Iraq and Gulf Analysis

An Iraq Blog by a Victim of the Human Rights Crimes of the Norwegian Government

The Second Licensing Round in Iraq: Political Implications

Posted by Reidar Visser on Sunday, 13 December 2009 18:25

The second licensing round for Iraqi oilfields was carried out by the oil ministry in Baghdad over the weekend. On the one hand, the contracts won by foreign companies will prove controversial because Iraq remains in the middle of a chaotic process of political transition and has yet to agree on a legal framework for the oil sector. At the same time, however, the relatively straightforward nature of the technical service contracts under offer as well as the emerging broader picture of a reasonably balanced mix of foreign and Iraqi participation in developing the country’s oil sector mean that these deals are on the whole less vulnerable to criticism than those previously entered into by foreign companies on extremely lucrative terms with the Kurdistan Regional Government – and therefore also stand a greater chance of surviving in their existing form in the long term.

On the whole, the mostly unsuccessful first and partially successful second licensing round have ended up producing an outcome that seems more sustainable than if all the contracts on offer had been immediately awarded to foreign companies as planned. If that had happened, the whole package would have been attacked both for selling Iraqi oil on the cheap and for marginalising the domestic oil industry. In the event, a more balanced picture emerged, even if some of the failed offerings from round one (including Zubayr and West Qurna Phase 1) have since been awarded to foreign companies in separate deals (led by Italian and US firms respectively). In addition to Rumayla which was awarded to a Sino-British consortium in the first round in June, the successful bids in the second round include most notably the supergiant project West Qurna Phase 2 (in Basra; awarded to a consortium led by Russia’s Lukoil and also including Norway’s Statoil in a smaller role) and Majnun (Basra; Shell), plus Halfaya (Maysan; CNPC), Gharraf (Dhi Qar; Petronas), Badra (Kut; Gazprom) and Qayara and Najma (near Mosul, both to Sonangol of Angola). The new agreements also include partnership stakes for Iraqi state oil companies, and the “leftover” fields that were not awarded will be developed by the Iraqis themselves as well (Middle Euphrates, East Baghdad, and a group of fields near Kirkuk).

There is a narrative in the international press to the effect that this particular distribution of contracts was a result of international oil companies steering clear of “politically troublesome” areas in north and instead sticking to the “relatively stable south”. While this may perhaps come across as plausible at first glance, it is only partially correct. Karbala, for example, is arguably more loyal to the central government than Basra has ever been; however, no deals were clinched for the fields in that area. Conversely, the so-called “safe” fields in the far south are not without security complications of their own. The example of West Qurna underscores this point: The field happens to be situated in what is easily the most troublesome piece of real estate in the Basra area as far as tribal geography is concerned, with the same tribes that created problems for the British in the 1920s remaining influential on the edges of the oilfield today. In other words, the north/south distinction is likely less related to the security dimension than to the geological facts: The truly big oil potential is simply in the deep south. IOCs appear ready to take considerable risks – arguably bigger risks than those involved elsewhere – to get a foothold in this key area of Iraq.

The tribal macro geography of West Qurna

Beyond possible security threats at the local level, the involvement of foreign companies is also potentially controversial in governorate-council politics. This is particularly the case with regard to Basra where West Qurna and Majnun are situated. Basra is home to a long-standing regionalist movement which demands improvement in living standards in an area which despite its status as Iraq’s leading oil producer still has a worse infrastructure than the rest of the country, even six years after the fall of the old regime. Last January it became clear that the vision of a standalone federal entity in Basra did not appeal to local interests; however, the decision by the Maliki government in May to set aside 50 cents from each barrel of oil exported from Basra in a separate development fund seems to testify to the continued strength of some kind of local regionalist sentiment. If the Iraqi government keeps it promise to Basra in this regard and is also able to add some jobs reserved for the local population (as has recently been attempted) then the IOCs operating in the area may well hope for frictionless conditions at the governorate level. Conversely, if opposition to the deals inside the South Oil Company should continue (this appeared to be more pronounced during the first licensing round) and jobs and development fail to materialise, then the spectre of Nigeria is not far away given the area’s political traditions.

Finally, in terms of Baghdad politics, the reception of these deals is likely to be more or less similar to the situation during the first licensing round, except that perhaps there is a greater acceptance that the fields under offer this time could be more suitable for joint development between Iraqi and foreign firms. The Kurds will remain opposed to anything that strengthens the central government, whereas Fadila may continue to oppose these deals from what seems to be an increasingly opportunistic stance aimed at hurting Maliki for failing to join the Shiite alliance for the next elections – so far at least. On the whole, though, the terms offered to the foreign companies are so modest in terms of per-barrel profit that it seems highly unlikely that any responsible parliament will opt to cancel them altogether in the future. More unclear, however, is the cumulative effect of the deals on the general direction of Maliki’s policies. The totality of the deals with very stringent and ambitious production targets mean many of Iraq’s oilfields will plateau very rapidly and hence bring lots of money to the country in a very short period of time, clearly creating an enhanced potential for corruption and autocracy (as well as disincentives for political reform) at a time when this is exactly what Iraq does not need. In this way – by pretending Iraq is normal when it isn’t – the foreign companies could help bankroll a system of government that will remain rotten at its core until the 2005 constitution has been revised.

Similarly, with respect to the Kurdistan dossier, different signals are being sent. Shahristani, the oil minister, will obviously portray the deals as a triumph that serves to emphasise the uneven distribution of oil resources in Iraq and the relative strength of the far south – and therefore will get yet another argument for continuing to ignore the Kurds until they are willing to negotiate (symptomatically, Sinopec was excluded from the second round because of its investment in Addax, which operates in Kurdistan). At the same time, though, Maliki has recently spent more time than normal talking to the Kurds. Under an alternative scenario, one could envisage that the realities of the new situation would finally encourage Kurdish leaders to break free from the maximalist position of figures like Barzani and Hawrami and instead enter serious negotiations with Baghdad. Maliki still does not seem to have made up his mind entirely with regard to potential partners after the elections, and there is no doubt that an alliance with, say, parties like PUK and/or Goran, would make more sense to him than Barzani/Hakim, not least since Maliki would then be in far a better position to maintain his centralist agenda south of Kurdistan.

In the immediate future, in terms of the next parliamentary elections now scheduled for 7 March, the net outcome of the licensing rounds is likely to be more of an asset than a liability for Maliki. He will try to sell these deals as achievements much in the way his opponents will try to sell security lapses as examples of his failure. Little wonder then that the Daawa party was among the fiercest opponents to the postponement of the elections.

Crossposted to the blog of the Gulf Research Unit at the University of Oslo

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15 Responses to “The Second Licensing Round in Iraq: Political Implications”

  1. Wladimir said

    Thanks for the update. Why PUK/Gorran? KDP/PUK have an unified alliance list. Gorran and PUK ‘hate’ each other to the guts. Maliki will meet Barzani soon: http://rudaw.net/details.aspx?lang=English&page=articles&c=News&id=14549 and spoke with Kemal Kerkuki (KDP) recently.

    You already saw this probable: http://carnegieendowment.org/publications/special/misc/iraqielections2010/
    Carnegie special on Iraq.

  2. Reidar Visser said

    Not necessarily the two of them at the same time. But it is undeniable that Baghdad politicians are a lot more optimistic with regard to both of them in terms of prospects for future dialogue, whereas Barzani is seen as difficult to do any meaningful business with. Khayrallah al-Basri (ex-Iraqiyya, now with Maliki) recently even proposed that Goran should join the State of Law alliance…

  3. Wladimir said

    Where did you read that of Khayrallah al-Basri? link maybe? (Doesn’t matter if it’s in Arabic).

  4. Reidar Visser said

    Here it is: http://al-iraqnews.net/new/siaysiah/42337.html

  5. Henk said

    I doubt that PUK can break with KDP at the moment. The KDP has stood by the PUK after the Kurdish elections in July. If the PUK would break with the KDP, the KDP would probably join up with Goran in the Kurdish region. And redirect the money from Erbil to Goran.
    The relations between the Kurdish parties and their (separate?) stand towards Baghdad will make the formation after the elections probably difficult.

  6. Brent said

    I have to say I disagree with the following. “the relatively straightforward nature of the technical service contracts under offer as well as the emerging broader picture of a reasonably balanced mix of foreign and Iraqi participation in developing the country’s oil sector mean that these deals are on the whole less vulnerable to criticism than those previously entered into by foreign companies on extremely lucrative terms with the Kurdistan Regional Government – and therefore also stand a greater chance of surviving in their existing form in the long term.”
    The contracts are development production sharing contrcts the TSCs were droped after the 1st round and Iraq might be in for a shock as they find out the details of these contracts they are no where near as transparrent as the KRGs. Just read this…
    …Billionaire Lukoil shareholder Leonid Fedun told Reuters he expected a five-fold rise in Iraqi production to cap oil price growth, while also deterring investors from pursuing more difficult and costly projects in other parts of the world.

    “A top manager at a leading Western company said the modern history of the oil business will be split into the pre-Iraq and post-Iraq periods. I agree,” Fedun said in an interview.

    “We’re witnessing a revolution in oil production.”

    Iraq, emerging from the shadows of war, has deals on the table to raise oil capacity to 12 million barrels per day from 2.5 million bpd today, a level that would eclipse second-ranked Russia and leave the country behind only Saudi Arabia.

    Lukoil, frustrated by the loss of its Saddam Hussein-era contract at West Qurna, is returnig to the field in partnership with Norwegian player Statoil. They will lead the second phase of the field’s development.

    “Investment will be in the billions of dollars. The project is colossal,” Fedun told the news agency.

    The Lukoil-led consortium proposed a per-barrel fee of $1.15 and output of 1.8 million bpd at West Qurna Phase Two, an eventual target roughly equal to the entire output of Lukoil’s fields in Russia.

    The deal, which gives Lukoil access to 12.9 billion barrels in oil reserves, was more than a service contract, Fedun said.

    “It’s a hybrid between a service contract and a production sharing agreement,” he said. “There is a remuneration fee and we could potentially book a portion of the reserves, although we don’t yet know how much.

    “As soon as the contract comes into force, we will move quickly toward its realisation. Within three to four years we will launch the first phase, and then the second.”

    Fedun said the ministry’s target of reaching 12 million bpd was realistic and that, as these plans are realised, the effects on the world market would be widespread.

    “World oil supplies will rise by a minimum 20% and demand won’t increase at the same rate over the same period. This raises questions over the long-term oil price,” he said.

    It also raises questions over investment elsewhere, he said.

    “A whole host of projects that were under consideration now seem uncompetitive,” Fedun said.

    “Does the industry need to invest in the development of difficult oil deposits, such as oil sands, or in deep drilling in the Gulf of Mexico, West Africa or the Brazilian shelf? “Do we really need the second phase of the East Siberia-Pacific Ocean pipeline?” he said, referring to Russia’s landmark project to deliver East Siberian oil to Asian markets.

    Lukoil is alone among Russia’s top four oil producers in not having brought a major East Siberian field on stream.

    Fedun said the potential rewards in Iraq – low production costs, low transport costs and the promise of access to other lucrative fields – made the inherent risks worthwhile.

    “Despite terrorist acts, the country is politically stable. Yes, there are risks, but the regions where the big companies are working are comparatively stable and located not far from the export infrastructure.”

    Lukoil had no immediate plans to invite its 20% shareholder, ConocoPhillips, to join its Iraqi project.

    But Fedun denied US players had performed poorly in auctions dominated by Russian, Chinese and other companies.

    “ExxonMobil were successful,” he said. The US major led a group including Shell to win the West Qurna Phase One field in the first round of auctions.

    http://www.upstreamonline.com/live/article201680.ece

  7. Reidar Visser said

    Brent, the contracts are obviously outside my area of specialisation and I merely rely on secondary sources, where however the emphasis seems to be on a per-barrel fee and production targets/timelines which sounds relatively straightforward and not particularly exploitative (since Iraq will still get a lot more than the oil companies). And surely, from the interview you refer to, it still seems that it is Shahristani and not Mr. Fedun that knows the exact contents of the contracts? You say “Iraq might be in for a shock as they find out the details of these contracts they are no where near as transparent as the KRGs.” But Fedun says “There is a remuneration fee and we could potentially book a portion of the reserves, although we don’t yet know how much.”
    So is it not Mr. Fedun (and not Shahristani) that has yet to make some discoveries?

  8. Kjetting said

    Why are the contracts in KRG more transparent? Not a single one has been publicised as they should have been according to the KRG Petroleum law. There is little transparency in KRG oil, except for a publication of a model contract back in 2007.

    As for the contracts that Baghdad is offering, they are service contracts. There is no grant of a right to explore and produce (as in the KRG PSC’s) and the companies are paid for services rendered. The companies will, however, most likely be able to book some of the reserves. This is because of changes in the SEC booking regulations and not because they get ownership.

    The contracts have not changed in basic structure between the 1 and 2 Round, but they have been developed to become clearer and less ambiguous.

    You should also know that Iraq retains more then 95 % of the revenue from the contracts, a government take seen in few other countries. They have also managed to contract a total Iraqi production increase of 9.5 million barrels per day for an average price of app. 90 cents per barrel after tax. While this does not ensure that there will be no opposition to the contracts for other reasons, there seem to be little reason that there should be objections through claims that the companies are robbing Iraq of its oil wealth.

  9. Brent said

    I agree Reidar but I can assure you that Mr Fedun knows exactly how much money he is going to make or he would not have been so bullish.
    Kjetting, all the details are available including r factors on the KRG web site please show me the details of the latest oil ministry ones. As Mr Fedun said they are more than just service contracts and he should know he just spent billions on aquiring one. As for 95% I bet that is just for the oil what about the total including bonuses. I dont think Iraq is being ripped off but I think its extremely hipocritical of the Oil ministry to say the KRG contracts are illeagal.
    “The contracts have not changed in basic structure between the 1 and 2 Round, but they have been developed to become clearer and less ambiguous.”
    They have changed in the most important way, monetarily!! And, as you will be able to recall Kjetting, that was why the 1st bid round failed.

  10. Joel Wing said

    1) The major change between the 1st and 2nd bid round that I have read about is that the Oil Ministry reduced the taxes they were going to charge the oil companies to try to make them more attractive. Otherwise its a change in the attitudes of the companies, not the Oil Ministry that led to more of them being willing to make offers.

    2) Fedun is smoking something if he thinks Iraq is going to reach 12 mil/bar/day. The only way that could happen is if the oil companies agree to pay for ALL of the necessary new infrastructure and supplies because the Oil Ministry doesn’t have the capacity nor money to do that. Iraq doesn’t even have enough water right now for the water injection process. Plus the huge increase in demand for services is probably going to set off an inflationary increase so they will be getting less bang for the buck. I would bet Iraq reaches about 6 mil/bar/day capacity and actually produces about 50-75% of that, which will not have a large impact upon the world oil market.

  11. Salah said

    The tribal macro geography of West Qurna

    Reidar, with all due respect I don’t know if this your words or not?

    But the Iraqi oil a long history have had never subjected to “tribal macro geography”? this may applied to other Gulf stats and Arabia Saudi were the oil fields and oil regions are “owned” to princes or Shiekhs.

    But in Iraq its totally different,this troubled me as some thing new coming from a shooler like you? is there any evidences on the ground made you state that? and did you think there some power to invente this type of “tribal macro geography”?

  12. Salah said

    I think the most important issue here with Iraqi oil sector is the the issue of The United Nations approved the financial takeover, and President Bush vowed to spend Iraq’s money wisely.

    Till now UN and US both some how control the Iraqi oil money and Kuwaitis still sucking more billions from oil money and they invested in US banks under name of future generations founds for !!

    We know there are a lot of serious allegations about Iraqi oil money

  13. Reidar Visser said

    Salah, not sure whether I understand you correctly here, do you mean that the Siyamir, the Bani Mansur and the Hallaf and others do not exist?

  14. Salah said

    Reidar,

    apologizes if we do misunderstand each and another.

    My point here when reading that sentence, Iraqi oil filed south or north whatever been are not subjected to tribal owned land, they are far from “tribal” control.

    All the oil fields and other regions that have national importance never been in control of the tribes in that region or area, its to central government all to a long.

  15. Salah said

    Reidar,

    What,s your view with Iranian occupied oil file 4 from Faka area Sound?

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