Fierce Competition Expected at Second Licensing Round in Iraq

Second Time Around

Iraq’s second licensing round has been in the offing for over a year and is now picking up where the first licensing round, in the middle of the year, left off, hoping to result in a host of development commitments producing significant output increments within the first 18 months and reaching plateau production within about seven years’ time. Most of the fields offered in the second licensing round are—unlike in the first round—greenfield developments, which raises significant questions about the lack of connecting infrastructure between the fields and the underdeveloped Iraqi export facilities. The transport and export infrastructure is outside the contractual scope of the deals on offer, putting the onus on the Iraqi Oil Ministry to project manage and tender all necessary infrastructural expansions to contractors within the upstream project timeframes, in order for bottlenecks—it could be incredibly costly to the awarded oil companies, if their newly installed production capacity is shut in—to be avoided.

Iraq’s first licensing round was seen as a great disappointment as tight government terms left most bidding consortia unwilling to match the Oil Ministry’s maximum remuneration fee. While the failure to award more then one contract was, in many ways, embarrassing to the Oil Ministry and suggested that it had overplayed its hand regarding the bidders, it also helped it entrench its resource nationalist credentials with the wider Iraqi population, among which popular fears about the government’s willingness to give companies too good terms were rife and scepticism towards private business in the strategic oil sector since the time of widespread nationalisation in the 1970s has been running high. Since then, the Iraqi government has “clarified” investment terms, in effect improving the taxation terms significantly, although the government has refused to acknowledge that terms have been sweetened for domestic policy reasons, allowing bidding companies to recalculate their offers. The size of the first- and many of the second-round assets is just too large not to access from the oil companies’ point of view and where there seemed to be a relatively united front meeting the Oil Ministry in the first round, serious competition is anticipated on all sides ahead of the second. This is backed up by the recent cabinet ratification of the only contract to be awarded in the first round—BP and CNPC’s Rumaila deal, which took several months of fierce negotiations before the fine print was agreed upon—and following an agreement by an Eni-led consortium to develop the Zubair field and an ExxonMobil and Shell consortium to develop West Qurna-1. Neither of those deals has yet been ratified by the cabinet, but the resubmitted bids and closed negotiations at the two (initially) first-round projects have together with the Rumaila deal promised to lift Iraq’s output from 2.5 million b/d currently to around 7 million b/d within the space of 7 years, which although grossly optimistic, has injected a new sense of optimism into the whole process.

The Bidding

Iraq’s Oil Ministry will offer the second round fields sequentially during the Friday and Saturday (11-12 December) bidding session, angling for maximum transparency at the televised and web-streamed event. Bids will be structured mainly along two parameters: the remuneration fee per barrel of incremental production and the production plateau they can lift production to and maintain for a demanded minimum time period. In the first licensing round, the size of the plateau was favoured as the most important parameter, however in the second round the size of the remuneration fee will carry an 80% weight in the Oil Ministry’s final decision.

Remaining Concerns

Bidding is, however, expected to be less then evenly spread across the spectrum of fields offered in the second round, with most interest and competition naturally being directed towards the large southern fields, where the physical security situation is most favourable and the reservoir status and quality best known. This includes the 4.1-billion-barrel, 2-tcf of associated gas Halfaya field in the Maysan province. Interest in the 8.1-billion-barrel East Baghdad oil field—with significant heavy oil content—is also expected to be significant, although the security risk at the field just outside the Iraq’s capital is much more of an issue. Security will be an even bigger issue with regards to the Qamar, Gullabat, Naudman, and Khashm al-Ahmar fields in the Diyala province, as well as Qayara and Nejma in the northern Ninevah province, which are located either in the relative vicinity of the city of Mosul, which remains a hotbed of ethnic and jihadist violence, or are located in areas claimed by Iraqi Kurdistan and held by its Peshmerga militia. In the latter case any company awarded the fields would not have its rights recognised by the Kurdistan Regional Government (KRG) and would wade into the dispute between the KRG and the central government over the region’s borders and the extent of its autonomy over its natural resources –a conflict which looks likely to intensify over the year ahead.

Apart from security concerns and the questions about Iraq’s ability to match production capacity increases with organising and tendering sufficient timely expansion in its damaged and under-dimensioned transport and export infrastructure, there are also significant questions to be resolved about other technical and logistical challenges. Oil companies will need vast amounts of water for injection into the reservoirs in order to keep pressure intact, at a time when Iraq is facing a prolonged drought. Constructing joint desalination facilities has been broached in inter-company discussions—especially regarding the south—but constructing a large facility would itself take several years, not resolving the relatively imminent problem with the early production increment deadlines.

Iraq still lacks an oil law and therefore the cabinets’ ratification remains the only guarantee that the deals will be honoured and no price renegotiation sought. With general elections coming up in early March, the date for the second licensing round is much more conveniently placed than the first, as no investment will have time to get underway before the result of the election is known. Significant opposition still exists within Iraq to allowing private enterprise access to its oil, although years of failure by the national oil industry—because of heavily depleted capabilities—to repair and upgrade its installations, and promises of large incremental volumes from the few recent deals struck, might persuade many Iraqi politicians to continue on the set-out course, in order to reap the rewards of dramatically higher exports in a few years’ time.

Outlook and Implications

Bidding is expected to be fierce for Iraq’s large southern fields—Majnoon, West Qurna-2, Halfaya and Gharraf—with interest in East Baghdad also likely to be significant given its size and closeness to refineries and infrastructure around the capital. Some of the northern fields in violent and disputed areas will likely see lesser interest, with perhaps some Chinese companies feeling inclined to take a gamble given that Chinese NOCs have significant upstream investments both on the Kurdish and Iraqi sides that could translate into significant influence.

Iraq’s Oil Ministry has encouraged bidding through consortia, with Total and Chevron being reported as a likely partnership to bid for Majnoon and, at least in Total’s case, Halfaya, where India’s ONGC and Oil India have also expressed interest, in addition to Shell. Statoil and Japex are reported to be eyeing Gharraf, while the ExxonMobil and Shell consortium that has secured West Qurna-1 might try to gain further economies of scale by bidding aggressively for West Qurna-2. LUKoil and ConocoPhillips have a clear stated interest in West Qurna-2 as well however, although the Russian government has encouraged all Russian companies to bid as a joint group. Chinese companies are nevertheless seen as likely to bid the most aggressively, prompting much speculation of tie-ups between Western companies and Chinese players in order to combine the technical prowess of Western IOCs with the low operating costs of the Chinese NOCs.