Summary
The "service contracts" recently offered by the Iraqi government for oil companies to develop their huge resources represent some of the most difficult issues for the global oil companies to face. The fact that BP accepted the contract, despite only taking a $2/bbl margin that is oblivious to oil price changes, suggests that they are taking a long-term view of the Iraqi opportunities for the fact is that a project like this, no matter what the size, cannot compete on a profitability basis in BP's global opportunity portfolio. In fact, oil companies have always feared and resisted these types of contracts since they do not allow the oil companies to book reserves under the normal regulatory and financial systems in the US and elsewhere.
Analysis
This type of contract, with it's low margins and high thresholds for success represents the worst of all worlds for the multi-national oil companies (MNOC's). It essentially reduces them to the level of and EPC contractor like KBR in that they must apply sophisticated technology and engineering principles - very expensives skills to acquire and maintain - but they are paid on a fixed margin basis tied to the barrels they produce. Some of the terms such as recovery of their capital and additional tax/cost breaks are not covered in this article; however, I would suffice it to say that BP's break in the ranks of the oil major's represents a major step backwards for them in terms in maintaining the high margins they have traditionally received for their skills and their access to capital for developments in politically and technically challenging lesser developed country environments. It is likely that this will prompt other major areas - particularly Brazil, West Africa, and elsewhere in the ME - to examine such contracts for their projects as well.
