Iraq's First Oil Auction Sputters

Government Counted on Foreign Bids For Licenses, But Just One Deal Struck

(AP)  Iraq's hopes for an oil-revenue fueled postwar recovery suffered a sharp blow Tuesday as the foreign oil companies it counted on to help develop its vast reserves greeted the country's first oil auction in over 30 years with grumbles and just one deal.

Roughly a year in the making, the foreign licensing round was touted by Oil Minister Hussain al-Shahristani as a key step to boosting Iraq's oil output to 4 million barrels per day and raking in cash the government desperately needs after years of sanctions and the U.S.-led invasion in 2003 left its economy in shambles.

But the process has been criticized inside the country from the start, and the poor showing at the televised event could offer opponents of the embattled al-Shahristani even more ammunition. It's the kind of political unrest that helped keep the companies at arms length, despite a shot at 43 billion of the country's 115 billion barrels of crude reserves.

"With this outcome, the Iraqi government becomes the desperate one," said Samuel Ciszuk, Mideast energy analyst for London-based IHS Global Insight. "Al-Shahristani has been very focused on this round, and criticized for ignoring everything else, including the easy repairs that could have been done over the past couple of years."

The televised event came as U.S. troops completed their withdrawal from Iraqi cities, handing over security of urban areas to their Iraqi counterparts. The development, hailed by Iraqis as a sovereignty milestone, likely served to only further raise questions among oil companies monitoring events around the country before committing to big projects.

From the first field offered, disputes over how much the companies would get for producing over a minimum output target cast a pall on the process.

Under the 20-year service contracts on offer, the companies would be paid a per barrel fee for any crude they produce in excess of a minimum production target. But the price requested by all the companies was at least twice as high - and in a couple of cases almost 10 times higher than what the oil ministry was willing to pay.

Two oil executives from different companies at the auction complained that Iraq was offering too little money given the prevailing security risks and political uncertainty. They also complained that they were not given enough time to revise their bids - sometimes as little as 15 to 30 minutes. Both spoke on condition of anonymity because of the sensitivity of the issue.

Chevron Corp., the second-largest U.S. oil company behind Exxon Mobil Corp., said it decided not to submit a bid in the opening round, but didn't rule out doing so in future auctions.

It said it opted out after a "careful evaluation of the opportunities against Chevron's standard investment criteria and our inventory of investment projects worldwide."

The first field on offer was the day's sole success story. But also underlined the government and the companies' widely differing expectations.

Two consortiums, headed by British giant BP and Exxon Mobil, submitted offers for the Rumaila oil field - the largest prize on offer with 17.8 billion barrels in crude reserves.

The Exxon Mobil-led consortium, which included Malaysia's Petronas, requested $4.80 per barrel for production over the minimum, while BP wanted $3.99 per barrel. The ministry was willing to pay $2 per barrel.

BP agreed to match the ministry's price and won the contract for Rumaila.

Exxon Mobil, in a move mirrored by other companies throughout the day, refused to revise its bid.

"Our numbers were not far from reality, and proof of that is that BP accepted our price for Rumaila," al-Shahristani said after the auction. He said he believed oil companies inflated their requests to cover security companies' fees.

But dollars aside, interest was much thinner than Iraqi officials anticipated.

"It's been nearly 40 years now that Iraq has failed to live up to its oil potential," said Daniel Yergin, a Pulitzer Prize winning author and chairman of IHS CERA, an energy consultancy. "It's not a foregone conclusion that these arrangements will, in themselves, do what needs to be done. It's only a beginning, and it's an uncertain beginning."

No bids were offered for the Mansouria gas field in Diyala province, home to some of Iraq's worst violence. Only one bid was submitted for each of the Bai Hassan and Kirkuk oil fields in the north, the Akkas gas field, and the Missan fields - three adjacent fields offered as one bloc.

China's CNOOC led the consortium bidding for Missan, and sought a payment of $21.40 per barrel over the baseline minimum output level. Iraq said it was willing to pay $2 per barrel.

The Zubair oil field attracted four consortiums, while the West Qurna Stage I field in the south drew interest from five groups led by France's Total, Russia's Lukoil, Spain's Repsol, Exxon and CNPC. Again, in the case of West Qurna, the bids were as much as 10 times more than what the government was willing to pay.

Officials had earlier said that any fields not agreed on would be re-offered in subsequent rounds. Al-Shahristani, however, said the top offers on all the non-awarded fields - except for Mansouria - would be presented to the cabinet for review.

The step was clearly aimed at saving the process. But it embraced the same solution that has stoked parliamentary ire.

Some lawmakers have argued that al-Shahristani's insistence on having the Cabinet approve the deals, instead of the parliament, would render the deals unconstitutional.

The political wrangling was largely an effort by the country's various political blocs to secure a stake in Iraq's oil fortunes.

But whatever its roots, the dispute has done little to calm international oil companies' angst.

The firms were already worried about Iraq's security situation, the lack of a new national oil law and the government's argument that deals struck independently with the semiautonomous Kurds in the north are illegal.

The poor showing Tuesday will do little to boost al-Shahristani's clout.

His critics have pointed to Iraq's inability to even reach its prewar production levels as evidence that he has failed in his job. Others gripe that the bidding round will open the door for an economic occupation of the country at a time when it is pulling away from the U.S. military presence that many in Iraq likened to military occupation.

The minister, however, has insisted he was working for the country's best interests. Iraqi officials have estimated that based on crude oil at $50 per barrel, the companies could have earned around $16 billion in total. Iraq, meanwhile, would have brought in over $1.7 trillion.

The company response to the bidding sends a clear signal to Iraq, said analysts.

It says "the companies will still be there, but they've made it clear what their baseline is, and that they can't go into the red even to get access to Iraqi oil," said Ciszuk. "The risks are just too great."

[apndrgn]

just read a book by michael crichton, eaters of the dead. You know Baghdad was know as the City of Peace in earlier times. To think that it might be a toilet is to misunderstand the white throne. Fertilizer is the primary product of the human world as far as sustaining organisms, trees, photosynthesizers, are concerned. A retaining wall is great, but if the tree is starving to death, it would just as soon eat poop and live with its roots exposed.

[whitemale08]

A classic example of how the Anglo-American dual world power works as the original purpose of the empire, the British East Company.

1. Overthrow Iran's government so British Petroleum can privatize their oil.

2. 1974 arm puppet Saddam Hussein with chemical weapons to topple Iran because British coup failed.

3. Give puppet Saddam Hussein the green-light to bust up Kuwaite and guarantee their oil to be forever traded on Wall Street/City of London.

4. De-stabalize Iraq and put sanctions but has the un-inntended consequence of Saddam nationalizing their oil and central bank.

3. British weapons company BAE funds Saudi charity originazation associated with CIA/MI6 Al Queada to shock-n-awe in 9/11 to invade Iraq.

4. Use partisan tools, like Druggie Limbaugh and junkyard dog Sean Hannity to lead young Americans to fight for the British Empire under a fake phony banner of 'Iraqi Freedom'.

4. After invading Iraq for the 2nd time, the British finally gets to privatize Iraq's central bank and has their newly installed puppets sell off Iraq's oil for pennies-on-the-dollar in depressed world economy.

Meanwhile Iraqis, who once made up a sophisticated and educated society, are now living back in the dark ages with berkas and daily violence that resembles the movies Mad Max and Children of Men.

[edward1975-2009]

With the political unrest, no company in their right mind would be willing to sent the equipment and manpower into this bomb waiting to go off. Within months of our departure, tribal leaders will again, create a country in conflict. This country and it's people will be in the midst of a civil war, until another lunatic is implanted as leader.

[anti-global2]

maybe it is because the country is a toilet, and it's peope are, well what you usually find in a toilet if you know what I mean. It is just one of many places in the world filled with stinky, dirty, uneducated, backward people. Now we know why Saddam did what he did. At least there was stability, and my U.S. dollars didn't have to pay for it.

[edward1975-2009]

Your US dollars are what installed him and his Baath party as the government of Iraq. Just as we had financed Bin Ladin against Russia in Afghanistan. All these people that we trained and armed, are now turning on us like rabid dogs. It's what happens when you crawl into bed with flea ridden vermin.

[formrusmcsgt]

Considering that Iraqis consider themselves Shia, Sunni, or Kurd first, Iraqis second, the nation remains a cobbled-together group of people who can't stand each other.

Not conducive to foreign investment, that's for sure.