2nd Foreign Energy Company Ready To Leave Iraq Showing The Difficulties Of Working In The Country

Norway’s Statoil Hydro is contemplating departing Iraq. It is currently working with Russia’s Lukoil, and the Iraqi state-run North Oil Company in a joint venture to develop the West Qurna Phase 2 field in Basra. Since late-2011, Statoil has been considering selling its share of the company, because of the various problems it has run into in Iraq, and now appears ready to finalize that deal.

Norway's Statoil won an auction for the West Qurna Phase 2 field along with Russia's Lukoil in Iraq's second auction in Dec. 2009

Statoil first entered the Iraqi petroleum industry in December 2009. That month, the Iraqi Oil Ministry held the second auction for several petroleum fields across the country. Russia’s Lukoil and Norway’s Statoil put in the winning bid for the West Qurna Phase 2 field in Basra. It has estimated reserves of 12.876 billion barrels. At that time, West Qurna was not operating. The two foreign companies agreed to form a joint venture with the state-run North Oil Company, and eventually raise production from zero to 1.8 million barrels a day in several years. After reaching an initial output mark, Lukoil and Statoil would begin being paid $1.15 per barrel of petroleum produced. The first goal was producing 130,000 barrels a day by January 2013, then 150,000 barrels by the end of the year, and 400,000 barrels by 2014. These technical service agreements benefit the Iraqi government as it gains the foreign know how and technology of international energy companies who have to put up a large amount of start-up money, and get production going before they receive any form of compensation. Even when they do, the Iraqi government was able to negotiate very low profits for them. Corporations like Statoil were willing to accept these stiff terms at first, hoping that they could enter the Iraqi market, which had been cut off since 1990 by international sanctions, and then get better terms or more fields later on.

(Univ. of Texas)

Statoil quickly ran into problems with West Qurna Phase 2. One of them was that local tribes were demanding that they be paid for losing their land to the companies. One sheikh told Reuters that his people had sabotaged some of the work at the field to push their case. An Iraqi oil official claimed that these protests had pushed back the timeline for starting production at West Qurna, and that the Oil Ministry was talking about setting up some kind of payment plan as a result. Next, Statoil and Lukoil found that West Qurna was littered with old ordinance like mines and unexploded artillery shells from the Iran-Iraq War. As a result, contractors had to be hired to clear the fields, which again hindered work. All these issues meant that by January 2012, West Qurna Phase 2 was still not producing any oil, more than two years after the initial auction. Frustration with these delays, and the tough terms included in the original contract, all contributed to Statoil changing its opinion about operating in Iraq.

By mid-2011, the Norwegian company had enough of the difficult conditions in Iraq. In June, it started talking about renegotiating its deal with the Oil Ministry, claiming that it could not reach the production targets included in its contract, and that government red tape was holding up work. By January 2012, the Norwegians had changed their tone once again, and this time were talking about selling their share of the joint venture all together. Some analysts believed that this might have just been a bargaining tool to get better terms from Baghdad, but reports now make it seem like the corporation is serious about departing. In February for example, Reuters noted that the Norwegians had gone to the Oil Ministry, and that it had initially agreed to the sale. Statoil officials said that they were more interested in investing in Norway and the United States, than Iraq. If the Norwegians went ahead with this, it would be the second time a foreign energy company pulled out of Iraq. Kazakhstan’s KazMunai Gas withdrew from a deal for the Akkas natural gas field in Anbar in mid-2011 after the local government there staged protests, made demands for greater control over its energy resources, and requested economic concessions. That was the first time a corporation decided to leave Iraq’s oil and gas fields. That experience, and Statoil’s show how hard it is for some to operate in Iraq’s environment.

If Statoil goes ahead with its sale it would highlight the limits of working in the country. Many locals and provincial governments want a piece of the country’s greatest assets its oil and gas, which can complicate things with protests and attacks on equipment. Fields in southern Iraq are also littered with the remnants of the Iran-Iraq War, making it impossible to do anything until they are cleared. To add to that the government’s red tape can be maddening. Prime Minister Nouri al-Maliki is the acting Interior Minister right now, which means that all visas have to be okayed by his office or him personally. That causes huge delays for companies to get their workers and personnel into Iraq. That’s especially important, because the country lacks the skilled work force to develop its oil fields. That same bureaucracy has slowed down the payment to some of the companies operating in Iraq. Those revenues are very limited as well, because of the technical service agreements the government offered. Some of the major oil companies can probably wait out these difficulties. Others like Statoil may not have the resources and patience to wait for their deals to come to fruition. If it exits Iraq, it may not have a big affect either. It is the junior partner in the joint venture, with only 18.75%. That means West Qurna Phase 2 will still be developed, and other corporations will still be interested in Iraq, but it does take some of the veneer off of the country. Many businesses were willing to accept Baghdad’s terms, because the country has such huge, untapped reserves of oil and gas. Now, companies are beginning to form a more realistic view of what Iraq is like, and could use that in their negotiations with the Oil Ministry.

SOURCES

El Gamal, Rania, “Iraqi tribal disputes pose new challenge to oil firms,” Reuters, 5/29/11

Gismatullin, Eduard and Stigset, Marianne, “Statoil May Renegotiate West Qurna Contract, Questions Schedule,” Bloomberg, 6/23/11

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Lando, Ben, “Joining The Global Oil Sector: Challenges And Opportunities Facing Iraq,” Middle East Institute, 4/29/11

Mohammed, Aref, “Landmines hamper Iraq oil boom, delay investment,” Reuters, 11/16/11

The National, “Iraq oil deals,” 12/12/09

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Reuters, “UPDATE 1-Iraq Oks $998 mln oil contract with Samsun-source,” 1/24/12

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Smith, Patrick, “Analysis: Iraq’s oil projections wildly optimistic,” AK News, 5/15/11