The New Oil Contracts

The Iraq Oil Ministry began a bidding round in June for eight currently producing oil fields, which are among the largest in the world. Only one consortium -- BP and the Chinese National Petroleum Corp. -- agreed to the terms. The rest of the companies balked, saying the terms just simply were not generous enough. The terms have since been sweetened (and applied retroactively to BP and CNPC's deal), and the companies are now jumping on board.

Because the U.S. and British companies have, to a large degree, squeezed into pre-existing negotiations, some strange bedfellows have emerged to sign these new contracts, and more odd pairings are expected soon.

• BP and CNPC finalized the first new oil contract issued by Baghdad for the largest oil field in the country, the 17 billion barrel Rumaila field.
• ExxonMobil, with junior partner Royal Dutch Shell, won a bidding war against Russia’s Lukoil and junior partner ConocoPhillips for the 8.7 billion barrel West Qurna Phase 1 project.
• Italy's Eni SpA, with California’s Occidental Petroleum and the Korea Gas Corp., was awarded Iraq's Zubair oil field with estimated reserves of 4.4 billion barrels.
• Japan's Nippon Corp., leading a consortium of Japanese companies including Inpex Corp. and JGC Corp., is at an advanced stage in talks to win the Nassiriyah oil field.
• Shell, with partners CNPC and the Turkish Petroleum Corp., is also in discussions for the giant Kirkuk oil field, although negotiations have been delayed until after Iraq’s January elections.

The Terms

These contracts are complex and unique, representing a hybrid of existing models. They are not the best that the oil companies hoped for, which would have been production sharing agreements (PSAs). Nor are they the worst the companies might have feared; Iraq is not maintaining its nationalized system, closed to foreign oil company production participation (U.S. and other foreign oil companies sell Iraqi oil now and have done so for decades).

They are also not technical service contracts (TSCs), although this is what the Iraqi Oil Ministry has named them (likely in an attempt to thwart opposition to the contracts for offering too much to foreign oil companies). Greg Muttitt, an Iraq oil expert with Platform, told me, "TSCs generally last just a few years, they're generally for a specific job (e.g. installing pumps) rather than managing a field, and they go to service companies like Baker Hughes and Halliburton."

On the positive side for the companies, where the development production contracts (DPC) that Iraq was signing prior to the 2003 invasion offered 12-year contracts, today’s run for 20 to 25 years. And while as recently as a year ago the Iraqis offered the foreign companies a 50 percent ownership stake, today’s contracts offer them a 75 percent stake (25 percent for the Iraqi government).

On the other hand, where the PSAs sought under the Iraq Oil Law would give the companies an equity stake and the ability to book the oil in the fields as their own, these contracts provide reimbursement fees for capital and operational expenses and a fixed fee per barrel of oil produced and deny the companies the ability to book reserves.

It remains unclear whether the foreign companies or the Iraqi government ultimately has production decision-making authority. And some of the benefits included in the contracts would be annulled if the Iraq Oil Law were passed, including requirements to hire and train Iraqi workers and the transfer of needed technology.

Finally, the Iraqis apparently sweetened the deals further in the last few weeks by reducing the amount the foreign companies pay in taxes and allowing them to use private security forces to protect their facilities.

The Next Bidding Round

On Dec. 11 and 12, the second, much larger, bidding round will be launched in Baghdad. Forty-four international companies have been prequalified to bid on run for 11 groups of oil and gas fields in already producing and undiscovered fields. Negotiations will include the super giant Majnoon field, which Chevron and France’s Total have teamed up to bid for.

The contracts for these fields are expected to mirror those described above, but no "model contract" has been made publicly available.

Sunlight

The Iraq Oil Law has remained an elusive goal of the world’s most powerful industry and governments because a massive organized global resistance movement has been shining a bright spotlight on its content, its backers, and on the consequences of its passage.

We must continue to shine this spotlight on the new contract negotiations to help ensure that 1) the military occupation of Iraq will be able to conclude, and 2) that the Iraqis are not freed from a foreign military occupation only to be brought under foreign economic control.

Thursday 18^th February was the effective date of the deal to develop the 4 billion barrel Zubair oilfield, west of Basra, according to a report from Reuters.

The consortium that won the deal, consisting of Italian company Eni, US's Occidental, and South Korea's Kogas, is due to pay the $300 million signature bonus within 30 days of the effective date.

The 20-year contract, which can be extended to 25 years, has a target output for the field of 1.2 million barrels per day.

(Sources: Reuters, Upstreamonline.com)

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.