First Mega-Contract Awarded in Iraq's Second Oil Licensing Round

Majnoon

A consortium of Shell and Petronas today managed to secure a development contract for the 12.5-billion-barrel Majnoon field in the south of the country, promising to boost the field’s production capacity from 45,900 b/d to 1.8 million b/d within the space of seven years, in exchange for a fee per incremental barrel produced of just US$1.39. The price offer was somewhat below the figure the government had put down as the maximum it would agree to, with Shell and Petronas fighting off fierce competition from Total and CNPC, which offered US$1.75 per incremental barrel produced and only promised to lift production to 1.4705 million b/d. The Majnoon field is located in the south of the country in proximity to existing pipeline and export infrastructure, and also close to Kuwait, making it possible for companies to use Kuwaiti ports and roads for much of their early access and equipment transportation before roads and connections to the area have been improved. Shell will hold a 60% operating stake in the consortium, with Petronas partnering on the rest.

Halfaya

The 4.1-billion-barrel Halfaya field in the south was secured by a consortium consisting of CNPC, Total, and Petronas, promising to develop the field in exchange for US$1.4 per incremental barrel produced and to reach a 535,000-b/d production level within the space of seven years. CNPC will lead the consortium with a 50% operating stake, with the two other partners each holding a 25% share in the license. The consortium fought off several bids including a joint approach between Norway’s Statoil and Russia’s LUKoil, which requested US$1.53/b in exchange for lifting production to 600,000 b/d; a bid from India’s ONGC, Oil India, and Turkey’s TPAO, which offered US$1.76/b for 550,000-b/d production; as well as a consortium between Italy’s Eni, South Korea’s KOGAS, U.S. firm Occidental, China’s CNOOC, and Angola’s Sonangol, which offered a wide-off-the-mark US$12.5/b to achieve 400,000 b/d production.

Qayarah, East Baghdad and the Eastern Fields

Bidding for the 807-million-barrel Qayara field proved much less attractive, with only Angola’s state-owned Sonangol submitting a bid, requesting US$12.5/b of incremental production achieved in return for bringing the field’s output to 120,000 b/d-the minimum requested level by the Iraqi Oil Ministry. The maximum remuneration level the ministry would have accepted was US$5/b, Agence France-Presse reports Iraqi oil minister Hussein al-Shahristani as saying. Sonangol was unwilling to change its offer during the 30-minute initial reaction period offered to failed bidders under the Iraqi licensing auction terms.

Disappointments continued, with the 8.1-billion-barrel East Baghdad field failing to attract any bids at all, a fate that also befell the Eastern Fields group consisting of the Qamar, Gullabat, Naudman, and Khashm al-Ahmar fields in the Diyala province.

Outlook and Implications

The bidding confirmed IHS Global Insight estimates that competition would be fierce for Iraq’s southern fields, while interest would be much lower for the fields in the Iranian border regions, the central areas of the country, and in the north (see Iraq: 10 December 2009: Fierce Competition Expected at Second Licensing Round in Iraq). Risks—both above ground and below—are much greater at those fields and infrastructure is much less well developed—and in some cases completely destroyed—making it a much riskier undertaking. The volumes produced from these fields are also far lower than from the south, where production costs are some of the world’s lowest. With this in mind, competition is likely to be very fierce for the West Qurna-2 field tomorrow and possibly for the Gharraf field, while interest in the remaining fields is likely to be low or none, especially for northern assets, which are located in areas claimed and physically occupied by Iraqi Kurdistani militias.

The fact that no bids at all were submitted for the East Baghdad field, which his located close to the capital and is therefore seen as suffering from a much higher security risk, was still surprising, but shows—together with Sonangol’s wide-off-the-mark remuneration fee request for the Qajarah field—that the tight Iraqi terms only really work at the vast southern mega-fields and nowhere near compensate for investment in higher-production-cost fields where the uncertainty as to whether Iraq will manage to build connecting pipeline infrastructure in time is much higher and the reservoir geology is less well known.

Iraq has still, however, managed to secure very important production increase commitments today, with West Qurna-2 still to come. The biggest winners seems to be Shell and CNPC, which both won significant contracts in Iraq during and after the first licensing round and also operated the South Gas Initiative and the al-Ahdab field, respectively. Shell is clearly keen to raise its Gulf oil footprint, where it has trailed behind U.S. supermajor peers for some time, and reverse the long-term decline in the region stemming from their heavy involvement in the mature Omani oil patch. CNPC is clearly bearing Chinese flag in securing access to reserves and has proved before that it can use its access to cheap labour and equipment to bear much lower rates of return in the Middle East and Africa. Total had likely hoped to secure a leading role at the Majnoon field, but will now have to play a smaller partnering role at the less important Halfaya, a somewhat disappointing outcome for the French supermajor known for its relative appetite for risk and old Iraqi connections.