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Iraqi Oil Auction Flops As International Companies Stay Aloof

Iraqi Oil Minister Hussain al-Shahristani had touted the auction as a key step to boosting oil output and giving the government much-needed funds for rebuilding programs.
Iraqi Oil Minister Hussain al-Shahristani had touted the auction as a key step to boosting oil output and giving the government much-needed funds for rebuilding programs.
(RFE/RL) -- Iraq's oil industry has suffered a blow as its first auction of production rights in over 30 years failed to draw the support of international oil majors.

Only one deal was agreed in the bidding in Baghdad on June 30.

The result of the auction showed, as one industry analyst put it, that the Iraqi government and the international oil companies inhabit different planets.

The main stumbling block was the wide gap in the expectation of profits from Iraqi oil. The government was offering foreign investors a fixed fee of around $2 a barrel for extracted crude, while some bidders, such as the U.S. ConocoPhillips, were seeking nearly $27 per barrel!

Asked whether the outcome represents a setback to Baghdad's plans to revitalize the oil industry, Nicosia-based oil-industry analyst Rafiq Latta said: "On the face of it, it looks that way. One winning bid out of eight [leases offered] is a pretty poor show, especially given the hype and the amount of work that's been put into this round."

The only deal agreed was with a consortium led by BP and including the China National Petroleum Corp, which settled for $2 a barrel for the right to further develop Iraq's biggest oil field, Rumaila, in the south of the country.

Iraqi Oil Minister Hussain al-Shahristani tried to put the best face possible on the disappointing day, saying the Rumaila contract foresees almost a trebling of production from that field, which would go a long way toward meeting the projected national output of 4 million barrels per day.

Resistance To International Entry

The plan to open Iraq's oil fields to foreign investment is a controversial one. The industry has been in Iraqi hands since it was nationalized in 1972, and not everyone is in favor of allowing the big international corporations back in.

Analyst Latta says Oil Minister Shahristani does get some political cover from the fact that the foreign corporations found the terms too strict for their liking.

"He can go back to parliament and his opponents and say, 'well, look, the terms were tough,' whereas previously he was accused of being soft and selling out the country," Latta says. "So he does gain from that."

Security is a key concern for foreign investors.
Among the other restrictions imposed by the government is one that winning companies must put down a deposit of $2.6 billion before even beginning their investment in the oil fields themselves. They would also have to join a partnership with Iraqi government-owned companies, and share management of the fields despite fully financing their development.

Latta points out that that the main Iraqi partner company would be the South Oil Company, which is hostile to the presence of foreign oil concerns, as are many Iraqi politicians. He says the "astonishing" difference in pricing is partly due to factors like that.

"The companies' offers were in turn very much affected by the fact that they are looking at what they see as a very high-risk environment," Latta says.

They felt that if they were to enter such an environment, they should be well compensated.

Latta concludes that Iraq's vast energy resources give it great potential for the future, but whether this is ever fully realized rests mainly on political factors, not on any geological difficulties.

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