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Washington, 19 March 2010 (Oil & Gas Journal )

Iraq’s December 2009 auction of rights to develop 60 billion bbl of crude oil reserves in 10 fields will lift the country’s production to 9.6 million b/d by 2017 if several major obstacles can be overcome, a new Energy Policy Research Foundation Inc. (EPRINC) report concluded.

“By any standard, the Iraqi auction represents a major event in the history of the world oil market: It is the largest single transfer of reserves into the production stream since the beginning of the petroleum era,” the report maintained, saying the supply effect might lower oil prices enough to strain alternative fuels.

The report suggested that, although a wide range of external and internal threats and more traditional obstacles could derail Iraq’s prospects for a massive crude oil production increase, the prospect that it could send a supply shock into world markets can no longer be dismissed.

Expanded Iraqi production also could prevent a price spike if production outside the Organization of Petroleum Exporting Countries drops over an extended period, according to the report.

“In this scenario, the role of Iraqi supplies may be more of a brake on rising prices than a catalyst to a lower price path,” it explained. “In any case, the Iraqi auction clearly opens the door for a careful review of the conventional wisdom on the outlook for oil prices over the next 20 years.”

Under the new contracts, companies have committed to bring 9.6 million b/d online by 2017, which with production expected from fields not covered by the auction would meet the Iraqi government’s expectations for 12 million b/d. The EPRINC report assumed companies will be able to achieve only 50-75% of the targeted levels by 2017 but included scenarios under which total Iraqi production would approach or exceed the 12-million b/d benchmark by 2020.

The scenarios, it said, “clearly raise the potential for downward price adjustments in crude oil against a range of business-as-usual cases.” Several likely price outcomes, it added, “may also place alternative transportation fuels into severe financial distress.” Biofuels with economics marginal while crude oil prices are $80/bbl would require additional subsidies, “which may not be easily obtained in an era of ‘fiscal fatigue.’”

The US Energy Information Administration estimates Iraq’s reserves at 115 billion bbl, third behind Saudi Arabia and Iran. “However, credible estimates . . . suggest Iraq contains over 200 billion bbl of recoverable reserves and potential reserves of over 400 billion bbl,” EPRINC’s report indicated. It is available online at www.eprinc.org/pdf/EPRINC-Iraq-FirstLook.pdf.

Moving quickly

The unprecedented scale of the Iraqi government’s commitment and the project-management experience of many of the companies winning technical service contracts provide potential for field development to progress quickly, the report said. “Some of the difficult political issues have been met in the auction decision and process; others are being met, if grudgingly, by the very large and unexpected revenues which will be distributed to all Iraqi provinces on an equal per capita basis,” it said.

“The pitched rhetoric between the Kurdish government and the central government has softened, but substantial areas of disagreement remain,” it continued. “In line with their historical pursuit of autonomy, the Kurds have initiated and want to pursue a separate energy enclave. Under the proposed revenue distribution structure from the central government, the Kurdish government would receive 17%. It would be a great deal of money, much greater than the Kurds are likely to achieve from their regional oil development program.”

Other risks include the absence of a comprehensive law justifying the legal framework for the auctions, resolution of the Kurdish-Arab struggle for Kirkuk and oil and gas resources in Kurdistan, and Iraq’s outstanding debt with Kuwait, Saudi Arabia, and the United Nations.

“Several major oil companies, who chose not to bid, could not get comfortable with the lack of clarity on performance conditions of the contracts, stability of the tax regime, and the large carried interest of the Iraqi national oil company (approximately 25%) in the fields won by the bidders,” the report added.

Other problems include security, delivery of rigs, the handling of water for secondary recovery, and completion of government projects to upgrade pipelines and ports.

“None of these uncertainties are insurmountable, but resolving all these issues is critical if the Iraqis are to move forward on the ambitious production program,” the report said.

New ground

Besides scale, the auction broke new ground in two crucial ways, the report said. It would be the first time so many development projects of this size are started simultaneously with identical target completion dates. And the auction represents the first major break from the prevailing oil industry structure in almost 40 years.

EPRINC observed that since many producing countries began to nationalize their oil resources in the 1970s, multinational oil companies have had limited ability to explore for or develop reserves in those countries, particularly around the Persian Gulf. “The Iraqi auction will stand as an action that marries the interests of oil companies and of a government which controls a very large reserve base,” the report said.

“With its action Iraq has established a format for reserves development which leapfrogs the models of the other major Gulf oil producers—a transparent contractual arrangement that offers international companies an acceptable return on investment.”

China has become the biggest single investor in Iraq's oil and gas sector, with nearly one fifth of the reserves that have been auctioned over the past year under its control, Meed has reported.

China is spending a total of $577m in signing on fees to give it access to an estimated 24 billion barrels, or about 18% of the reserves on offer, the magazine said, citing its own data.

Chinese investment doubles the US' signing on fees, which has committed $296m to control about 12 billion barrels, the magazine added.

(AME Info FZ LLC)

A consortium led by CNOOC Ltd, the Hong Kong-listed unit of China National Offshore Oil Corp., has signed an initial agreement with Iraq to develop the 2.5 billion-barrel Missan oil field complex in southern Iraq, a senior Iraqi oil ministry official said Monday. Sabah Abdul Kadhem Al Saadi, director of the legal and commercial office at the Oil Ministry & apposes Petroleum Contracts and Licensing Directorate, told Dow Jones Newswires that a final deal could be signed within days, pending approval by the Iraqi cabinet.

CNOOC and its partner, Sinochem International Corp, last week agreed to the Iraqi oil ministry's proposals to develop the three Missan fields - Fakka, Buzurgan and Abu Ghirab. The CNOOC/Sinochem alliance made an unsuccessful bid for the complex in the country's first licensing auction in June. The two Chinese state-run firms initially offered a remuneration fee of $21.40 for each extra barrel of oil produced and suggested raising production from the fields to 450,000 barrels a day. They subsequently lowered the fee to $18.09 a barrel, but that was still much higher than Baghdad's proposed fee of $2.30 a barrel. CNOOC will hold a 60% stake in the venture; Sinochem will own 15% with an Iraqi state company holding the remaining 25%, according to the Iraqi oil ministry.

Awarding Missan brought to 11 the number of deals signed with international companies from the first and second bidding rounds held last year. Iraq aims to boost its production from these oil fields to 12 million barrels a day in six to seven years from current 2.5 million barrels a day, officials said. It would also make the Chinese oil companies the dominant foreign players in Iraq's promising oil sector, following four big development deals they signed in 2009 and 2010, including the one for the supergiant Rumaila oil field in partnership with BP and Ahdab field.

The Chinese were the only companies that bid last year for Missan oil fields after other companies were discouraged from bidding for the fields because some of them are in a disputed area near the border with Iran. In December, Iranian troops occupied an Iraqi well in the Fakka field bordering Iran and caused a political and diplomatic row. Last month, the Iraqi government said Iran withdrew its troops from the field but wanted negotiations to demarcate the borders.

Iraq expects to step up its Treasury bill activity in 2010 to help plug continuing budget deficits and foster a secondary treasury market, the Central Bank and Finance Ministry said in a submission to the IMF.

Iraq, only just emerging from sectarian war but still battling a stubborn insurgency, also wants to develop foreign exchange markets outside the framework of dollar auctions currently conducted by the Central Bank.

That included the establishment of an interbank foreign exchange market and dinar forward market, the submission said.

The country's letter of intent submitted to the International Monetary Fund for a $3.6 billion standby arrangement was dated Feb. 8 and can be accessed here

Iraq, which on Sunday held its second election for a full-term parliament since the 2003 U.S.-led invasion, said it would not return to a budget surplus until 2012.

(Newsweek, Inc)

The Central Bank of Iraq’s (CBI) dollar sales fell to $85.010 million in its daily auction on Tuesday, compared to $183.530 million in the previous session.

“The demand hit $5.01 million in cash, covered at an exchange rate of 1,183 Iraqi dinars per dollar, and $80 million in foreign transfers outside the country, covered at an exchange rate of 1,173 Iraqi dinars per dollar,” according to a CBI news bulletin received by Aswat al-Iraq news agency.

None of the 11 banks that participated in today’s session offered to sell dollars.

The Central Bank of Iraq runs a daily auction from Sunday to Thursday.

( Aswat Al Iraq )

08 March 2010 (Reuters)

Iraq has signed an initial deal with China's CNOOC and Sinochem to develop the 2.5-billion-barrel Maysan oilfield complex, Oil Minister Hussain al-Shahristani told Reuters on Sunday.

A final deal with both companies will be signed in the coming days, after they accepted the government's proposed remuneration fee of $2.30 for every additional barrel of oil produced, Shahristani said.

"The Chinese companies have accepted all our conditions for this field," he said. "We have an authorization from the cabinet to sign the final deal."

CNOOC, together with Sinochem, made an unsuccessful bid for the three Maysan fields in Iraq's first auction of oilfield contracts last year. But since then they had decided to accept the government's proposed remuneration fee of $2.30.

CNOOC and Sinochem had projected plateau output of 450,000 barrels per day (bpd) when they first made the bid last year.

The deal is one in a series of contracts with international oil companies that could boost Iraq's output capacity to 12 million barrels per day, rivaling top producer Saudi Arabia, from around 2.5 million bpd now.

The government is hoping that the deals will generate cash needed to rebuild Iraq's shattered economy after years of war, sanctions and economic decline.

BASRA - AP,03/03/2010

International oil executives have flocked to this southern Iraqi city to survey their potentially lucrative prizes: the fields that it is hoped will one day dramatically increase output of cheap, plentiful crude.

For their companies, the fields that they won the rights to develop in two biddings rounds last year are their first foray into Iraq's oil sector in over three decades.

For Iraqi Prime Minister Nouri al-Maliki, the executives and their investments are a vital part of his bid to win a second term in March 7 elections. Al-Maliki has billed himself to voters as the leader that can ensure the development of Iraq's dilapidated oil sector and bring in billions of dollars to rebuild the country's struggling economy.

Al-Maliki's promises could take years to fulfill and many experts see his predictions for increasing oil output as wildly optimistic. But what matters for the premier is persuading voters to keep him in his post to shepherd the process.

"Al-Maliki can present himself as a guarantor to these plans ... whether they are going to meet their huge targets or not," Mideast oil analyst Samuel Ciszuk of the London-based IHS Global Insight said.

Iraq sits atop 115 billion barrels of crude, the world's third largest proven reserves of conventional crude oil. But current production of about 2.4 million barrels per day remains well below levels before the 2003 U.S.-led invasion that toppled Saddam Hussein.

Al-Maliki's government has vowed, based on developers' promises, to raise output to more than 12 million barrels a day within six to seven years. The production increase would translate into hundreds of billions of dollars in sorely needed revenue for a government that relies on crude sales for 95 percent of its revenues.

Iraqi officials hailed the multibillion dollar deals as the dawn of a new day in the oil sector after two international auctions since June secured commitments from international firms to develop 10 oil fields. The government plans to develop 11 others left over from the two biddings on its own.

But meeting the government's timetable will be difficult. After decades of neglect because of years of war and Saddam-era sanctions, infrastructure is poor. Also, continuing violence in the country means security costs to keep workers safe as the U.S. looks to withdraw all its troops from the country by 2011.

"Bottlenecks are everywhere and it is going to be very tall order," Ciszuk said. "It's going to be very, very tough to do."

The southern city and province of Basra -- home to 70 percent of Iraq's daily oil output and its only Persian Gulf outlet -- is a key litmus test for al-Maliki. Five of the fields awarded in the auctions are located near the city, and representatives from 11 oil companies have been visiting since early this month to meet with oil officials and tour the fields.

Yet Basra, Iraq's second largest city with 3 million residents and a Shiite stronghold crucial for al-Maliki's Shiite-led government looks like a city that fortune overlooked.

Its dust-covered streets are strewn with mounds of garbage around which some of its poorest residents compete with sheep and goats for discarded food. Streets are packed with cars jostling for space with donkey carts and, in a few neighborhoods; residents still endure water and electricity shortages.

Al-Maliki's Coalition of State and Law secured a sweeping win in Basra and other parts of the mainly Shiite south in last year's provincial elections, boosted by his crackdown on militants and image as the protector of Iraq's security.

But his stature in Basra has been hurt by the continued lack of basic services and the faltering fight against corruption -- as well as continued militant attacks in Baghdad.

"During the last elections, they promised to change everything, but they didn't honor their word and instead they focused first on lining their pockets, then those of their aides," said Jassim Riadh Mohammed, a 43-year-old supermarket owner. Mohammed won't be voting for al-Maliki.

Al-Maliki also faces sharp competition in the south from rival Shiite parties, some of which harshly criticized his oil deals. The Sadrist party, loyal to radical cleric Muqtada al-Sadr, Fadhila Party and nationalist Iraqis, accused him of surrendering the nation's oil wealth to international companies.

Al-Maliki is hoping the promise from Basra's giant oil fields will be enough to win over voters. But years of neglect weigh heavily on that possibility.

About 60 kilometers (38 miles) northwest of Basra, roaring flames billow from Rumaila, Iraq's biggest oil field. The flames are the result of the burning of natural gas that is extracted along with the crude -- a reminder that Iraq desperately needs foreign help even in capturing and selling the gas instead of burning it off.

Rumaila, with an estimated 17.8 billion-barrel reserve, is considered the workhorse of Iraq's oil industry, producing about 1.1 million barrels per day. It was snapped up at the oil auction by British giant BP PLC teaming up with the China National Petroleum Corp.

Their consortium plans to drill 56 wells and upgrade equipment to boost output by 10 percent by the end of 2010, Dhia Jaafar, the director-general of the state-run South Oil Co., told The Associated Press.

They hope to ramp up ramp up production to 2.85 million barrels per day within seven years. Like other firms, the BP-CNPC consortium offered production targets in exchange for a per barrel fee in a 20-year contract.

The work in Basra's four other fields will begin in the next two months, Jaafar said.

Casting a shadow over development hopes is the lack of a legal rule book to govern foreign oil investments. The proposed national oil law has been in limbo since 2007 amid bickering between the Baghdad government and the semiautonomous Kurdish government in the oil-rich north.

That fight could put these deals in danger of being scrutinized or canceled by the new government.

The political rivalries among Shiites in the south also make investors wary.

"I think that's why we have not seen a lot of investment before the elections and before the results that will allow the companies to see who has become stronger and who has become weaker," said Ciszuk.

05 March 2010 (Emirates Business)

Iraq will not be able to produce 10 to 12 million barrels of oil a day in foreseeable future, said analysts.

Such a production target for the country set by its politicians to be achieved in the next six years is expected to upset OPEC supply equations. Although the country's Oil Ministry has awarded a series of prominent contracts in recent months, a plethora of loopholes continue to plague the country thus deterring investments, officials from insurance firms and think tanks said.

"Iraq continues to grapple with some very serious problems. I will be surprised if they are able to achieve a supply level of 10 to 12 million barrels a day in a foreseeable future," Herman T Franssen, President of International Energy Associates, a Washington-based company, told Emirates Business.

Iraq has total oil reserves of about 115 billion barrels. The country currently produces about 2.3 million barrels of oil a day.

Franssen said: "Iraq does not have the required infrastructure - ports or pipelines to be able to transfer such huge volumes of oil."

The first impediment in the country's quest for achieving higher volumes of oil production and export would come if the country attains a production capacity of 3.8 million barrels a day, Franssen said.

"That's when Iraq's production will match the quota fixed for Iran. And considering the traditional rivalry between the two countries, Iraq will face difficulties in raising its output further," Franssen said.

Iraq has awarded 10 oil projects to foreign consortiums so far. While three contracts were awarded out of auctions held the last year, seven were awarded recently.

The projects are meant to enhance Iraq's oil production capacity to 12 million barrels a day in six years, a target about which the country's Oil Minister Hussain Al Shahristani and the country's Prime Minister Nouri Al Maliki have boasted about. Even the service contracts of these companies call for the production reaching such a level in six years. Work has not begun on any of these projects, analysts monitoring them said.

Luay Jawad, Director of Iraq Energy, a think tank that helps companies set up oil business in Iraq, said ports in the country are still a matter of talks.

05 March 2010 (Wall Street Journal)

A consortium led by Cnooc Ltd., the Hong Kong-listed unit of China National Offshore Oil Corp., is the frontrunner to win the right to develop Iraq's 2.5 billion-barrel Missan oil-field complex after agreeing to Iraqi government proposals, officials said Thursday.

The Iraqi Oil Ministry has concluded talks with Cnooc and its partner, Sinochem International Corp., relating to the development of the three Missan fields in southern Iraq and has submitted a draft contract to the cabinet for final approval, said one official familiar with the talks.

Cnooc officials couldn't be reached for comment.

An agreement would further cement China's strong role in developing Iraq's oil fields. Cnooc's rival China National Petroleum Corp. has been the dominant player there, finalizing an agreement in November as part of a consortium including BP PLC to develop southern Iraq's giant Rumaila oil field, and clinching a $3 billion deal in 2008 for the Ahdeb field in Wasit province in southeastern Iraq.

China's state-owned oil companies have been heavily investing overseas in recent years, albeit with mixed success, in an effort to ensure adequate supplies of fuel for the country's booming economy.

If the Cnooc-led consortium wins the right to develop the fields, they would have to pay a recoverable signature bonus of $300 million, according to Iraq oil ministry's tender protocol.

The Cnooc/Sinochem alliance made an unsuccessful bid for the complex in the country's first licensing auction in June. The two Chinese state-run companies initially offered to receive a remuneration fee of $21.40 for each extra barrel of oil produced and suggested raising production from the Fakka, Buzurgan and Abu Ghirab fields to 450,000 barrels a day.

They subsequently lowered the fee to $18.09 a barrel, but that was still much higher than Baghdad's proposed fee of $2.30 a barrel, which the Chinese companies have now agreed to. "They have accepted the ministry's proposed fee," said Oil Ministry spokesman Assem Jihad.

Cnooc would hold a 60% stake in the venture; Sinochem will own 15% and an Iraqi state company will hold the remaining 25%, according to the ministry.

Iraq has set a minimum production plateau target of 275,000 barrels a day from the Missan fields, which are producing 100,000 barrels a day. If awarded, Missan would bring to 11 the number of deals signed with international companies from the first and second bidding rounds held last year.

The Chinese firms were the only companies that bid last year for Missan oil fields. Other companies were discouraged from bidding for the fields because some of them are in a disputed area near the border with Iran.

In December, Iranian troops occupied an Iraqi well in the Fakka field bordering Iran and caused a political and diplomatic row between the two countries. Last month the Baghdad government said that Iran withdrew its troops from the field but wanted negotiations to demarcate the borders.

Backed by armed bodyguards, international oil executives have flocked to Basra to survey their potentially lucrative prizes: the fields that they hope will one day be pumping out dramatically greater amounts of cheap, plentiful crude.

For their companies, the fields that they won the rights to develop in two biddings rounds last year are their first foray into Iraq's oil sector in over three decades.

For Iraqi Prime Minister Nouri al-Maliki, the executives and their investments are a vital part of his bid to win a second term in March 7 elections. Al-Maliki has billed himself to voters as the leader that can ensure the development of Iraq's dilapidated oil sector and bring in billions of dollars to rebuild the country's struggling economy.

Al-Maliki's promises could take years to fulfill and many experts see his predictions for increasing oil output as wildly optimistic. But what matters for the premier is persuading voters to keep him in his post to shepherd the process.

"Al-Maliki can present himself as a guarantor to these plans ... whether they are going to meet their huge targets or not," Mideast oil analyst Samuel Ciszuk of the London-based IHS Global Insight said.

The southern city and province of Basra — home to 70 percent of Iraq's daily oil output and its only Persian Gulf outlet — is a key litmus test for al-Maliki. Five of the fields awarded in the auctions are located near the city, and representatives from 11 oil companies have been visiting since early this month to meet with oil officials and tour the fields.

(Associated Press)