Monday, June 4, 2012

Disappointing Fourth Oil And Gas Auction For Iraq

In May 2012, Iraq held its fourth oil and gas auction. The government was hoping to earn several million dollars in signing fees, and develop new areas of the country, but the results were lackluster at best. Only three of the twelve fields were successfully bid on, highlighting the flaws in the process. Iraq was largely looking for exploration work, with contracts that limited the ability of companies to develop any oil they found, and it lacks the infrastructure to produce gas either. That meant there was little chance for the bidding companies to make money off of them. For all of those reasons, it could have been predicted that the fourth auction would end as a disappointment.

Iraq’s Oil Ministry offered twelve oil and gas blocks for auction last month. The fields had a potential to add 29 trillion cubic feet of natural gas and 10 billion barrels of oil to Iraq’s reserves. The blocks were spread across Ninewa, Anbar, Najaf, Qadisiyah, Babil, Muthanna, Diyala, Wasit, and Dhi Qar, areas that were largely without major deals beforehand. The auction was also aimed at developing Iraq’s reserves rather than production, which had already been achieved with its previous three rounds. 47 companies were pre-qualified, and out of those, 39 paid the participation fee. Baghdad was hoping to raise around $235 million from signing fees and other charges if all the fields were sold off. The auction took place on May 30-31, resulting in only three successful negotiations. On the first day, three oil and three gas blocks were offered, with only two being bid on. One oil field in Basra got a successful offer by a consortium made up of Kuwait Energy, Turkey’s TPAO, and Dubai’s Dragon Oil. Petro Vietnam and Russia’s Bashneft were interested in another block, but could not come to terms with the Oil Ministry. The next day, Pakistan Petroleum won a bid for a gas block that went from Diyala to Wasit. Russia’s Lukoil and Japan’s Inpex also won a contract to an oil field that went from Muthanna to Dhi Qar provinces. The poor results were a large disappointment for Iraq. It achieved none of its goals from raising large amounts of money to gaining the interest of companies in new, largely unexplored oil and gas fields. These problems were visible months before the auction occurred.

From the beginning, analysts and oil executives voiced their concerns about the fourth bid round. Many of the fields were for gas, but there had been a recent upturn in production and discoveries around the world, which made Iraq less attractive. Major oil companies were also much more likely to simply explore for new reserves around the fields they already operated in southern Iraq, than bid on unexplored areas in more remote areas. The main point of contention was the contracts offered by the Oil Ministry. The Iraqi government had service contracts again, like it did in the previous bidding rounds. Those paid companies a set fee when they reached a certain production level, and did not allow them to include the oil and gas reserves found on their books, which would increase their standing. Foreign firms were willing to accept these limits on their profits, and strict terms when major fields in southern Iraq were offered in 2009, but not so with those put up for auction in 2012. That was due to a number of factors. First, the contracts said businesses could immediately exploit any gas they found, but Iraq lacks the infrastructure to do so. That meant the businesses would have to build almost all the pipelines and facilities, expending huge costs before they could see any profits. At the same time, the contracts said the government had the right to put off any oil production for several years, by paying the companies compensation fees for not doing so. While Iraq desperately needs natural gas to fuel its power plants, it is already awash in oil. Sometimes it produces more oil than its pipelines, storage tanks, and ports can handle, and has to cut output as a result. Because of all those limitations, and the fact that some of these fields were offered in areas where insurgents were still active such as Anbar, Ninewa, and Diyala, analysts believed that Baghdad should offer $10-$20 per barrel in remuneration fees to cover their risks. The Oil Ministry was never going to accept such high amounts however. The only real concession Iraq was willing to give the foreign interests was the elimination of the requirement that they enter into joint ventures with state-run companies. Despite all this, Iraq tried to work with the foreign firms, which led to several delays from the original start date of November 2011, to January 2012, to March, to April, and finally May. That many hold-ups should have been ample warning to the authorities that the fourth bid round was not going to go as planned. The deals offered were simply not good enough to get a wide range of interest, and the result was the few successful deals made.

Despite this, some Iraqi officials tried to put a positive spin on things, while others disagreed. The head of the contracting department within the Oil Ministry insisted that the fourth round was a success, because it had winning bids on 25% of the blocks offered. The Ministry also immediately announced a fifth round with another 10-15 fields up for auction, which would focus upon gas. Not all were so upbeat however. The head of the legal section at the Ministry said that the terms proved to be too tough for companies, and wanted them changed in the future. His opinion seemed more relevant. The government was obviously looking for a better response to its offerings, and another similar round would probably have a lukewarm reception as well. Companies have to have more avenues to make a profit to make it worthwhile to them.

Iraq made a miscalculation with its fourth auction for oil and gas fields. It was hoping that the promise of large undiscovered oil and gas deposits would bring in an array of foreign investors, but there were some major deterrents. The combination of remote sites and strict contracts that severely limited the ability of companies to make a profit or even exploit any gas or oil that they found meant that it was a losing combination for Iraq. There was no way that many firms would agree to do just exploration work when they couldn’t even count what they found in their books, because of the service contracts that the Oil Ministry are wed to, and the lack of infrastructure where the fields were. Another similar round would not do much better unless Iraq was willing to re-write its terms. For now at least, Baghdad would be better off encouraging corporations to explore for oil and gas around the fields they are already operating on for logistical and financial reasons, than trying to get them to look into new and more remote areas of the country.
Map of oil and gas fields offered in 4th auction round May 30-31, 2012

Executive from Kuwait Energy places what would turn out to be a winning bid for an oil field in Basra, May 30, 2012 (Reuters)
Iraq's OIl Minister Luaibi addresses the press during the first day of the auction (Reuters)
Members of Iraq's oil committee observe the first day of he auction (Reuters)
Executive from Russia's Lukoil places a winning bid on the second day of the auction, May 31 (Reuters)

Associated Press, “Only 3 of 12 lots sold in Iraqi energy auction,” 5/31/12

Aswat al-Iraq, “4th energy round ends with 3 blocks awarded,” 5/31/12
- “Dates for fourth oil bids postponed,” 10/10/11

Dow Jones, “27 Firms Show Interest In 4th Oil Bidding Round,” Iraq Business News, 7/10/11

Dunlop, W.G. and Faraj, Salam, “Iraq announces new energy auction after lackluster sale,” Middle East Online, 5/31/12

Hafidh, Hassan, “Iraq Delays Energy Bidding Round To April:Official,” Market Watch, 1/4/12
- “Iraq to begin preparation for oil new bid round,” Dow Jones, 1/8/11
- “UPDATE: Iraq Amends New Bid Round Terms To Favor Companies-Source,” Dow Jones, 2/20/12

Ibrahim, Haider, “Fourth round of drilling licensing to target gas not oil,” AK News, 4/9/11
- “Iraqi Oil ministry launches fourth round of oil licenses,” AK News, 4/25/11
- “Oil and Energy Committee: ‘postpone oil licensing,’” AK News, 5/1/11

Jacobs, Caroline and Boselli, Muriel, “UPDATE 3-Total latest oil group to shift Iraq focus to Kurdistan,” Reuters, 2/10/12

Lando, Ben, “4th bid round delayed, Exxon still qualified,” Iraq Oil Report, 1/30/12
- “ANALYSIS: Iraq’s fourth bid round evolves with Kurdish oil dispute,” Platts, 5/29/12

Mackey, Peg, “REFILE-Iraq unveils oil, gas exploration auction details,” Reuters, 4/20/12

Neuh, Florian, “Iraq oil bid delay seen as positive,” The National, 2/1/12

Rasheed, Ahmed, “Iraq set to auction new oil, gas blocks,” Reuters, 5/28/12
- “UPDATE 2-Iraq parliament panel wants to halt 4th energy auction,” Reuters, 5/16/11
- “UPDATE 4-Tough terms dampen Iraq’s energy auction,” Reuters, 5/31/12

Reuters, “Iraq to invite energy firms to 4th bid round,” 4/17/11

Salaheddin, Sinan, “Iraq sets January 2012 for its 4th energy auction,” Associated Press, 4/25/11
- “Iraq’s daily oil production exceeds 2.7 million barrels,” Associated Press, 1/2/11

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

Al-Tamemi, Noor, “Iraqi oil ministry prepares for fourth licensing round,” AK News, 3/20/11

UPI, “Iraq boosts oil output, offers new blocks,” 5/11/11

Al-Wannan, Jaafar, “Oil ministry announces amendments to new oil contracts,” AK News, 9/29/11

Yee, April, “Bidders blanch at Iraq’s oil terms,” The National, 10/14/11
- “Dragon Oil wins exploration rights in Iraq,” The National, 5/31/12

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