Friday, July 10, 2009

1st Oil Bidding Round Flops In Iraq

On June 29, 2009 the Iraqi Oil Ministry offered up six oil fields, and two natural gas fields for long-term deals with international companies. The process was one of the most open and transparent in recent history as it was broadcast live on Iraqi television. 35 companies were pre-approved to participate, but only 22 placed bids. The Oil Ministry was offering 20-year technical service agreements. The companies would be paid a flat fee to invest technology, but would also be paid a fee for each extra barrel of oil produced. The winning companies were also to pay a hefty signing bonus in the form of multi-million dollar loans. Because there were so many objections to the deals, the Oil Ministry claimed that Iraq would earn $1.7 trillion over 20-years from the contracts, while the companies would only be paid $16 billion. Iraq would also get up to $2.6 billion in loans from the signing bonuses.

In the end the process turned out to be a flop. The oil companies first offered an opening bid for how much they expected to be paid for each barrel of increased output, and then the government reveled their price. The two sides were then to negotiate and agree upon an amount. In the end, only one consortium of British Petroleum (BP) and China’s CNPC won a bid for the South Rumaila field in Basra. BP-CNPC wanted $3.99 per extra barrel, while the government asked for $2. BP-CNPC ended up agreeing to the Oil Ministry’s price. That was because it was the smallest gap between the companies’ demands and the Ministry’s. In comparison, the government was willing to pay $8.50 for extra production from the Akkas gas field in Anbar, while the foreign businesses wanted $38. One natural gas field in Diyala didn’t even receive a bid.

It was apparent that Baghdad had unrealistic expectations about their offers, something Anthony Cordesman from the Center for Strategic and International Studies warned about after a recent trip to Iraq. He wrote that Iraqi officials were just thinking about the possible profits, and not about workable business models that international companies would accept. The first round of bidding seems to have proven his point.

This event was supposed to be a defining moment for Iraq’s oil industry. The country relies upon petroleum for almost all of its revenue, and with the drop in oil prices and budget deficit, the Oil Ministry was promising that this first round of bidding would open the country up to the foreign know how necessary to boost production, while protecting the nation’s resources. In the end it turned out to be a fiasco. Only one deal was agreed upon, and the Oil Ministry proved that it was out of touch with economic realities. With oil prices down, the companies, not the oil producing nations have the upper hand, as the former are desperate for deals, which gives the corporations more leeway to negotiate. This could’ve been expected as the Oil Minister’s plans have been ad hoc at best, and he’s scrapped earlier ideas to increase output in 2008. Iraq’s oil wealth will continue to be underdeveloped and mismanaged with this continued leadership, robbing the country of the money that it so desperately needs after years of wars and international sanctions.

Oil And Natural Gas Fields And Bids

South Rumaila Oil Field – Basra Province
Reserves: 7.3 billion barrels
1. British Petroleum and China’s CNPC
2. Exxon-Mobile and Malaysia’s Petronas
Initial Bid: BP-CNPC $3.99 per extra barrel
Oil Ministry’s Bid: $2 per extra barrel
Winning Bid: $2 per extra barrel by BP-CNPC

West Qurna Oil Field – Basra Province
Reserves: 7.4 billion barrels
1. Exxon-Mobile and Royal Dutch Shell
2. Spain’s Reposal with Denmark’s Maersk Oil and Gas and Norway’s Statoil Hydro
3. Russia’s Lukoi
4. France’s Total
5. China’s CNPC
Initial Bid: Exxon-Mobile and Royal Dutch Shell $4 per extra barrel
Oil Ministry’s Bid: $1 per extra barrel
No winners

Kirkuk Oil Field – Tamim Province
Reserves: 6.5 billion barrels
Bidders: Royal Dutch Shell and China’s Sinopec and Turkish Petroleum Corp
Initial Bid: $7.89 per extra barrel
Oil Ministry’s Bid: $2 per extra barrel
No winners

Zubayr Oil Field – Basra Province
Reserves: 4 billion barrels
1. Italy’s Eni, China’s Sinopec, and South Korea’s Occidental and Korean Gas
2. India’s ONGC, Gazprom Russia, and Turkish Petroleum Corp
3. Exxon-Mobile, Royal Dutch Shell, and Petronas
4. British Petroleum and China’s CNPC
Initial Bid: Eni, Sinopec, Occidental and Korean Gas $4.80 per extra barrel
Oil Ministry’s Bid: Unknown
No winners

Maysan Group Oil Field – Maysan Province
Reserves: 2.5 billion barrels
Bidders: China’s CNOOC and Sinochem
Initial Bid: $21.40 per extra barrel
Oil Ministry’s Bid: $2.30 per extra barrel
Deal has been referred to Iraqi cabinet

Bai Hassan Oil Field – Maysan Province
Reserves: 2.3 billion barrels
Bidders: Conoco Phillips, China’s Sinopec and CNOOC
Initial Bid: $26.70 per extra barrel
Oil Ministry’s Bid: $4 per extra barrel
Deal has been referred to Iraqi cabinet

Akkas Natural Gas Field – Anbar Province
Reserves: 4,000-4,500 billion cubic feet
Bidders: Italy’s Edison, Malaysia’s Petronas, China’s CNPC, Turkey’s TPAO,
And Korea’s Gas Corp
Initial Bid: $38 for extra production
Oil Ministry’s Bid: $8.50 for extra production
No winners

Mansuriyah Natural Gas Field – Diyala Province
Reserves: 3,100 billion cubic feet
Bidders: None


Aswat al-Iraq, “Plan to develop Bai Hassan, Kirkuk oil fields,” 7/4/09

Chmaytelli, Maher and DiPaola, Anthony, “Iraq Says May Earn 100 Times More Than Oil Companies (Update1),” Bloomberg, 6/23/09

Chon, Gina, “Big Oil Ready for Big Gamble in Iraq,” Wall Street Journal, 6/24/09
- “Foreign Firms Bid for Iraqi Oil Licenses,” Wall Street Journal, 6/30/09
- “Oil Companies Reject Iraq’s Contract Terms,” Wall Street Journal, 7/1/09

Cordesman, Anthony, “Observations From a Visit to Iraq,” 6/15/09

Dow Jones, “UPDATE:Iraq Parliament Panel: Rumalia Deal Needs Lawmakers’ OK,” 7/3/09

Hafidh, Hassan, “FOCUS: Oil Majors Line Up For Iraq’s First Bid Round,” Dow Jones, 6/29/09

Hoyos, Carola, Warrell, Helen, and Bernard, Steve, “Crude Competition,” Financial Times, 6/30/09

Al Jazeera, “Foreign oil firms reject Iraq terms,” 6/30/09

Lando, Ben, “Oil bid debrief,” Iraq Oil Report, 7/8/09

Lando, Ben and Latif, Nizar, “One oil field awarded, many questions remain,” Iraq Oil Report, 6/30/09

Londono, Ernesto, Ibrahim, K.I., and Mufson, Steven, “Anxious Oil Giants Pass on Iraq,” Washington Post, 7/1/09

Reuters, “Iraq To Move Up Second Energy Bidding Round,” 7/2/09

Salaheddin, Sinan, “Iraqi PM dissatisfied with energy auction results,” Associated Press, 7/2/09

Sly, Liz, “Iraq awards BP-led consortium a contract to develop oil field,” Los Angeles Times, 7/1/09


Anonymous said...

Do you really agree that Iraq should lower the demands on foreign companies? Considering these contracts are gigantic and oil prices are again going to rise, it may certainly be in favour of the government and Iraq to hold out their reserves rather than give them up out of desperation for less favourable deals which could hurt the Iraqi economy in the long run. Far more important in the short term is the security situation and problems of corruption.

Joel Wing said...

To me it's not about the prices that the Oil Ministry set or something like that in this 1st biding round. To me the big problem is that the Oil Minister is completely incompetent. Not a single one of his plans has worked and since Iraq depends upon 80-90% of its money from oil, and there's little to no chance that they will be able to diversify their economy anytime soon, they need to do everything they can to get production up, rebuild and renovate its infrastructure, etc. Most of the increase in production has been because of the Americans, not the Oil Ministry. The U.S. paid for a huge protection project to stop attacks on the pipelines and has improved security in most of the country.

The Oil Minister on the other hand has failed on everything he's come up with. In 2008 he was going to offer 2 year no bid technical service agreements. At the very last minute he scrapped the whole process and signed a deal with a Chinese company the ministry hadn't even been talking to before. Then he says this 1st round of bidding is going to be the most important act he's done so far, he spends around a year in preparation, and then he only comes out with one deal. Before that he starts signing drilling and other contracts for some of the same fields he's offering up to bid, which means the new companies that won bids would have to deal with the previous state-run oil companies work, plus new contracts that were just signed before the bidding process. Now he says a couple of the fields will be developed by the state-run companies, something that they're already doing and have proven incapable of boosting production at, others will be developed by a National Oil Company which doesn't exist yet and can only be created by passage of a new oil law which isn't going to happen anytime soon, and some of the others will be included in a 2nd round of bidding, which of course if goes like the first one will flop again.

The current Oil Minister is the 3rd since the U.S. invasion, yet he's the only one that has no experience in the oil business. He's a nuclear scientist who before this appointment was known for his connections to Grand Ayatollah Sistani and having put together the sectarian Shiite United Iraqi Alliance. He was a political appointee who was given control over the future of the country. So when it comes down to it, it doesn't look like he's playing tough with the oil companies to try to protect the country's resources and get a fair deal, it's that the guy doesn't seem to know what he's doing.

Jay said...

Well I wouldn't dispute that he's incompetent, but surely the fact that these negotiations were open and transparent is a good thing, isn't it? Is there still room for backroom deals and bribery in the system they have in place?

It may be embarrassing that it went so badly, but the establishment of a transparent system gives me hope regardless.

Joel Wing said...

It was an amazingly transparent bidding round from how it was described. That makes up for the fact that his other oil deal with a Chinese company last year and a natural gas deal last year with Shell were no-bid deals done in secret. The last thing they said was 2 fields and 1-2 of the natural gas deals would be developed by the state-run companies that are already working on them, a couple more will be worked on a state-run oil company that needs the national oil law to be passed to be created, and then some of the others may be included in the 2nd round of bidding that's supposed to happen later this year. All of that basically means nothing will happen to them in the end unless they get bid on in the 2nd round.