Thursday, May 24, 2012

Shell Working On Revising Its Oil Contract With Iraq, Likely Sign of Things To Come With Other Companies Operating In Country

In 2009, Iraq held two rounds of auctions for international energy firms to bid on its oil fields. That resulted in the return of foreign companies to Iraq’s petroleum industry after a decade long drought, because of international sanctions. Afterward, Iraq announced that it would reach 12 million barrels a day in capacity by 2017. If that was accomplished it would be one of the greatest expansions in world history. Unfortunately for Iraq, no one believed that figure was possible. Now, Shell, one of the firms that successfully participated in the 2009 bidding, is in talks with the Oil Ministry to reconfigure its deal. It wants to reduce its production target, and extend its timeline by several years. If it accomplishes that, all the other oil companies working in Iraq are likely to want to renegotiate their terms as well.
Map of Majnoon and Iraq's major southern and central oil fields (BBC)
Shell is developing the Majnoon field in Basra, but is in talks with the Oil Ministry to change its contract. Shell originally won rights to the bloc in December 2009, putting in a winning bid with Malaysia’s Petronas. The two agreed to produce 1.8 million barrels a day by 2017. Currently, Majnoon is pumping 65,000 barrels a day. Shell wants to reduce its production target to 1 million barrels a day, and extend the date that’s to be reached by twenty years or more. The company would also like to reduce its investment in the field from the original amount of $50 billion to around $40 billion. Shell has already spent $1 billion on the field since 2010, and plans on investing another $1 billion this year. The corporation has already met with Iraqi officials once in March 2012, and is supposed to meet again in May in Lebanon. The Oil Ministry seems to be open to Shell’s proposals, but will not budge on the remuneration fee of $1.39 per barrel. The production goals and dates were based upon the bidding that took place in 2009. The oil companies worked out fees and numbers with the Oil Ministry until they got to a point where they thought they could make a profit. They were not based upon any sound analysis of the fields, the country’s infrastructure, Iraq’s needs or anything else substantive. That’s how Iraq came to claim it could reach 12 million barrels a day in capacity by 2017, even though no one believed that was possible. Deputy Premier Hussein Shahristani, who is in charge of Iraq’s energy policy, has already officially dropped that mark to 11 million barrels by 2020, but the Oil Ministry has talked about cutting that even more to 8-8.5 million barrels. Some analysts and oil company executives believe that a more realistic figure might be 6 million barrels a day. From the start, Shell knew it could not reach the numbers it set in its 2009 bid. It went ahead anyway, because it wanted to get into the Iraqi market along with all the other firms, because of its huge, untapped potential. Some believe that Iraq has enough petroleum reserves to maintain international prices in the future as demand increases, and other countries cut back on their production. There was no way that Shell was going to miss out on that. After it started work in Iraq, reality kicked in, and that has led it to enter into talks with Baghdad to change its deal.

Shell’s negotiations could lead to revising all of Iraq’s oil contracts. Companies have complained about the work environment in the country due to red tape holding up everything from visas to equipment shipped into the country. Some companies have gotten into payment disputes, and Iraq lacks adequate infrastructure, and what it has is aging. That causes bottlenecks, such as not having enough pipeline or storage capacity to deal with all the increased production that the foreign companies have achieved so far. Many of the fields along the border with Iran also need mine clearing due to unexploded ordinance from the Iran-Iraq War. If Shell is successful in their bargaining, it is likely that all the other companies that signed deals in 2009 will ask to change theirs as well. That will lead to more realistic figures for Iraq’s oil industry, and give the companies breathing room, because they were facing penalties if they did not reach their marks. Deputy Premier Shahristani has already talked about coming up with new numbers based upon conversations with energy executives, so Baghdad is open to these revisions. It’s just a matter of time then, before Shell is likely to emerge with a reconfigured contract, with others following suit.

The two bid rounds for Iraqi oil fields in 2009 were as much a development story, as a political one. Iraq wanted to announce that it was returning as a major player in international markets after years of wars, sanctions, and the U.S. invasion. Its claim that it could reach 12 million barrels in capacity was as much a political statement to that affect as anything else. No other country has ever been able to produce that much in such a short amount of time, so analysts were always skeptical, but the headlines still went around the world, which was what Baghdad wanted. Now after a few years of actual work in Iraq, companies are slowly going to the Oil Ministry asking for new terms. Shell is the first one to officially do so, and could set the standard for all the others. The results will be much more realistic numbers for how much oil Iraq is likely to produce in the future. That doesn’t mean Iraq will still not have large growth, and play a more important role in OPEC, it just won’t be as big as some originally claimed.


Dow Jones, “Iraq’s Majoon Oil Field To Hit 175,000 Barrels A Day In August –Official,” 2/7/12

Falush, Simon and Mackey, Peg, “Iraq to lower oil target to more prudent level,” Reuters, 4/18/12

Flynn, Alexis, “ROYAL DUTCH SHELLA : Shell Suggests More Realistic Iraq Oil Target,” Dow Jones, 5/17/12

Mackey, Peg, “Shell’s Majnoon deal highlights Iraq oil target verdict,” Reuters, 5/18/12

Rasheed, Ahmed, “Exclusive: Shell in talks to cut iraq’s Majnoon output target,” Reuters, 5/8/12


Anonymous said...

Most of the international companies working im Iraq are complaining about the HUGE delay of Iraq government to deliver visas for their staff.
Many companies are complaining they cant achieve their goals due to de lack of international staff.
As the current political crisis is ongoing do you thing could be any relation between the delay of the visas and the coordination among Kurdis (Foreign Affairs under Kurdish) MOI and Defense (both under MAliki)??

Joel Wing said...

Anon the problem isn't coordination between the Kurds and Baghdad, its the red tape that exists no matter who is in government. Making Maliki the acting Interior Minister has not helped. There were reports that all visa applications had to be approved by his office, which obviously meant they had to work their way up all the way through bureaucracy to go through. That supposedly has been solved according to reports, but I dont know whether thats true or not. Also entering Kurdistan is much easier than going to the rest of the country.