Iraq Outlines 2009 Oil Licensing Round; Short-Term Contracts Called into Question

Selling it Twice

The international oil industry's hopes yesterday of seeing the long-awaited short-term pilot technical-service contracts (TSCs) awarded to a group of majors and IOC consortia have been dashed. Instead, the Iraqi Oil Ministry has released the outline of its coming oil licensing round, presenting a far more realistic time-frame than before while casting severe doubt over the TSC stop-gap deals. When Oil Minister Hussein al-Shahristani revealed the list of six oilfields and two gas fields for which 41 pre-qualified companies will be allowed to bid, the six oilfields were shown to be more or less the same fields designated under the initial pilot contracts.

While the outline's release was touted as a positive measure, kick-starting Iraq's oil development, it appears that talks about the immediate execution of repairs and upgrades with leading majors and IOCs have been derailed, calling near-term output gains of 500,000-600,000 b/d within one to two years, severely into question. The licensing round, with a bid deadline for March/April 2009 and awards due in June 2009, is hoped to result in 1.5 million b/d of added production capacity. However, realistically results are not likely to start trickling in until mid- to late 2010, and thus the real crude output gains seem to have been pushed back to some time between 2011 and 2012.

Offering the same oilfields in the 2009 licensing round as for the short-term pilot contracts means that the window of opportunity for the majors and IOCs involved has shrunk from two years to one—though some oil executives still seem to be hoping that talks can be salvaged. If not, it is unlikely that any large production gains will come out of Iraq at all in the near term, with the country suffering the effects of a depleted workforce due to decades of brain drain, derelict production facilities, and reservoir damage from years of irresponsible—politically decided—production targets on its main fields.

The Need for an Oil Law

In the current deadlocked political situation, just about the only thing every Iraqi faction seems to agree on is the need to remove the current oil law –dating from the pre-2003 invasion Saddam Hussein regime- for something more updated. The essence of a new oil law has, however, proved to be a highly controversial topic—every draft so far has been deadlocked, and none has even reached the parliament floor for debate.

At the centre of the controversy is whether Iraq is to allow production-sharing contracts (PSAs). This type of contract is favoured by the oil companies as it would give them long-time bankable stakes in their respective projects' output, whereas TSCs would reduce them to mere contractor status. With the Iraqi Oil Ministry presenting the coming licensing round as a TSC-based round—albeit for long-term contracts—the scope for IOCs to turn a profit looks to be severely curtailed. Nevertheless, with the scrapping of the current outdated oil law appearing to be the only certainty, oil companies will require a new oil law to be in place well before the March/April bid submission deadline to be able to commit under long-term contracts. The government has promised to present the final legal and technical specifics of the licensing round by September this year; as such the deadline to pass an oil law will be very tight and the scope for further delays large indeed.

Pilot-Contract Agreement Failure

Al-Shahristani yesterday told Agence France-Presse (AFP) that Iraq "did not finalise any agreement with them [the majors and IOCs involved in the short-term contract negotiations] because they refused to offer consultancy based on fees as they wanted a share of the oil. The technical support agreements are only simple consultancy contracts to help us raise the production during the interim period". Yet the failure to reach an agreement with IOCs is more complex than that, with greater roots in the lack of progress on installing a credible legal framework for the sector. Nevertheless, the Iraqi government has now gone back to its original time-frame of giving the companies only a one-year contract term to add a total of 500,000-600,000 b/d of production capacity, something the companies might feel unable to do.

For the forthcoming licensing round, the need for a legitimate and credible oil law—and one that is respected by all major Iraqi factions, reducing the chances of radical change as soon as a new government coming in—will be even stronger. The Iraqi government will demand, as a condition for bids being eligible, that IOCs set up a manned office in the capital, Baghdad, while at the bidding and negotiating phase. Should a company win, a proper Iraqi subsidiary and branch office will have to be established. While the Iraqi security situation has improved radically in the past year, IOCs have still been pressing hard for the option to work remotely, only providing advice from abroad to Iraqi workers, but the government has now indicated that companies will not be allowed to do this past mid-2009.

Outlook and Implications

While the news of the licensing round has been sold to media as the Iraq's oil industry finally being restarted, the failure—in al-Shahristani's own words—to agree to short-term service contracts with the majors and IOCs during more than six months of negotiations, could endanger most—of not all—of the added production volumes hoped for from Iraq up until the second half of 2010.The Oil Ministry now appears to be offering the short-term stop-gap contracts a time-frame of only one year in which to complete work, despite any of the other reasons for the hold-up (the need for an oil law, greater security, better incentives) really having changed in the past month. This could put the contracts into doubt altogether, but even if they are signed during July, work would take some time to start up, leaving them with less then a year to complete their assignment, before the fields are up for bidding again.

Nevertheless, the new timing of the licensing round is more realistic than previous ideas of launching bidding this month, having a September/October deadline and issuing awards by November. As this was never to happen, the current schedule actually seems feasible by international standards. Iraq will, however, still need to pass an oil law, as no IOC will establish a full subsidiary under a law that is certain to be scrapped and without knowing what will follow, and at what terms. Delays past September are therefore risking the whole process being pushed back consequentially. Likewise companies are likely to continue to be reluctant to place personnel in Iraq until greater political and security clarification and stability is reached. In particular, clarification of U.S. policies after the presidential elections later this year will be eagerly awaited.

It seems as though the international and domestic political pressure against the Iraqi and U.S. governments to scrap the Oil Ministry's insistence on PSA-based contractual frameworks and the awarding of no-bid short-term pilot contracts has been successful. At worst, this could well have cost them raised Iraqi oil production for another two years.

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