Iraq Improves Gas Licensing Round Terms by Removing Export Uncertainties

Addressing Concerns

Oil and gas company concerns that taking on the development of the three gas fields offered to investors in Iraq’s first gas-focused licensing round could potentially expose them to the risk of having to take over the construction of domestic and international pipelines to monetise their future production and having to find international buyers themselves for a share of their production earmarked for exports have been mollified, by the Iraqi Oil Ministry. Speaking to media, Abdul-Mahdy al-Ameedi, Director-General of the Iraqi Oil Ministry's Petroleum Contracts and Licensing Directorate (PCLD) told Reuters that "the contractor has no relation to exports or building export facilities," on the sidelines of a celebration of OPEC’s 50-year anniversary. Contractors will only be responsible for developing the fields and connecting them to the national gas transmission network, which the Oil Ministry hopes to build, he further told Reuters, adding that "and if there is a surplus, the Oil Ministry will decide whether to export it through this network." Further clarifying that this was going to be clearly encoded in the model contracts, he said that "there is no article in the contract that states that companies should build export infrastructure. The contractor digs wells then produces gas and builds infrastructure to process and manufacture the natural gas," according to Reuters.

The clarification was needed, as the current virtually non-existing state of Iraq’s domestic gas transmission system, after decades of wars, sanctions and insurgency, has raised fears of a form of “mission creep” in which companies nearing production development on the three technical service contracts (TSCs) offered would have to also take on the construction and reconstruction of national trunk pipelines, and perhaps even smaller network connections, given the shortage of project management capacity in the Oil Ministry amid the rapid and massive oil projects development ongoing simultaneously (see Iraq: 26 August 2010: Sweetened Iraqi Gas Terms Could Backfire As Kurds Push for Gas Exports). "If the Iraqi side can't receive the produced gas then the companies will seal the producing gas wells and stop production, but the Iraqi side will pay the fees until the resumption of production and Iraq is ready to receive the produced gas," al-Ameedi promised, according to Reuters. The potential take-or-pay solution could of course become a politically unmanageable promise to completely fulfil, but the fact that companies at least can be compensated for their capital costs during a standstill should go a long way to reassuring potential gas investors that some of the biggest strategic and tactical worries have been successfully removed. Additionally, the PCLD is also reported to have lowered the TSC’s training commitment for Iraqi nationals from US$5 million per year to US$1 million per year, in another effort to improve terms. As has also been widely expected for some time, the PCLD has dropped its requirements for signatory bonuses.

Moving Forward, with Possible Delay

The clarifications mean that Iraq has removed some obstacles that might have kept a significant number of companies from bidding, according to reported reactions and questions during a recent workshop for prospective bidders held by the PCLD in the Turkish city of Istanbul in late August. Still, the tight deadline for the auction could be pushed, according to both Iraqi Oil Ministry sources and officials from the 11 companies that have bought the tender documents. "All preparations to hold the bid round are in place and ready, but if companies ask for more time to study the new model contract we will delay it for a few weeks," a ministry official told Dow Jones, while an IOC official said that "as far as I know all companies are favouring a postponement," hinting at a one-month delay as likely. Companies are understood to have been given until yesterday to answer on the timing issue, with a PCLD decision to push back the tender expected quite soon.

Outlook and Implications

The promise that companies developing the three gas fields, some of them in areas with considerable remaining security threats, will not have to take on the development of pipeline links domestically or internationally at a later stage in order to be able to monetise their production is reassuring. The government’s apparent drop of a requirement to export 50% of the production is also good, as it is not up to companies to construct export deals that generally in any case have to rely on a bilateral political process, especially in the highly regulated energy sectors of Iraq and its neighbours. Iraq has not abandoned its wish to become a gas exporter; however, it has realised that putting an immediate quota on how much should be exported, before export buyers have been developed or domestic demand satisfied, could be counterproductive in several ways.

The promise to commit to take-or-pay under the gas TSCs is a further booster of the contracts’ commerciality, as it is quite likely that the tight development deadlines that the Iraqi government insists on will not be fully matched by Iraq’s development of a capacity to transport the gas produced to national or international consumers. One should probably not have too high hopes about Iraq during a potentially long period of time paying the companies for gas not lifted, as this would raise significant political opposition in the country’s legislature; however, the existence of such a clause would at least make a compromise solution likely for an Iraqi government faced with potentially year-long delays at its offtake capacity, where the investor is compensated for the shut-in cost. Lowering the minimum Iraqi training investment and scrapping the signatory bonuses will further make it easier for the companies to take on the project risk involved in those fields’ development.

Still, the Iraqi gas licensing round remains only borderline attractive, given what is expected to be tight fiscal terms and remaining significant insecurity surrounding the Akkas and Mansuriyah fields. Mansuriyah is an area claimed by Iraq’s Kurdish population, as well as in areas close to al-Qaida strongholds over the past few years. Siba in the relatively peaceful south and Akkas on the Syrian border are both ideally suited for exports to Kuwait and Syria, respectively, although politically such deals might not be entirely straightforward. The domestic supply first strategy now chosen will of course essentially demand a good gas price/remuneration fee offer from Iraq for the licensing round to be successful, something that the Oil Ministry might find difficult, as the lesser flexibility of a gas development contract and the need for greater offtake security by developers will be a change from the oil-focused licensing rounds, where the Oil Ministry succeeded in pushing the oil companies very far on the remuneration fee, given how different the IOCs’ margins looked.

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