Tuesday, October 14, 2008

Iraq opens bidding on oil contracts

By Mary Beth Sheridan

Published: October 14 2008 09:48 | Last updated: October 14 2008 09:48

Iraq opened bidding Monday on the first round of contracts to develop its oil fields since the fall of Saddam Hussein, in an effort to spur production in a sector crucial to the country’s rebuilding.

Iraq has the world’s third-largest oil reserves. But despite five years of efforts and $2.7 billion in U.S. reconstruction funds, Iraqi production is still well below the U.S. goal of 3 million barrels per day announced in 2004.

Oil fields have been looted and attacked by insurgents since the 2003 U.S.-led invasion, technical experts have fled abroad due to violence and the infrastructure is creaky after years of international sanctions and neglect. Iraq needs billions of dollars of investment to repair its equipment and increase production, experts say.

“It’s a huge step,” said Vera de Ladoucette, director of Middle East research for Cambridge Energy Research Associates, noting that the new bidding involves fields representing one-third of known Iraqi oil reserves.

Iraqi Oil Minister Hussein Al-Shahristani met Monday in London with representatives of three dozen international companies to outline requirements for bids on the 20-year contracts to develop six major oil and two natural gas fields.

Bids are due in six months and the government is expected to sign the contracts by July 2009, according to the Oil Ministry spokesman, Aasim Jihad. Oil analysts estimate the contracts will lead to increases in production by 2011 or 2012.

Iraqi authorities are expected to announce a second round of bidding soon on another group of fields.

Oil is critical to Iraq’s economy, producing over 90 percent of its revenues. But bringing in foreign companies has been a touchy subject in this country, which nationalized its oil industry in 1972. Politicians have voiced suspicions that the U.S.-led invasion in 2003 was aimed at giving Western companies access to this country’s oil.

A bill aimed at establishing a new framework for the oil industry has been bogged down in Parliament since last year. It would determine how revenues are shared between regions, and spell out the rights of foreign investors.

Shahristani has emphasized that the new contracts will be technical service deals, and not allow international firms to keep any of the oil from the fields they work.

Iraq is a rare prize for oil companies, with known reserves of 115 billion barrels, the third-largest in the world after Saudi Arabia and Iran. But the country also presents considerable risk.

With the new oil legislation stalled, the government is relying on a law from the Saddam era for the new contracts. And while violence has dropped from the terrifying levels of a year ago, Iraq is still plagued by car bombs, sniper attacks and kidnappings.

“You have a degree of uncertainty, both legal and security uncertainty,” said De Ladoucette. “But on the other hand, this window of opportunity might not present itself again, so companies are going.”

On the legal side, she said, there remains a contradiction between the country’s 2005 constitution, which give the country’s regions more say on oil deals, and the old legal framework, which favors Baghdad.

Security, she noted, is still far from perfect. “But the major uncertainty is whether Iraq’s government will be able to guarantee a minimum level of security on the day the coalition troops leave the country,.” she said.

The government for the autonomous Kurdish region in northern Iraq has already signed its own investment deals with international oil companies, o the annoyance of the central government.

The U.S. government has tried in numerous ways to help Iraq rebuild its oil industry, strengthening infrastructure and helping train a special corps of oil police who protect pipelines and other installations.

This past summer, Iraq’s oil production finally crawled back up to the levels prior to the 2003 U.S. invasion — about 2.5 million barrels per day.

But in recent months, it has slipped to about 2.3 million barrels, due to poor weather, maintenance, and problems in a southern oil field caused by incorrectly injecting water to force out more oil, U.S. officials say.

Shahristani’s goal is to increase Iraq’s production to 4.5 million barrels a day by 2012.

US officials believe foreign involvement in the industry is essential since most of the American money to rebuild Iraq’s oil industry has now been spent, and this country’s own investments in the sector have been slowed by a sclerotic bureaucracy, the violence, and a lack of know-how and legal guarantees.

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