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Small Oil Finds Risks in Iraq Are Irresistible

Posted on: Friday, 14 October 2005, 12:00 CDT

By Heather Timmons

The very risk and uncertainty that has made the international oil companies wary of going into Iraq has attracted tiny, aggressive engineering, drilling and contracting firms to the country. "Like any market, people will take opportunities where they can," said Norman Davidson Kelly, the president of Tigris Petroleum, which is working on two projects in Iraq, including an evaluation of fields in the Missan Province, in southeastern Iraq, with Royal Dutch Shell and BHP Billiton. "The fact that the big companies are concerned means that the smaller ones can come in," Kelly said. Tigris has half a dozen people in Baghdad who collect data and coordinate with the Iraqis on behalf of the Shell-BHP joint venture.

But while Iraq represents an irresistible opportunity for these small companies and their interest may even help stabilize the country's faltering oil production they are not enough, politicians and oil experts say. Without billions of dollars in investment from international conglomerates, Iraq looks poised to miss out on the biggest oil boom in decades.

The small companies, some represented in Iraq by just one individual, are footing hefty bills for travel and security in the hopes of winning a piece of Iraq's business. Some have actually signed the first paying contracts with Iraqi officials since the fall of Saddam Hussein's regime more than two years ago, though the total dollar amount of the contracts is less than $1 billion, oil experts say. With attacks on pipelines and oil employees showing no side of waning, they may be the only business that Iraq does with foreigners for some time. The major oil companies like Shell, Chevron and BP have offered to conduct studies of oil field data from outside the country, or to send oil ministry employees out of the country for training. But they say security concerns have stopped them from sending in employees from Europe or the United States. Oil production in Iraq has declined to less than two million barrels a day in August from 2.6 million barrels a day in January 2003, and little improvement is expected through next year. The country expects "refining and production to continue to be constrained through 2005 and 2006, to say the least," Thamir Ghadban, a former Iraqi oil minister, told industry executives at a conference in London last month. The industry needs some $20 billion in investment over the next five or six years to improve production alone, he said. Many experts do not anticipate a sizable increase in Iraq's oil production until the end of this decade. Rather than earning money from its oil fields, Iraq is being forced to spend about $250 million a month to import oil products like gasoline, and diverting money pegged for repairs to increase security. Sabotage, faulty repairs and insufficient oversight and investment in projects are the biggest factors in the decline in production. The country's draft constitution, meanwhile, provides an unclear foundation for future investment. It only directly addresses oil that is being extracted from "current fields," which is to be administered by the federal government, not oil that will come from planned fields, or the vast reserves that oil experts predict may be found in areas where planning has not even begun. It is also contradictory, inferring that oil will be under federal control in one section, and regional control in another. In the past year, little-known companies like Everasia of Istanbul, Ironhorse Oil & Gas, and Oil & Gas International of Canada and Petrel Resources of Ireland have signed multimillion-dollar contracts to develop fields in Iraq. Others, like the little-known R.G. Price are putting in months of free technical work in the anticipation of deals. "Only very exceptional, quite eccentric people like ourselves are going to work there for the next two years," predicts David Horgan, managing director for Petrel Resources, which signed a $200 million cash contract in September to increase production in two southern oil fields from 50,000 to 200,000 barrels a day. The phenomenon is being repeated around the world, as untapped oil reserves are increasingly concentrated in politically risky areas where global oil companies fear to tread, experts say.

John Mitchell, an associate fellow at Chatham House, a London- based research firm that specializes in international issues, said that small, risk-taking companies "are expanding in places like Iraq, Nigeria or Angola they're prepared to take high risks, and the host government is making space for them."

Risks and danger are balanced by the possible financial upside. "For a very small company, if they do well, it transforms them," Mitchell said. Horgan of Petrel said security risks had increased substantially in Iraq since 2003. The company has been working in Iraq since before the war, and has built up good contacts within the Ministry of Oil, where at all but the top levels, many executives still remain from prewar days. But the company encountered its first real problems there when it started doing exploration work in the western desert in early 2004, Horgan said. Petrel received a letter in calligraphic Arabic that said, "Anyone who works with the oppressors will be decapitated and burnt," he said. The letter ended by apologizing for any inconvenience, he added. Petrel has since stopped sending executives to the western desert to do seismic or geologic evaluations, and does not hire employees from countries involved in the coalition that invaded in 2003.

Source: International Herald Tribune

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