June 19, 2008
Western Oil Firms Head Back to Iraq Companies Hone in on No-Bid Deals Years After Ouster
By Andrew E. Kramer
Thirty-six years after losing their oil concession to nationalization as Saddam Hussein rose to power, four major Western oil companies are in the final stages of negotiations this month on contracts that will return them to Iraq.
The deals, expected to be announced on June 30, mark the first commercial contracts by the major oil companies since the U.S. invasion and open a new and potentially highly lucrative country for their operations.
Because the Iraqi Parliament has not yet passed an oil law laying out conditions and terms for competitive tenders, the ministry is offering the two-year contracts on a no-bid basis. The ministry described the contracts as a stop-gap measure to bring modern know- how into the fields while the legislation was pending.
While small by industry standards, the deals hold great promise for the companies. They come at a time when once-powerful, publicly owned Western energy companies are finding it increasingly difficult to gain access to other oil producing nations.
"The bigger prize everybody is waiting for is development of the giant new fields," Leila Benali, an authority at Cambridge Energy Research Associates on Middle East oil, said in a telephone interview from the firm's Paris office.
The contracts would be a "foothold" in Iraq for companies striving for longer-term deals, she said.
Senior officials from major companies, who spoke on a not-for- attribution basis, said in two interviews that the companies were sensitive to the criticism that they will appear to be benefiting from the war.
But the officials said the contracts were a continuation of charitable work the companies had been conducting here to assist the Oil Ministry. They are, the officials said, extensions of two-year- old memorandums of understanding under which the companies provided pro bono advice and training to the Iraqis.
That relationship with the ministry, company officials and U.S. diplomats said, was a reason the contracts were not opened to competitive bidding.
In addition, as the deals are structured as service contracts - the companies will be paid for their work, rather than offered a license to the oil deposits - they do not require the passage of the oil law, which is stalled in Parliament.
Still, that law, when it is passed, would lay out procedures and conditions for competitive bidding for Iraqi oil contracts, including the so-called technical support agreements now being awarded on a no-bid basis.
Also, industry analysts said, the deals are wider in scope than typical oilfield service agreements of the type that Halliburton and Schlumberger perform routinely.
"These are not actually service contracts," Benali said. "They were designed to circumvent the legislative stalemate" and bring Western companies with experience managing large projects into Iraq before the passage of the oil law.
While the contracts will be opened for competitive bidding in two years, they provide formal competitive advantages to the companies that will hold them first on the no-bid basis. A clause in the draft contracts would allow the companies to match bids from competing companies and retain the work, according to the Iraq country manager for a major oil company who did not want to be identified discussing the terms.
In another unusual aspect, the ministry has offered to pay in oil, rather than money, an unusual practice for service contracts but typical of the production sharing agreements for undeveloped projects envisioned in the oil law.
The companies' role otherwise will resemble advisory work. It will include consultation with Iraqi engineers outside of Iraq, possible limited visits by Western experts to the fields and assisting the Iraqis in procuring oilfield equipment in an exceptionally tight market.
Assem Jihad, the spokesman for the Oil Ministry, said it chose companies it was comfortable working with based on its experience under the charitable memorandum of understanding agreements. "The companies will use all the new equipment and techniques the oil fields need," he said. "Because of that, they got the priority."
In all cases but one, the same company that had provided free advice and training to the ministry for work on a specific field was offered the technical support contract for that field.
The exception is the West Qurna field. There, the Russian company Lukoil, which claims it holds a Saddam Hussein-era contract to the field, had been providing free training to Iraqi engineers under a memorandum of understanding. But a consortium of Chevron and Total were offered the contract. A spokesman for Lukoil, in a telephone interview, declined to comment.
The intent of the new agreements is to increase Iraqi oil exports by half a million barrels a day by the end of the year, about equivalent to the increase in production Saudi Arabia is expected to announce at an oil summit this month.
David Fyfe, a Middle East analyst at the International Energy Agency, the organization in Paris that monitors oil production for developed countries, said the Western expertise may indeed enable Iraq to raise production by that amount, though over a slightly longer time frame.
The International Energy Agency has estimated repair work on existing fields could bring Iraq's output from the current 2.5 million barrels a day to roughly 4 million barrels a day over several years.
After new fields are tapped, Iraq is expected to plateau at about 6 million barrels a day, Fyfe said.
In a twist of corporate history for some of the world's largest corporations, though the Oil Ministry and the companies said the current contracts were unrelated to the companies' previous work in Iraq, all four companies that had lost their concessions are now back in the country.
The forerunners of Exxon Mobil, Shell, Total and BP were equal partners in the Iraq Petroleum Company consortium that operated here from 1929 until it was expropriated by the government in 1972.
Originally published by The New York Times Media Group.
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