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Surprises aplenty in Iraqi oil selloff

The distinguishing feature of Iraq's auction of oil rights this weekend is the relative absence of American companies, in contrast to five weeks ago, when US firm ExxonMobil and Anglo-Dutch Shell signed an agreement to develop the West Qurna Phase 1 field.

That development came only two days after the British company BP and China's CNPC (China National Petroleum Corporation) signed terms for the development of the huge Rumaila oil field, at 17.8 billion barrels (Bbbl) over twice the size of West Qurna 1, which holds at least 7 Bbbl of recoverable oil, and only three days after Italy's Eni signed to develop the 4.1-Bbbl Zubair oil field along with Korea Gas and Occidental Petroleum.

It looked, then, that there was a slight tipping in favor of US and British companies, historically over the last century the ones with the greatest influence on the pace of development of Iraq's hydrocarbon energy resources. (See The Rise of Rimland?, Asia Times Online, November 13, 2009).

The results of the latest round of bidding, in which 10 more fields were offered, show a different pattern. Out of over 40 companies constellated in various consortia, only seven firms present at the auction were American and only one actually entered a bid.

For West Qurna Stage 2, out of four consortia submitting bids, the winners were Russia's Lukoil and Norway's Statoil, which will split shares respectively of 63.75% and 11.25% after an Iraqi state partner comes on board as intended with a 25% share. Soviet state companies had planned to develop West Qurna in the late 1980s and Lukoil inherited the agreement, only to have it nullified, along with all of Saddam Hussein's other contracts, after his fall.

While West Qurna 1 went to ExxonMobil and Royal Dutch Shell, West Qurna 2 is the larger resource, with estimated reserves of over 12 Bbbl. Lukoil had lost West Qurna 1 in a consortium with ConocoPhillips; a third independent bidder was CNPC.

That's not all. The largest field on offer in the round just concluded, Majnoon, with 12.8 Bbbl estimated reserves, went to a consortium bringing together Shell with Malaysia's Petronas. Outbidding a consortium formed by CNPC with France's Total, they will share respectively 45% and 30%, with the other 25% going to an Iraqi state company. Halfaya, the third-largest field on offer with 4.1 Bbbl, went to a consortium also formed by CNPC (one-half share) with Total and Petronas (one-quarter each) also participating.

There is no comprehensive legal framework for foreign direct investment in energy resource development in Iraq, partly due to the failure to hold a referendum (provided for in Article 140 of the Iraqi constitution and overdue by more than two years) on the status of Kurdish regions within four Iraqi governates, specifically to decide whether they become part of the Iraqi Kurdistan region.

As the northern city of Kirkuk and the region around it are included in this process, energy resources and the division of revenues between the federal regions and the political center in Baghdad is an issue. Due to the failure of Iraq's government to get parliament to approve such a law governing oil and gas development, the legal framework for the ventures assigned in the auction just concluded is set up in the form of service contracts.

Nevertheless, the present developments bode well for political stability in Iraq if the security situation remains also stabilized as a precondition for that. The more revenue that there is to divide among the center and regions, the easier it will be to divide this revenue; and the easier it is to divide increasing revenue, the easier it will be to resolve acute political issues. Still, the fields recently auctioned are mainly in the south of the country, rather than in the Kurdish region.

An interesting exception is the Qaiyarah and Najmah fields, adjacent to one another in the northern province of Nineveh, where the Angolan company Sonangol won with a revised bid. This would be a good sign for cooperation between the Kurdish region and the political center in Baghdad for future energy exploration and development in Iraqi Kurdistan, and for an eventual political settlement of thorny issues, including reversal of Saddam's Arabization policy in the north, which altered the ethnic balance there and hence also contemporary electoral rolls.

Running down the list of fields for the sake of completeness, Gharaf with 900 million barrels (Mbbl) went to a Petronas-Japex (Japan Petroleum Exploration Co) consortium and Badrah (100 Mbbl) to Russia's Gazprom. Other fields (East Baghdad, the four "Eastern Fields", and the three Middle Furat cluster) received no bids in part due to the fluid security situation in the country.

A third of a century ago, the legendary Seven Sisters of the global oil industry would have had these fields to themselves, but since then there has been an enormous diffusion of expertise and know-how to other companies. These have the technology necessary for less complicated developments, are able form partnerships for access to more complex technology when necessary, and are able to compete on a cost basis.

So despite the earlier award of West Qurna 1, it is turning into an energy bonanza in Iraq for almost everyone except the Americans, whose erstwhile vice president, Dick Cheney, is widely reported to have been one of the driving forces of the military intervention following energy task-force meetings with US energy companies where maps of Iraqi oil deposits were closely examined.

The country's proven natural gas deposits are meanwhile estimated at slightly over 100 billion cubic meters (bcm), with probable reserves up to nearly three times that figure. At the end of September, Turkey signed an agreement to take 8 bcm per year from deposits in Iraqi Kurdistan to help kickstart the Nabucco pipeline long under negotiation to channel gas from the Caspian Sea region to Europe. This story is far from over.

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This page contains a single entry from the blog posted on December 16, 2009 4:59 AM.

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