BAGHDAD (Reuters) – Iraq will auction 12 new oil and gas exploration blocks this week in a fourth energy bidding round, as it seeks the rapid expansion of a sector vital to its economy, but tough contract terms mean Baghdad may struggle to drum up major interest.
The country, a member of the Organization of the Petroleum Exporting Countries (OPEC), has the world’s fourth largest oil reserves and can offer some of the last potentially rich unexplored territories after its energy sector was left under-developed by decades of war and economic sanctions.
Foreign energy companies are hesitant over Iraq’s offer of service contracts, under which they would be paid a fee for their services. Such deals are seen as less advantageous than production-sharing contracts, through which explorers can claim a share in profits from output.
The auction, now scheduled for Wednesday and Thursday, has already been postponed several times by the oil ministry to address complaints by potential bidders about contract terms.
In February, Baghdad made concessions to lure participants to the round, notably by dropping a clause that required companies to be partners with a state oil operator.
“Everything is in place to make this a success and as part of that we have eased the contract terms,” Abdul-Mahdy al-Ameedi, director of the oil ministry contracts and licensing directorate, told Reuters.
Companies will still have to weigh the limited advantages of service contracts, especially if they are not immediately given access to any crude oil, against risk from Iraq’s political instability and the absence of a formal legal framework for the contracts due to delays in passing a national oil and gas law.
Companies that win bids will be able to extract gas discovered in the blocks immediately, but the Iraqi government has retained the option to pay companies compensation to keep oil in the ground and boost its own reserves.
The exploration blocks on offer are mostly in remote parts of western and central Iraq, making them riskier investments since the sites would be harder to protect against possible insurgent attacks.
“Neither the terms nor the acreage on offer are attractive, so I wouldn’t be surprised if there were little interest from the international oil companies,” said one senior Western oil executive, who asked not to be identified.
While violence in Iraq has fallen sharply since the height of the war in 2006-2007, Sunni Islamists tied to al Qaeda are still capable of bombings and attacks, mainly hitting security forces or government targets.
An important drawback is the Iraqi parliament’s failure to agree on new hydrocarbon legislation because of a long-standing dispute over oil and land between the autonomous Kurdish region and Baghdad’s Arab-led central government.
Without the new laws, Baghdad relies on legislation dating back to the nationalization of Iraq’s oil industry in 1972.
According to a final tender document, the outcome of the bidding will be decided only according to the remuneration fee companies seek for each barrel of oil equivalent produced. The bid with lowest fee will win an exploration block.
Industry sources said companies would have to bid $10 to $20 a barrel for the service fee to compensate for the risk involved.
“The remuneration fee bids will have to be at least that high to make any sense of the economics,” said an oil company source.
Iraq qualified 47 energy companies, ranging from oil majors such as BP to Russian state-run operator Gazprom, to participate in the auction, which is expected to add 29 trillion cubic feet of gas and 10 billion barrels of oil to Iraq’s current reserves of 143.1 billion barrels.
U.S. oil major Exxon Mobil was disqualified from participating in the fourth round after it had signed an exploration deal with the autonomous Kurdish region, a move the central government in Baghdad viewed as illegal.
The sprawling exploration blocks could be among the world’s last major unexplored territories with such potential.
“Who could miss such a golden opportunity to invest in such promising areas. The crude and gas are there and it only needs someone to poke them,” Baghdad-based oil analyst Hamza al-Jawahiri said.
Iraq’s gas reserves of 112 trillion cubic feet are the world’s 10th largest, according to U.S. Department of Energy data.
In light of the potential legal, political and security difficulties, national oil companies, willing to accept tougher conditions, are likely to be the most determined bidders.
“I’m certain there will be bidders and they will likely be aggressive, albeit dominated by national oil companies,” a senior oil executive said, referring to state-run companies who analysts say would be more willing be accept tougher conditions.
The exploration deals are expected to help Iraq maintain and increase reserves to offset expected depletion and could strengthen Baghdad’s case within OPEC for a large export quota when it returns to the exporter group’s quota system.
(Additional reporting by Peg Mackey in London; Editing by Patrick Markey and Anthony Barker)