May 29 (Bloomberg) -- Iraq is preparing to hold its first auction of oil and natural-gas exploration rights since the 2003 ouster of Saddam Hussein, offering investors the opportunity to exploit the world’s fifth-largest crude reserves.
BP Plc and Royal Dutch Shell Plc, already partners at two of the country’s largest oil fields, are among the 47 companies pre-qualified to take part in bidding tomorrow and May 31, according to the Oil Ministry. Iraq’s main priority is to find gas deposits that can provide fuel needed to run power plants, the ministry said in a statement on its website last month.
The auction marks another step in an energy-industry revival that has vaulted Iraq into third-place among the 12- member Organization of Petroleum Exporting Countries, nine years after the U.S.-led invasion that toppled Hussein. Iraq has boosted crude output to more than 3 million barrels a day and is poised to overtake Iran as OPEC’s No. 2 producer. The government seeks investment as a way of boosting wealth in a country where 4,087 civilians died from violence in 2011, according to Iraq Body Count, a London-based research group, and per capita gross domestic product averages $2,100, World Bank data show.
“Access to reserves and the huge resource base in the country is sure to attract oil companies that need to replace the oil they produce,” Harry Tchilinguirian, head of commodity- markets strategy at BNP Paribas SA in London, said yesterday in a telephone interview. “Security concerns have been less at the forefront and there’s a high demand for crude in the market, so it’s not surprising there would be a high level of interest.”
Rumaila, West Qurna-1
In its three previous bid rounds since 2003, Iraq auctioned rights to produce at oil fields already discovered or in operation. It awarded 15 such contracts, including a license for the Rumaila field, Iraq’s largest, to BP and China National Petroleum Corp. Exxon Mobil Corp. operates the West Qurna-1 deposit, with Shell as a partner.
Iraq is offering drilling rights tomorrow to 12 areas, seven for oil and five for gas, covering 80,700 square kilometers (31,158 square miles), according to the Oil Ministry. The areas contain 29 billion cubic meters of gas and 10 billion barrels of crude, Oil Minister Abdul Kareem al-Luaibi said when announcing the round in March 2011. “We expect that there will be a lot of interest in these 12 blocks,” Hussain Al-Shahristani, deputy prime minister for energy affairs, said in an interview in Baghdad on May 27. “There is potential for important discoveries, particularly concerning gas in some of the blocks.”
Boosting gas output is central to the government’s aim of spurring the economy, which has been hobbled by electricity shortages. Authorities may want to speed the development of any gas finds and move less quickly to exploit discoveries of oil, posing a risk to some of this week’s bidders, said Robin Mills, an analyst at Manaar Energy Consulting in Dubai.
Iraq’s effort to renegotiate some previously signed contracts to reduce oil-production targets suggests the government sees a less urgent need for crude and may make investors wait longer before they can produce oil and recoup exploration costs, he said.
“This increases the risk for the explorer who may not be able to recover their money for an extended period,” he said in e-mailed comments yesterday.
Iraq is offering service contracts that pay its partners a fee for each barrel of crude produced, whereas oil companies tend to prefer production-sharing agreements under which they are compensated with a share of their output. Terms in this bidding round aren’t attractive, said Arnaud Breuillac, Total SA’s senior vice president for exploration and production in the Middle East.
“When you are going to drill exploration wells, service contracts are not enough,” he told reporters today in Abu Dhabi today. “We would like something where exploration risk is better rewarded.” Total is developing the southern Halfaya field, under a license Iraq awarded in December 2009, together with China’s CNPC and Petroliam Nasional Bhd., or Petronas, of Malaysia.
Another potential source of concern for investors is an impasse over the sharing of oil revenue between the central government and the Kurdish region in northern Iraq.
The dispute threatens projects of Exxon Mobil and other investors. Companies operating in the self-ruled Kurdish area are barred from taking part in tomorrow’s auction because the central government didn’t approve the production-sharing agreements they signed with the Kurds. Exxon, which agreed to explore in the Kurdish region, is banned from bidding.
Iraq’s gains in crude production are “fragile,” as “domestic politics continue to pose a risk,” Miswin Mahesh and Amrita Sen, analysts at Barclays Plc in London, said in a May 25 report.
Tchilinguirian of BNP Paribas said the country, which seeks to more than double oil output by 2015, will need to upgrade export capacity to sell additional production.
“The terms of the contracts will have to give enough incentive for companies to take up the exploration risk, Manouchehr Takin, an analyst at the Centre for Global Energy Studies in London, said by phone yesterday. “Exploration is a long-term prospect. If gas is discovered, it may be pushed more quickly to get into production.”