Wednesday, October 28, 2009

Iraq’s Continued Attempts To Develop Its Oil Industry

In June 2009, Iraq held its first round of international bidding on its oil fields. Out of six oil and two natural gas fields, only one, Rumaila in Basra tendered a winning bid. The Iraqi Oil Ministry was widely criticized as a result, with many believing they set unrealistic terms for oil companies, and simply expected the country’s large potential to draw in investors. Since then Baghdad has tried to finalize the Rumaila deal and negotiate new ones.

First, in October 2009 the Iraqi cabinet approved the bid for the Rumaila field, made by British Petroleum (BP) and the Chinese National Petroleum Corporation (CNPC). Rumaila currently produces 1 million barrels a day, the largest amount of any field in Iraq. BP-CNPC has agreed to increase production to 2.85 million a day, while getting paid $2 for each extra barrel. This will be done through a joint venture with the state-run South Oil Company holding 25%, BP holding 38%, and CNPC with 37%.

The Oil Ministry has also okayed two new deals for the Nasiriyah field in Dhi Qar, and the Zubayr field in Basra. A Japanese led consortium of Nippon Oil, Inpex, and JGC Corporation won the bid for Nasiriyah, beating out another group headed by Italy’s Eni. Nasiriyah has 4.4 billion barrels in reserves, but only produces 20,000 barrels a day. The Japanese companies have pledged to boost production to 100,000 barrels within 18 months, and to 150,000-200,000 in two years. Eni ended up getting the Zubayr field contract. It currently produces 227,000 barrels a day, and Eni promised to increase that to 1.125 million barrels in six years. Eni originally bid on the field in the June round, but the Oil Ministry turned down their offer.

Iraq desperately needs foreign companies to develop its oil fields. Years of sanctions and wars, have deprived the industry of new equipment, maintenance, and know how. Its infrastructure is also breaking down, and lacks the necessary pipelines, and storage and port facilities to handle any large increase in production. The oil firms are expected to invest in these, as well as training for Iraqis. For its part, the Oil Ministry has also begun to change some of its terms after the first bidding round flopped. It’s been reported that the taxes on foreign corporations have been cut for example, as one positive step. Iraq is also allowing the businesses to own a larger share of the joint ventures, as in the Rumaila deal where Iraq will only have 25%.

Things are far from settled however, with Iraq’s oil. The Oil Minister remains under attack from parliament, members of his own ministry, and the Kurds. Oil exports continue to fluctuate up and down. There are major problems with the Ministry’s accounting and metering systems, as well as corruption. Iraq has also failed to pass a new petroleum law. Because there is so much excess crude and other reserves right now, companies may not be as eager to invest in Iraq as before. All of these factors mean that new oil deals are more important to Iraq than to the oil conglomerates, so the Oil Ministry has to carefully construct its policy to appease both a strong nationalist trend in Iraq that is weary of foreign exploitation, and appeals to those same companies. This is something that the Ministry has been largely incapable of performing so far.

SOURCES

Agence France Presse, “ENI-led group agrees deal for Iraq’s Zubair oilfield,” 10/13/09

Lando, Ben, “Nippon consortium wins Nassiriya,” Iraq Oil Report, 10/20/09

Reuters, “Eni to think twice on Iraq’s Nassiriya field – CEO,” 10/15/09

Salaheddin, Sinan, “Iraqi Cabinet approves BP-led consortium contract to develop Rumaila oil field, spokesman says,” Associated Press, 10/17/09

Webb, Simon, “UPDATE 1-Lower taxes lure big oil Iraq oilfield deals,” Reuters, 10/14/09

Williams, Timothy, “As Iraq Seeks Oil Investors, They See an Uncertain Bet,” New York Times, 10/14/09

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