Iraq’s Contradictory Oil Plan

It’s been reported here several times before that Iraq has been pursuing its oil plans in a haphazard way. Baghdad’s latest moves are more proof of that. The government is now pursuing a dual track strategy that looks to be contradictory. On the one hand, the Oil Ministry has put up oil and gas fields for bidding by international oil companies. On the other hand, the government is offering contracts to Iraqi and foreign companies to begin service work and exploration on those same fields. The goal is to boost immediate production to make up for the declining price of oil, while setting up long-term development deals with multi-nationals. The plan seems contradictory as it would have companies begin to work on fields now that are up for bid by others.

Iraq is almost completely dependent upon oil to garner revenues. As noted before, the drop in oil prices has forced Iraq to cut its budget several times, and is still expected to run a large deficit. To try to make up for this gap the Oil Minister Hussain Shahristani is signing a number of service contracts to try to boost short-term production. In March 2009 the Oil Ministry signed a $250 million deal with a state-run engineering company to repair gas units at the Rumaila fields in the south. That followed a series of contracts signed in February. One was a $90 million joint venture formed between the Oil Ministry and the Mesopotamia Petroleum Company to drill 60 new wells per year in the south. The first explorations are to begin in Bazargan, Fakka, and Halfaya in a few months. Ramco Energy also signed a $400 million joint venture for drilling. They will first work with the state-owned oil companies, and then help the international firms that sign long-term production deals. The Korea National Oil Corporation signed a non-binding $3.55 billion contract to work on Qush Tappa, Sangaw, and six other fields in the south. British owned Foster Wheeler Energy Limited won a contract from the South Oil Company to work on offshore oil facilities in Basra.

The hope is that these moves will boost production by 500,000 barrels a day within two years. Before, Shahristani said that the Ministry was aiming for a 300,000-350,000 increase in two years. The Oil Ministry is also calling for the creation of an Iraqi National Oil Company and a Supreme Petroleum Council to coordinate these efforts. The National Oil Company will oversee oil work, while the Supreme Petroleum Council will be tasked with working out development strategy.

The problem is that Iraq is also courting major international oil companies to work on these same fields at the same time. On December 31, 2008 the first round of bidding on oil and gas fields began, followed by a second round in January 2009. These are 20 year, service agreements. The Oil Ministry is telling the corporations that they are expected to start work within six months of completing their contracts, which they hope to complete by June.

Trying to negotiation these deals couldn’t have come at a worse time. In 2008 when oil prices were high Iraq had the upper hand when dealing with the international oil companies. Now that prices have dropped the corporations know that countries like Iraq are desperate for funds and can drive harder deals to their advantage.

The Oil Ministry has already begun making concessions. In early February Shahristani traveled to Istanbul, Turkey to meet with 32 companies to try to work out details on the contracts. Originally Iraq was offering joint ventures where a state-run oil company would own 51% and the foreign firms 49%. Now the Ministry has said the corporations can have 75% of the joint ventures. Iraq has also lowered the production targets the companies have to meet before they start getting paid. Since oil firms are still unsure of the risks involved in investing, Iraq is likely to make more compromises in the future.

There are a number of issues that stand in the way of Iraq signing these long-term contracts. The largest impediment is the fact that Iraq’s parliament has not passed a new hydrocarbon law that has been stalled for years. Companies are afraid that their terms might change after the legislation is passed. An energy analyst writing for UPI doubted that Iraq would be successful in this dual track policy because it lacks qualified personnel. Since the U.S. invasion Iraq has had a massive brain drain, costing it much of its human capital. An official from Ramco Energy said many companies still do not want to do business in Iraq because they have not paid some companies for their work. The government bureaucracy is another major problem. Every little step needs to be okayed by higher ups that greatly delays any work. The Oil Ministry has also made arbitrary changes to deals. In September 2008 for example, Shell signed a joint venture with the South Gas Company to exploit Basra’s natural gas. Then in February Mitsubishi was added. Both of these were no-bid contracts, and Iraq’s parliament complained about the original Shell one because there was no transparency in the negotiations. The Middle East Economic Survey has criticized the Oil Ministry over these deals saying that they have not done a good job on them. The exact terms are unclear, they are too complicated, and the Iraqis are slow. Finally, in December 2008 the International Monetary Fund also said the government wasn’t doing enough to fight corruption in the oil sector.

Can Iraq balance all of its plans? It’s not clear whether the long-term oil deals will be completed by June 2009. Some of the short-term contracts already signed seem complimentary to that larger effort, while others do not. Iraq has vast oil and gas resources that have been underdeveloped because of wars and international sanctions. The recent dramatic drop in petroleum prices are putting tremendous pressure upon the Oil Ministry to increase output to fund the government, which is almost completely dependent upon oil. Since 2003 the Ministry has largely failed to meet its goals, which has forced it to reverse course and make dramatic changes in its strategy before. This latest effort seems to fit that pattern. This time Oil Minister Shahristani may be jeopardizing major oil exploration and development for immediate production increases.

SOURCES

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