Iraq To Hold Natural Gas Auction Today

Today, October 20, 2010, Iraq’s Oil Ministry will auction off three natural gas fields. They have a combined estimated reserve of 11.2 trillion cubic feet of gas, 10% of Iraq’s total. There are major questions about whether this will be a successful process or not.

The three fields involved in the auction are Akkas, Siba, and Mansuriyah. Akkas is in Anbar by Syria with a reserve of 5.6 trillion cubic feet. Mansuriyah is in Diyala near the Iranian border with a reserve of 5.6 trillion cubic feet. Finally, Siba is in Basra with a reserve of 1.1 trillion cubic feet.

The Oil Ministry has been worried about the level of interest international energy firms have expressed in the auction. The event was first set for September 1, then pushed back to October 1, and then finally October 24. Each time the Ministry said that it was trying to get more companies involved. Iraq has also lessened its terms. It dropped a requirement that businesses find an export partner for half of the gas they produced, it cut the large signature bonuses corporations will have to pay, and reduced fees to train Iraqis in the industry that were going to run $1-$5 million per year. To sweeten the deals even more, Baghdad said that it will pay the companies whether the gas they produced is used or not, and will revise the money the government will pay for added production at each field. One energy analyst said Iraq might have to offer even more, like equity that will allow firms to count the reserves in each field on their own books. Overall, the gas deals are similar to the oil ones offered in 2009. Companies will be offered 20-year service contracts where they will be paid a flat fee for their service, and then an additional amount once they reach a set production level.

There are many reasons why Iraq has had problems with this auction. The Oil Ministry said it wants to use the gas for domestic use first. The Ministry has estimated that the nation’s power stations and businesses need an average of 1.05 billion cubic feet of gas per day, and that would increase to 5 billion by 2018. Right now they only receive 670 million cubic feet per day. Iraq lacks storage facilities or pipelines to handle any new production however. The government said it would construct this network, but it would not be ready until 2014. The lack of infrastructure also includes exports. Akkas and Siba for example, are just along the Syrian and Kuwaiti borders respectively, but there’s no way to sell any gas there as there are no lines connecting the countries. As reported before, the Anbar provincial government also came out against the auction of the Akkas field and any foreign sales from there. Mansuriyah is near Iran, but foreign corporations are probably unwilling to sell there because of international sanctions. Gas is also harder to sell then oil. Right now there is a surplus of the commodity on the world market, and there are other countries that offer better deals and more safety than Iraq. Analysts have said that the sale of gas requires long-term agreements, but none exist. Next, the companies will be selling gas to the Oil Ministry, and they have not set a price. That may determine whether any profits are made. Finally, there have been reports that Baghdad has no plans for who or how the gas will be used. It wants to develop the industry, attract foreign investment, and power their factories, but without a strategy these endeavors may prove fruitless for both Iraq and the companies.

Because of these issues, only 13 of 45 pre-qualified corporations have registered and paid fees to participate in today’s auction. Those are France’s Total, Italy’s Eni, Edison, Norway’s Statoil, Kazakhstan’s KazMunai Gas, Turkey’s TPAO, Japan’s Oil, Gas and Metals National Corporation, Itochu Corp., Mitsubishi, Kuwait Energy, India’s Oil and Natural Gas Corp., South Korea’s KOGAS, TNK-BP, and BP PLC’s Russian joint venture. Back in 2009 the Akkas and Mansuriyah fields were unsuccessfully offered as part of the first oil bidding round, but only Akkas got any interest. A consortium of Edison, Malaysia’s Petronas, China’s CNPC, Turkey’s TPAO, and Korea’s KOGAS offered $38 for each additional amount of gas produced after production levels were reached, while the Oil Ministry countered with $8.50. Today will see whether Iraq does any better.

SOURCES

El Gamal, Rania, “PREVIEW-Iraq to auction gas fields despite uncertainties,” Reuters, 10/19/10

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

Salaheddin, Sinan, “Iraq gas auction draws limited participation,” Associated Press, 10/19/10