Iraqi Gas Auction All But a Neighbourhood Affair As Three Out of Three Awards Are Made

Trinity of Gas

Iraq's delayed third licensing round was held on schedule this morning, with 13 companies prequalified to bid and five consortia submitting bids for the three fields, resulting in all three gas fields finding an investor. The volumes committed were just shy of those outlined in Iraqi pre-planning at 820 mmcf/d in total, compared to 900 mmcf/d.

The successful conclusion of the tender reflects substantial consultation with companies in recent months—resulting in modifications and a few delays—to ensure that the third round, the first to focus exclusively on gas, did not fall flat (see Iraq: 16 September 2010: Iraq Improves Gas Licensing Round Terms by Removing Export Uncertainties). Indeed, two of the fields, Akkas and Mansuriya, had both been offered before but with no award made because of the greater risks associated with gas monetisation than those for oil (one bid on Akkas was received previously from an Edison-led consortium, but deemed too low at US$38/boe).

The five bids were separated on the grounds of the remuneration fee (90% of the points allocated) and the plateau production target (10% of the points), with some fairly wide disparity on financial bids for the two fields, Akkas and Siba, that attracted more than one bid. The Akkas contract was awarded to an unusual alliance of South Korean utility KOGAS and Kazmunaigaz Exploration Production (KMG EP), the London-listed upstream arm of Kazakhstan's state oil and gas firm, at US$5.50/boe, with the runners-up, Total and TPAO, bidding US$19/boe and a similar production target of 375 mmscf/d compared with the Korean-Kazakh bid of 400 mmscf/d (see table). Total and TPAO would almost certainly have been hoping to channel some Akkas gas through Syria, where both have interests (Total near the Iraqi border), an option that continues to make sense for the field, given its proximity to the border and its distance from Iraqi infrastructure and population centres.

Siba, meanwhile, has been awarded to Kuwait Energy alongside TPAO, this time successful, with a bid of US$7.50/boe and 100 mmscf/d, compared to KMG EP's bid of US$16/boe and 48.7 mmscf/d. Siba is close to the Kuwaiti border and has previously been touted as a source of gas for exports to that gas-hungry country, a deal that has not, as yet, been realised given Iraq's own obvious domestic constraints and priorities elsewhere.

Mansuriya, understandably, was the least sought-after in the round, given its proximity to Kurdish areas/tension on sovereignty and concerns over security, not to mention political hurdles to potential export outlets given the possibility of disputes over Kurdish transit to Turkey—and problems per se with any exports to nearby Iran. It did, however, attract one bid from Turkey's TPAO, which will work alongside Kuwait Energy and KOGAS. The group agreed to revise down its remuneration fee from US$10/boe to US$7/boe, demonstrating the same kind of bilateral haggling noted in previous rounds for oil contracts.

Lessons Learned

The introduction of take-or-pay clauses into the contracts—and the dropping of a 50% export requirement—was undoubtedly a factor in assuaging investor concerns that they would be pulled into constructing Iraqi infrastructure to ensure access to market, or be at the mercy of the conclusion of successful export agreements with neighbouring states in short order. The Iraqi side had actually introduced the export requirement as a concession given concerns about the development of its own market, but this turned into another stumbling block in its own right given the lack of existing infrastructure or supply agreements in place. However, the take-or-pay guarantee does bring with it substantial obligations (and risk) on the Iraqi side, which now has to build infrastructure, ready power plants, and potentially ink supply agreements with neighbouring states in time to host the gas, or pay the price of keeping it in the ground. The latter would be financially painful and politically disastrous, meaning that gas infrastructure development is now likely to move up the energy agenda, alongside the development of oil infrastructure to host the rising oil volumes set to emerge from the oilfields awarded in the first two licensing rounds (some of which has started to come through).

Gas infrastructure is also a key requirement to host the volumes of gas expected from Shell's associated gas deal in the southern fields, which appears to be making progress in recent weeks, with the agreement now set to be presented to the cabinet. That agreement would see up to 700 mmcf/d of gas in its own right, according to earlier figures, nearly doubling the quantity on offer from the current non-associated auction, where plateau rates were earlier scheduled for a seven-year period (now reportedly nine years for Siba and a reported 13 years for Akkas and Mansuriya, according to Turkey's Hurriyet).

Outlook and Implications

The preponderance of local actors (in the broadest sense) in the winning consortia, notably TPAO and Kuwait Energy, is indicative of the strong desire for Iraqi gas within the region, with Turkey, Kuwait (and indeed Syria), all hoping for Iraqi gas to improve their energy balances or, in Turkey's case, provide another source of transit supply. KMG EP's involvement is perhaps the most unusual in this regard, with that company not only continuing to accumulate stakes in upstream projects at home from its parent company, but also recently branching out overseas with an investment in the North Sea and now Iraq, in a fairly opportunistic way as opportunities emerge. Korea's state-owned KOGAS meanwhile is looking to expand its upstream presence, but has an overriding interest in LNG, making Akkas an unusual move in this regard, albeit that Syria has mooted this rather unlikely option for Iraqi gas in the past. Further analysis on these points will be provided in the coming days.
Nevertheless, while exports remain a firm possibility judging by previous comments from the Iraqi side, gas is first and foremost about domestic needs. Non-associated gas from these fields has a significant role to play in boosting domestic energy availability and thereby improving the security and economic climate for business and employment-generating industries, therefore making it just as political—if not more so—than the oil awards already made, with all the incumbent scrutiny that will bring. For these reasons, as well as the aforementioned potential for politically damaging outlays if infrastructure is not in place, gas infrastructure development is now likely to move sharply up the Iraqi government's priority list—with pipelines, gas-fired power stations, and potentially storage, all key issues. Meanwhile, further moves can also now be expected to put previous export discussions on a more formal footing, with Syria, Lebanon, Kuwait, Turkey (and then Europe), and even Egypt, all notionally keen on the prospect of Iraqi gas, some of them with that all-important ability to pay. If properly balanced against domestic requirements, this will offer a potential new source of revenue for Iraqi coffers alongside its rising returns from oil, and a welcome outlet for any gas that exceeds domestic absorption capacity, particularly in the early days.

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