Threshold was exceeded in Iraq Risk Service Contracts

BP agreement in October of 2009 has helped the Iraqi Oil Ministry to exceed the threshold. New agreements will mean billions of dollars of investment dollars for the international oil companies and similar amount of revenue potentials for the oil and gas service industry.

Threshold has been exceeded In the Iraqi risk service contracts with British Petroleum’s October 16th, 2009 agreement.

 

Ministry of Oil of Iraq several years ago set forth with a plan to increase the oil production from low 2 million barrels per day rates (currently 2.4 Million bpd) to 4 Million bpd, by first improving the production from existing giant oil fields with the assistance of international oil companies and by means of risk service contracts.

 

International oil companies were invited first to a pre-qualification tender, based on their commercial and technological experience and whether or not they took part in the blocked Kurdistan Regional Government Tenders. A few were blacklisted for the latter. Successful major international and large national companies were short-listed for the first round of Iraqi Tenders.

 

Although the national oil law has not being enacted after the 2005 Iraqi constitution, and a number fundamental issues plagued the parliamentary debate on the oil law; the Government found a way to legalize the new tender. In the absence of a new law, the Government elected the use of preceding Saddam era law. And, according to this practice, the Oil Ministry had the power to negotiate agreement with foreign firms and a cabinet approval would be sufficient. (Kurdish Regional Government opposes this legality, pointing the Iraqi Constitution and asking parliamentary action).   

 

Iraqi Oil Minister Shahristani put 6 oil and 2 gas fields in the auction block. These are the existing producing fields that are in need of serious capital investment. The desired contract type was similar to the Iranian model, and it is called the risk-service contracts. Considering these assets as proved undeveloped category, and therefore as a low risk investment, the Iraqi government asked the bidders to submit their proposals, including the proposed incremental production level, time frame, proposed capital and operational expenses and proposed discount over the $ 2 per barrel incremental oil fee.  Contract features were of a hybrid model between a risk based service contract for a free and tax regime, cost recovery that resembles a production sharing contract.

 

Initial response of the oil companies has been negative to the contract terms. A few improvements were made by the oil ministry on cost recovery and tax terms.

 

Pressure was building on the Oil Minister Shahristani and Prime Minister al Maliki ahead of the January 2010 general elections, when the BP agreement was announced in October, 2009.

It appeared that sheer amount of cash flow to be generated with million barrels of incremental oil production convinced BP economists and this has turned the tide against Shahristani.

 

All other prospective candidates showed up at the Ministry and now, we have been reading about the successful agreements. Besides ENI, successful contract negotiations are expected for West Qurna (ExxonMobil), Nassiriya (Nippon Oil) and Kirkuk (Shell).

 

Today’s announcement by the Iraqi Oil Minister gives an idea about the investment dollars for ENI. According to Shahristani, the company will spend $ 20 Billion for capital expenses and $ 15 Billion for operating expenses in the next 6 years, amounting $ 5.8 Billion a year. These expenditures will be income for the oil industry for both underground drilling and completion and surface facility work.