Sold to the highest bidder

With northern fields dropped from Iraq's bidding round amid political and security fears, IHS Global Insight Middle East Energy analyst Samuel Ciszuk takes a look at the implications.

“Given that only one contract was signed as a result of the first bidding round, the Oil Ministry will have to achieve a better result this time or else see its bidding round-based strategy over the past two years appear an almost complete failure”
-Samuel Ciszuk

The Iraqi Oil Ministry has issued a new revised list of oil and gas fields being tendered in the second bidding round later this year, pulling five oilfields and one gas field from the north out of the offering. The fields withdrawn from the list are the Qayarah, Gullabat, Najmah, Naudoman, and Qamar oilfields and the Khashm al-Ahma gas field, which all are located in the northern hydrocarbon area of Iraq, some of them in the disputed areas between the autonomous Iraqi Kurdistan region and Iraq proper, according to a report in industry newsletter Petroleum Intelligence Weekly (PIW). Citing a source in the Iraqi Oil Ministry, PIW says the Iraqi explanation is that it now will concentrate on awarding contracts for the rehabilitation and expansion of producing fields, awaiting the award of ‘greenfield’ projects until a national oil law – regulating exploration and development more clearly – is in place. The explanation, however, rings hollow, given that no other producing fields have been added to the list in the (largely) undeveloped fields’ stead. Rather, their common denominator (Qamar, Gullabat, and the Khashm al-Ahma gas field have been relatively explored but not developed, while the rest of the fields are very underexplored discoveries) is that they are located in an increasingly volatile northern region, and some of them even in territory disputed between the Kurdistan Regional Government (KRG) and the Iraqi government.

Neither are the fields particularly large, compared with much of the southern offering, which includes the massive West Qurna second-phase development, the Majnoon and Halfaya fields, and the central Iraqi East Baghdad heavy oilfield. Still, the second round contains some other relatively small (by Iraqi standards) oil and gas fields, although these are located in the south or in the Missan province further inland from the prolific Basra province in the extreme south. Given that IOCs and NOCs bidding for the northern crown jewels, the Kirkuk and Bai Hassan fields, in the first bidding round failed to come back with bids close to the Oil Ministry's maximum-requirement additional barrel remuneration fee, there is little to suggest that much smaller non-producing fields, with a completely unclear legal situation in an area that is looking increasingly volatile, would attract bidding interest.

Disputed territory
While the north of Iraq since the 2003 US-led invasion has been one of the country's quietest spots – with the autonomous Iraqi Kurdistan region often being held up as a good example of governance, business acumen, and security to the rest of the country – there is today rising tension in the area as the hitherto ad hoc relationship between the Iraqi government and the KRG needs to be properly codified. Originally consisting of the three northernmost Iraqi provinces, the KRG in 2003 used its close alliance with the invading US army to secure itself a significant role in the security of areas much larger, where the Kurdish population was in the majority or at least a dominating population group. Since then the KRG has attempted to solidify its increased territory, which now extends to many areas seen as core Kurdish territory in the broad nationalist discourse, although it has failed to incorporate one of Kurdish nationalism's main prizes – the Kirkuk city and region, including its oil production hub – under its aegis.

As Iraq now attempts to move forward from a martial-law-like situation into a more ordered political phase, the extent of the KRG's autonomy and its borders will have to be settled, prompting the temperature to rise when Iraq's Prime Minister Nuri al-Maliki – a proponent of greater centralisation and a Iraqi nationalist – tries to rein in Kurdish claims, while Iraqi Kurdistan prepares for regional elections just months before Iraq casts a parliamentary ballot.

Airbrushing the playing field
With the legal situation in these internal border areas continuing to be unclear to say the least, potential investors among IOCs and NOCs remain very much discouraged from investing in these fields. Given the lower-than-expected result in the first bidding round – where only a consortium consisting of BP and CNPC in the end managed to match the Oil Ministry's incredibly tough financial terms, securing access to the massive Rumaila field – the Oil Ministry is likely to want to avoid a similarly drab statistic, without being politically ready to significantly improve the financial terms offered. Hence, pulling the least attractive fields out of the race is probably a reaction based on soundings with potential bidders, and also a sign that a greater sense of realism is creeping into the Oil Ministry's most senior echelons.

With political rhetoric continuing to run high against the BP and CNPC contract among those opposing international investment in Iraq's previously nationalised hydrocarbons industry, there will be little tangible success to use as reference for the Oil Ministry by the time it manages to kick off the second upstream bidding round (scheduled for later this year, though the ministry hopes to perhaps launch it before the end of the third quarter). Given that only one contract was signed as a result of the first bidding round, the Oil Ministry will have to achieve a better result this time or else see its bidding round-based strategy over the past two years appear an almost complete failure. The Oil Ministry has been under fire over the past nine or 10 months for having concentrated entirely on preparing the bidding while neglecting to make easy repairs and developments in the meantime, thus failing to reverse Iraq's declining production at a time when low oil prices were hurting the country's budget – and general reconstruction effort – immensely.

Still, given the political resistance to foreign investment into its oil and gas sector, the Oil Ministry might be unable to offer significantly more attractive financial terms to oil companies – despite having demonstrated a tough attitude in the first bidding round and gained some resource-nationalistic credibility. With parliamentary elections in early 2010, oil companies will be likely to want to await the outcome before committing to vast investments, while the government and Oil Ministry will be politically unable to offer attractive terms while electioneering. Hence, pulling the least attractive fields from the second-round offering is one way of making the end result look at least somewhat more attractive, although it also recognises the increased political volatility in the north and the need to get legal clarity on the issue of Iraqi Kurdistan's borders before any significant investment can start trickling into those areas through the central government. The Iraqi Kurdistan government, however, was early to award oil contracts to smaller oil companies in some disputed areas, hoping to create ‘facts on the ground’ and now no doubt making sure that their interests in the disputed territories come with a clear price tag.