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If U.S. Oil Companies Aren't Winning Bids in Iraq, Who Is?
By Jason Simpkins, Managing Editor, Money Morning
Iraq has auctioned off more proven oil reserves in the past six months
than are collectively held by the United States, Mexico, and the United
Kingdom.
But U.S. oil companies have signed surprisingly few development
contracts – foreign rivals have swooped in to scoop up major deals.
Take last weekend, when Iraq wrapped up the biggest oil-field auction
in history. Major new deals were announced by Europe's Royal Dutch
Shell PLC (NYSE: RDS.A , RDS.B), OAO Gazprom (OTC ADR: OGZPY), Lukoil (OTC ADR: LUKOY), China's China National Petroleum Corp. (CNPC), and Malaysia's Petroliam Nasional Berhad (Petronas).
The U.S. oil majors – ExxonMobil Corp. (NYSE: XOM), ConocoPhillips (NYSE: COP) and Chevron Corp. (NYSE: CVX) – were nowhere to be seen.
In fact, of the more than 40 companies to take part in the licensing
round, only seven firms present at the auction were American and only
one actually entered a bid.
"We haven't really seen U.S. companies, and that is because of intense
competition," said Thamir Ghadhban, a prime ministerial adviser and
former oil minister. "The issue is financial and technical and not at
all political. This confirms Iraq can manage its oil policy and
activities without politicization."
At a time when concerns about the long-term viability of the world's
oil supplies have started to escalate, some industry observers had
feared that the underlying goal of U.S.-led invasion of Iraq was to
gain control of that Middle Eastern country's oil reserves. But Lukoil,
Petronas, Shell, and Norway's Statoil Hydro ASA (ADR NUSE: STO) – not U.S. Big Oil – were the big winners when the bidding closed Saturday.
Lukoil and Statoil will redevelop West Qurna-2 for a production fee of
$1.15 per barrel. That's significantly lower than the $1.90 a barrel
the government sought in its June licensing round, which was the first since the 2003 U.S. invasion.
West Qurna-2 is believed to hold more than 12 billion barrels of oil reserves. At current rates of consumption, that's about how much oil the United States uses in a 600-day period.
"We are going to make a profit out of West Qurna Phase 2," said Torgeir
Kydland, Statoil's senior vice president for international exploration
and production in the Middle East. "We're glad we won the field."
Meanwhile, the rights to develop Majnoon, a similar-sized oil field,
were awarded to Royal Dutch Shell and Petronas. Petronas, Malaysia's
state-owned oil company, is headquartered in the world's tallest twin
buildings, the Petronas Twin Towers in Kuala Lumpur.
In addition to the Majnoon field, Petronas will be cooperating with
other global oil companies on the Halfaya, Garraf, and Badra fields.
Malaysia isn't the only Asian player making a splash in Iraq's energy
sector either. Petronas will join France's Total SA (NYSE ADR: TOT) and CNPC on the Halfaya field, which has proven reserves of 4.1 billion barrels.
CNPC in the first licensing round in June joined British oil giant BP PLC (NYSE ADR: BP)
as the first companies to win an Iraqi oil contract in more than three
decades. The two oil giants signed a deal giving them the rights to
Iraq's Rumaila field, one of the nation's largest 17.7 billion barrels
of proven reserves.
Under terms of the 20-year contract, BP and CNPC have six years to
boost the field's production to 2.85 billion barrels per day (bpd).
Some analysts have suggested that Western oil majors have not been
active in Iraq because they aren't satisfied with the terms being
offered. That is, foreign oil majors will be paid a fixed fee per
barrel of oil produced, as opposed to sharing in the profits of the
oil's sale. And that fee will only be paid when the operated field
reaches a production quota set by the government.
CNPC and BP, for instance, will be paid $2.00 for every barrel of oil they produce beyond current levels.
On the other hand, ConocoPhillips (NYSE: COP)
reportedly wanted $26.70 per barrel to work the Bai Hassan oil field,
but the Iraqi government only offered the company $4.00 per barrel.
Security is also an issue. Some Western oil companies are more
reluctant to put their money, or their employees, in a politically
volatile nation.
"Politics – international, domestic, ethnic and party-based – has
dominated every aspect of discussions of Iraq's post-invasion oil
development," the Middle East Economic Survey
(MEES) said in its weekly newsletter. "Given the size of the potential
revenues at stake this was probably inevitable. But in the end the oil
development itself and by extension that of Iraq's economy, will
probably suffer."
Ethnic feuds, political strife, underdeveloped infrastructure, and a
lack of domestic support have left most Western oil majors
"unimpressed" by the prospects awaiting them in Iraq, MEES said.
However, smaller oil companies in fast growing emerging markets aren't
quite so particular. Many of them are state-owned – and thus
influenced by government policy objectives – and they are running out
of places to find accessible oil reserves.
Exploration costs have more than quadrupled since 2000, as oil
producers have been forced to take on more complex projects, and the
costs of both labor and materials have skyrocketed.
But for all its shortcomings, Iraq offers the world's third-largest oil
reserves with about 115 billion barrels of black gold bubbling within
its borders.
Additionally, many analysts believe Iraq will soon leapfrog Iran, which has about 137 billion barrels of proven reserves.
While the country boasts proven petroleum reserves of 115 billion barrels, the Energy Information Administration
(EIA) estimates that up to 90% of the country remains unexplored. Only
2,000 wells have been drilled in Iraq, versus approximately 1 million
in the state of Texas alone. Iraq could easily have another 100 billion
barrels of oil buried beneath its uncharted territories.
Indeed, the nation that currently produces just 2.5 million barrels of
oil a day hopes to be pumping 12 million barrels daily within the next
few years, said Hussein al-Shaharistani, Iraq's oil minister.
After the recent bidding round, which Shahristani described as "very
successful," the Iraqi oil minister underpinned his optimism by
acknowledging his country would soon be willing to discuss compliance
with the quotas set by the Organization of Petroleum Exporting
Countries (OPEC).
Iraq, which is a member of the crude cartel, has been exempt from oil
production quotas as it rebuilds its political and economic
infrastructure. But as it takes its place back among the world's top
oil producers, the country will have to make the transition back into
OPEC compliance.
"Iraq is a very active member of OPEC," said Shahristani. "We will be
coordinating with its effort to make sure Iraq and all other countries
can maximize the revenues from oil sales."
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