Iraq cuts interim contract term to one year

Iraqi oil minister Hussein Shahristani has told the oil ministry's licensing directorate to reduce the duration of the short-term technical service agreements being negotiated with international oil firms to one year from two, an informed source said July 1.

Companies which have submitted proposals for Technical Service Contracts covering six fields are BP (Rumaila), ExxonMobil (Zubair), Chevron/Total (West Qurna 1), Shell (Kirkuk), Shell/BHP (Meissan) and Anadarko/Vitol/Dome (Luhais).

Each contract requires investment of $500 million and aims to increase production by 100,000 b/d from each of the six designated fields.

Initial negotiations were for two-year contracts but Shahristani said recently that Iraq already had raised production from some of the fields and urged the companies to submit their bids by the end of June.

The source told Platts that the oil minister made the decision to cut the duration of the interim contracts after a press conference in Baghdad on June 30, when he announced the country's first post-war bid round offering long-term TSCs for six major oil producing fields and two gas fields.

The interim agreements were meant as a stop-gap measure to give Iraqi oil production a quick burst until the longer-term contracts are implemented.

Shahristani said at the news conference that the legal framework covering the bidding for the first-round fields would be sent in September to the 35 prequalified companies; he made no mention of the recently qualified six national state companies. The signing of the long-term TSCs is expected at the end of 2009, he said.

It is thought that the reason for cutting the life of the short-term TSCs is to enable the smooth transformation from the TSCs to the long-term contracts.

Shahristani named the fields included in the first licensing round to be developed further by the oil major as: Kirkuk and Bai Hassan in the north, and North and South Rumaila, West Qurna 1, Zubair and the Meissan fields (Buzurgan, Abu Gharab and Fakka) in the south.

The aim of the further development of these producing fields is to increase production by 1.5 million b/d, Shahristani said.

The gas fields in the first licensing round, which are to mainly provide natural gas to local power stations, were Akas in the western desert and Mansooriya northeast of Baghdad in central Iraq.

Total CEO Christophe de Margerie, whose company was shortlisted by Iraq for a TSC, said July 1 he welcomed Iraq's decision to open its upstream to foreign oil companies and said he could see Iraq producing 6 million b/d but could not say when.

"We are on the verge of signing service agreements with Iraq in partnership with Chevron for West Qurna," de Margerie told a news conference.

"We consider it is just a transitory contract and that is what we can do today with the problem of security to invest there with our own people. The idea of the contracts is to be an interim period during which you can help the Iraqi energy system develop reserves and increase production," de Margerie said, speaking on the sidelines of the World Petroleum Congress in Madrid.

"Today it is 2.5 million b/d, which is a good improvement on 1.6 million b/d not so long ago. I am very optimistic. I am sure one day we will see 6 million b/d in Iraq but when don't ask me. I can't tell you," he added.

De Margerie, however, said he believed a 2009 deadline for signing the longer-term agreements was "too short to invest in Iraq." The aim is to boost production by 1.5 million b/d from currently producing fields with the help of modern technology long denied the country while it was under UN sanctions during the Saddam Hussein regime, which ended with the US-led invasion of March 2003.

Rex Tillerson, CEO of ExxonMobil, also among the 35 shortlisted companies, said Iraq had the potential to produce higher volumes.

"There is no question that the Iraqi resource potential is there to support significantly higher volumes," he told the same news conference. "And it is important for Iraq to get started now to first restore production capacity that was once producing and is now no longer available due to maintenance and technical issues... I think the approach the Iraqis are taking is very sensible," Tillerson said.

But he added that the Iraqi government still had a lot of work to do on an oil and gas law. Political wrangling among Iraq's three main factions has held up passage of a federal oil and gas law through parliament and there has been no word from Baghdad that the impasse is close to ending.

"It is time to get started. It will have to be at a very measured pace...I am very hopeful for Iraq. I am glad to see that they are in a position now to get started. Whatever role we play now or in the future is entirely up to them," said Tillerson, who noted ExxonMobil could not be "on the ground" in Iraq for security reasons.

Created: July 3, 2008

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