BP, CNPC Agree on US$15-bil. Rumaila Project in Iraq

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A consortium of BP and CNPC has now signed and secured the supergiant 17-billion-barrel Rumaila field project, committing to raising production at the field from between 950,000—980,000 b/d to 2.85 million b/d in only seven years—alone lifting Iraq’s total oil production capacity from about 2.5 million b/d to 5.35 million b/d. The size of the project can not be overstated, with the field’s reserves alone being larger than Algeria’s total reserves and the peak production output from Rumaila being close to Kuwait’s and Abu Dhabi’s current total production capacities—the third- and fourth-largest OPEC producers as things stand.

The 20-year contract comes with a spending commitment of US$15 billion, according to the two companies, although Iraqi oil minister Hussein al-Shahristani has put the likely total investment over the contract’s life to US$25 billion, with another US$25 billion in operating costs during the televised signing ceremony. BP will have a 38% stake in the project, with CNPC taking a 37% stake, and Iraq’s state oil marketing organisation (SOMO) holding the remaining 25%.

Unlocking Iraq’s Riches

The unlocking of the lengthy negotiations between BP/CNPC and the Oil Ministry leading up to the contract signing (the Rumaila contract was initially the only contract awarded in the largely unsuccessful first licensing round in mid-2008) owes a lot to the significant relaxation of terms by the Iraqi government. After initially having wanted to tax all the operating companies’ oil sales at a 35% rate, the government agreed to only tax their profit oil, while also relaxing some of its initially insisted tight grip on the operational control of the projects. The tax change dramatically altered the companies’ project economics, while the contract model chosen by the Oil Ministry also encourages the producers to ramp up production to as high a plateau as possible, making some of the unsuccessful bidders in the first round come back with revised output models that make more economic sense. The relaxation of Iraqi operational control also served to make companies less fearful of red tape and bureaucratic delays, while still having the full responsibility for keeping tight deadlines, under the threat of fines.

However, there is also a timing element to the sudden rush by supermajors to Iraq’s southern supergiant fields, with the general election in mid-January now being so close that companies will not have time to start investing money before the outcome is known. With several political factions in Iraq being unwilling to allow private and/or foreign investment in the upstream sector and the country still lacking a new oil law that is compatible with its constitution (a draft has been deadlocked in parliament for more then two-and-a-half years), companies have been fearing a situation where they agree to undertake large investments swiftly, to later be faced with losing their contracts and potential expropriations by those parliamentarians who brand their entry into Iraq illegal.

Deferred Commitments

In fact, BP and CNPC only need to deliver a 10% production increase at the Rumaila field within the first three years at an estimated investment commitment of US$300 million during the first 33 months, making it possible for the firms to gauge the political climate in Iraq with some accuracy before it will have to start doling out the lion’s share of its spending on the field. Raising production to the 2.85-million-b/d plateau within seven years means that heavy investment will probably need to commence within the first three years, but at least it gives the consortium a chance to defer the risk during the first critical period. As elections are over, the hope is that quickly delivered increments will make Iraqi politicians reliant on the foreign companies’ ability to deliver, something the dilapidated Iraqi state-owned oil industry has been incapable of in past years.

Outlook and Implications

BP and CNPC’s example will now be eagerly followed by other companies—wanting to seize the opportunity to access the largest fields before the elections, when risks still keep some competitors away and improves their negotiating position vis-à-vis the government, while not making large investments necessary before election results are known— as was seen after the Eni-led consortium secured Zubair and in the competitive bidding surrounding the supergiant West Qurna-1 field being seen at the moment.

The movement forward also sends good signals for the second licensing round in mid-December, which will be even closer to the election and therefore will make the risk of losing actual investments due to political upheaval even smaller. At the same time, the actual firm promise of such vast additional oil export incomes to the state are likely to make some politicians currently opposed to foreign upstream investment change their minds, given the prolonged failure by the Iraqi state-owned industry—after decades of sanctions, war and brain-drain—to lift output, further lowering risk.

The remaining uncertainty now is the level of violence in the country, with recent large-scale bombings suggesting that tensions are building quickly ahead of the election. Furthermore, last week’s successful targeting of the northern Kirkuk-Ceyhan export pipeline in a bombing indicating that oil installations again might become more of a focus for militants. The south of the country, however, remains relatively calm still, with a significant and prolonged uptick in violence being required to scare the IOCs away from such vast projects now that they are so near to being secured

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