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Iraq Signs 10th Oil Deal, Polls Loom

Critics say Iraq's poor infrastructure will be a major obstacle to its reaching its projected oil output.
BAGHDAD (Reuters) -- Iraq has signed a contract with Russia's LUKoil and Norway's Statoil to develop one of the world's biggest oil fields, sealing the last of 10 deals that could turn the war-shattered country into a top oil producer.

Analysts had expected Iraq and energy firms that won bids at oil-field auctions last year to move quickly to sign final agreements before the March 7 elections, a pivotal vote as Iraq emerges from the conflict set off by the 2003 U.S. invasion.

The government wanted to push the deals through in order to show voters it had lined up huge investment and the promise of large increases in public revenue, said IHS Global Insight Middle East Energy analyst Samuel Ciszuk.

The companies, meanwhile, could afford to clinch the deals rapidly as they still had plenty of time to see what the next Iraqi government would be like before the contracts obliged them to start investing heavily in the fields, he said.

"The first chapter seems closed, the second chapter will be opened after the election and then, of course, there will be those challenges of a more physical nature," Ciszuk said.

LUKoil and Norway's Statoil sealed the 20-year deal to develop West Qurna Phase 2, a 12.9 billion-barrel supergiant oil field in the south, in an auction in December.

Statoil, which has a 25 percent stake in the firms' side of the venture, has said it would invest $1.4 billion over four-five years. LUKoil put the investment "in the billions."

The 10 deals could vault Baghdad to second place in the ranks of global oil producers, rivaling Saudi Arabia, and could more than quadruple oil output capacity to 12 million barrels per day (bpd) from the current 2.5 million bpd.

Infrastructure Hurdles

However, implementing a contract is far more difficult than signing one and in addition to political uncertainty as a result of the election, Iraq continues to present serious challenges for investors.

Violence has fallen in the past two years but attacks by suspected Sunni Islamist militants or Shi'ite militia the U.S. military says are supported by Iran remain common.

Corruption is endemic.

The production goals established in the contracts are ambitious, analysts say, and many view them as unrealistic.

Oil Minister Hussain al-Shahristani said the targets were contractual and had to be achieved. "The companies are obliged to implement them otherwise they should pay huge fines worth billions of dollars," Shahristani told Reuters today.

The contracts face a potentially troublesome hurdle in a March election as there is no guarantee they will be accepted without modifications by the next government. Some lawmakers already say the deals are illegal.

Iraq's poor infrastructure will be a major obstacle.

"Considering the country's poor and outdated oil infrastructure, with rusty pipelines and lack of enough storage, it's impossible to reach [10-12 million bpd]," said Ali Hussain Balou, head of the oil and gas committee in parliament.

"Iraq should spend billions of dollars to renew oil infrastructure, build new storage and new pipelines before talking about being able to pump 10-12 million bpd."

Foreign firms must overcome bottlenecks in supplying water for injection, building the pipelines, and removing land mines.

Management of projects of such a size will be a major test for the Iraqi oil industry, which has faced severe brain drain and underinvestment during three decades of war and sanctions.