IHS Global Insight Perspective | |
Significance | Eni has won Zubair, promising a minimum spend of US$10 billion and the boosting of production from 195,000 b/d to 1.125 million b/d—accepting Iraq's US$2/b remuneration fee—while talk abounds that a ConocoPhillips-LUKoil consortium is frontrunner to win the larger West Qurna-1 project in competition with ExxonMobil. |
Implications | The award shows that IOCs are able to accept Iraq's low per-barrel remuneration, but only after Iraq has significantly eased many of its terms and restructured the contract, and once bidders realised that with production ramped up to a maximum, return on investment would be acceptable. China's Sinopec was initially part of Eni's consortium, but its Iraqi blacklisting after having bought producing assets in Iraqi Kurdistan has now turned into a hefty punishment. |
Outlook | Private investors and the Iraqi Oil Ministry now appear to have found each other, which bodes well for the award of remaining fields and signals a possible breakthrough for Iraq, although the contracts still have to be ratified by the increasingly moribund cabinet, with added uncertainty in the form of the January elections in Iraq and what the result might be. |
Second Time Lucky
Eni has managed to secure the technical service contract (TSC) for the 4.2-billion-barrel Zubair field in a consortium with South Korea's KOGAS and Occidental, estimating its investment commitment at about US$10 billion as it raises the 195,000-b/d production capacity to 1.125 million b/d within seven years. Eni led the same companies, with the addition of China's Sinopec, in the first licensing round in a consortium to bid for the field, but they failed then to come anywhere close to accepting the government's maximum remuneration fee of US$2/b, despite surprising the Iraqi Oil Ministry by offering the development of a much higher production capacity plateau than the ministry's required minimum level of 400,000 b/d.
Zubair was one of the few fields that saw several competing bids in the first licensing round, with the Eni-led consortium submitting the lowest bid (based on the remuneration fee) at US$4.80/b. This demonstrates to what extent Eni and its partners feel able to meet the Iraqi terms now that the soft loan signature bonus appears to have been scrapped (it previously stood at US$300 million for the Zubair field), operational control of fields by investors has been improved, the contract term possibly extended from 20 to 25 years, and other—as yet unspecified—terms sweetened (see Iraq: 1 July 2009: First Upstream Bidding in Iraq Disappoints and Iraq: 3 July 2009: Face-Saving Exercise Begins as Iraq Mulls Aftermath of Failed Bidding Round). "We cut our fee [but] the whole structure of the contract has been changed. There has been a sweetening of other elements to the point that this contract is meeting our requirements in terms of return on investment", Eni chief executive Paolo Scaroni told Reuters, while later telling Dow Jones that "you cannot compare the $2 today to the $4.80 [Eni was asking for] two months ago".
Eni is planning to drill about 200 wells on the field in order to lift production to 1.125 million b/d within seven years, construct the necessary treatment plants and collection networks and facilities, and refurbish all existing installations on the field, according to its statement. Iraq's state-owned South Oil Company (SOC) will have a 25% stake in the contract. Zubair, located in the oil-rich southern Basra region, is made up of four domes, the Al-Hamar, Shuaiba, Rafidyah, and Safwan, with the last extending over the border into Kuwait, where it is known as Abdali. The field is currently producing from three geological intervals, but hydrocarbon shows and strong potential exists in other formations, Platts reports, although these are not part of the current project.
As with BP and CNPC's Rumaila contract—the only contract awarded during the first licensing round—the companies now negotiating with the Iraqi Oil Ministry are likely to look toward future potential in new underexplored horizons, for which they will be well placed to explore and win future development deals if they take on a field now.
Sinopec Punished
Meanwhile, China's Sinopec has now come to pay rather a high price for its purchase of Addax Petroleum earlier this year, which gave it an operating stake in the autonomous Iraqi Kurdistan's producing Taq-Taq field. The dispute about whether the Kurdistan Regional Government (KRG) or the central government would control the region's oil and gas reserves and have the authority to issue production-sharing contracts (PSAs) has led to the Iraqi Oil Ministry blacklisting all oil companies dealing with the KRG. As a result Sinopec has been disqualified from the Zubair consortium. While Sinopec's acquisition of Addax was, to a large degree, for its West Africa holdings, the Chinese firm was repeatedly unwilling to consider divesting from the Iraqi Kurdistan field. Such participation in a field that could see full production reach 200,000-250,000 b/d in the future seems to have cost it access to a 1.125-million-b/d project instead.
West Qurna-1 Award On the Verge
With Eni securing Zubair, a decision seems imminent on the fate of the West Qurna-1 field. ExxonMobil earlier confirmed that it has once again entered the fray. A consortium of ConocoPhillips and LUKoil is also involved in the race; late yesterday the two said that they had accepted all the government's terms, potentially making the companies frontrunners for a contract. "We have accepted the previous conditions set out by Iraq's Oil Ministry and will start talks tomorrow in Baghdad," a LUKoil spokesman told Dow Jones, adding that "we decided to review the terms, taking higher oil prices into consideration", referring to what had changed the companies' minds since the June auction. The giant West Qurna-1 field has reserves of about 8.7–9 billion barrels and the current production of 250,000–280,000 b/d could, according to their June bid, be lifted to 1.5 million b/d. ExxonMobil, however, is reported by Reuters to be offering to raise production to 2.1 million b/d—down from the 2.325 million b/d offered in the June licensing round—although it is unclear if the supermajor is ready to agree to the Iraqi government's low US$1.9/b remuneration fee, with media reports pointing both ways this morning. Earlier this week reports indicated that Total was also preparing a bid for West Qurna-1. The fact that no talks have been reported yet between the Oil Ministry and the company could be the reason why an award decision continues to be a long-drawn-out process.
Outlook and Implications
Ratification
The contracts—like the recently finally negotiated Rumaila contract with BP and CNPC—will have to be ratified by the cabinet, however, which might not proceed as swiftly as Oil Minister Hussein al-Shahristani has indicated. Political progress has more or less ground to a halt in Iraq at the moment, with eyes turned increasingly towards the January parliamentary elections, leaving the coalition parties pitted against each other to a certain extent in trying to ensure that they do not compromise their own position and allow other parties to gain points to their detriment.
Given the broad scepticism among Iraq's population against IOCs and foreign companies accessing the country's oil reserves after decades of highly resource-nationalistic propaganda and rhetoric, many parties will be afraid of appearing to be involved in bringing IOCs into Iraq in the run-up to elections. There is also a general uncertainty about which political parties might come out stronger after the election, making companies wary of committing to large deals without the existence of a stable oil law, a situation that raises the risk a future government might not feel itself bound by previous governments' assurances. Nevertheless, should it prove true that the Iraqi Oil Ministry and government have scrapped the soft loan signatory bonuses that required large upfront payments from the investors, companies' reluctance might understandably have changed radically, as even with swift cabinet ratification, large-scale work—investment—would not get under way until after the Iraqi election result becomes apparent.
Politically, the success of these contracts in the short term rests on whether al-Shahristani and Prime Minister Nuri al-Maliki can portray the terms both as fair and not massively improved. While quotes like the one above from Eni's Scaroni indicate the opposite, al-Shahristani yesterday told the Wall Street Journal that "terms of the deals offered to international oil companies hadn't changed". In yet another aspect, however, it might prove difficult for the oil minister and the Iraqi government to defend the contracts. Before the televised June auction, its transparency was touted by al-Shahristani himself as one of the qualities legitimising the contracts, as everyone could follow the negotiations. Since then, BP and CNPC, the only winners in that round, have spent several months negotiating terms and details, only reaching a result in the past week. Now new contracts are being signed through bilateral negotiations between IOCs and the Oil Ministry, with uncertainty about exactly what changes have been made to the Iraq investment terms. This is something Iraqi parliamentarians opposed to foreign investment in the upstream sector will seize upon when the oil minister returns to the parliament for questioning on 27 October. Given the general stalemate, however, a "no-confidence" vote appears less likely than it had done earlier this year.
Nevertheless, for the companies, this seems like a good opportunity to be seized, as no material investments will be made in any case before the January election brings more political clarity to the years ahead. Instead, they can agree to somewhat relaxed terms now, while the Iraqi government scrambles to improve its oil sector track record and show some promising progress. It is clear that IOCs have realised that the way to make Iraqi oil contracts profitable for them is to ramp up production as high as technically possible in the shortest time possible, in order to generate as much cash flow as they can—given that they are paid by the barrel produced. This now raises the question of whether the Iraqi contracts can result in overproduction and too-rapid decline rates in the future, something to which the Iraqi government, concerned with funding a national recovery over the coming two decades, might have given too little consideration.