Iraq's fourth postwar energy auction got off to a disappointing start Wednesday with only one of six offered deals for oil and natural gas exploration ending with a successful bid by a Kuwaiti-led energy consortium.
Four deals attacted no bidders and a fifth for oil exploration in southern Iraq was withdrawn when a British-led consortium sought nearly double the government's proposed payment of $5 per for each barrel of oil equivalent.
Wednesday's lack of interest was a blow to Iraq's attempts to attract foreign investment and build up its energy sector hit by years of neglect and violence, including the turmoil following Saddam Hussein's 2003 ouster. Iraq holds the world's fourth largest oil reserves and oil revenues make up nearly 95 percent of the country's budget.
In the current energy auction, 12 exploration blocks in different areas of Iraq are on offer over two days, with 39 foreign energy companies registered to compete.
Offering a possible explanation for Wednesday's poor showing, senior Oil Ministry official Abdul-Mahdi al-Ameedi said energy companies told him that the contract terms were problematic. Iraqi officials have said the terms would not be revised.
"We believe that the contracts are balanced and can achieve benefits for both sides," al-Ameedi told reporters. "It sounds like the companies were ambitious to achieve better contract guarantees."
The Iraqi oil minister, Abdul-Karim Elaibi, said that if Thursday's auction also attracts little interest, Iraqi companies would explore those lots.
In the current bidding, conditions appeared less attractive for foreign firms than in three previous rounds held since 2009.
Only areas with undetermined hydrocarbon resources are on offer, while previously the rights to known big and medium oil and gas fields were being auctioned off. Operating costs for energy companies could be high because most of the 12 exploration blocks are in remote and unsafe areas and lack infrastructure.
The government also added a clause for the first time that prevents companies from signing deals with regional authorities without the approval of the central government in Baghdad. Companies that violate the clause will have their contracts terminated, said Sabah al-Saidi, the deputy head of the Oil Ministry's Licensing and Petroleum Contracts department.
The new clause came in response to Exxon Mobil's bold move last year to sign six deals with Iraq's northern self-ruled Kurdish region without Baghdad's approval. In return, Baghdad banned the Texas-based company from taking part in the current bidding, but kept a deal to develop the 8.6-billion-barrel West Qurna Phase One oil field in the south.
In Wednesday's auction, the only successful bid was made by Kuwait Energy and its partners, Turkey's TPAO and the UAE's Dragon Oil. The group won the rights to explore a 900-square-kilometer (350-square-mile) area in oil-rich southern Basra province. It will be paid $6.24 for each barrel of oil equivalent they find.
An unsuccessful bid was made for oil exploration in an 8,000-square-kilometer (3,100-square-mile) area in the southern Muthana and Najaf provinces. A consortium led by UK's Premier sought $9.85 for each barrel of oil equivalent, but the government only offered to pay $5 per barrel and withdrew the lot. The consortium also included Vietnam's PetroVietnam and Russia's Bashneft.
Iraq is offering the energy companies service contracts in which they will be paid a flat fee, rather than the more lucrative production-sharing contracts in which they receive a share of the hydrocarbons found.
Four other exploration blocks attracted no bidders. Government officials said two of the lots for natural gas exploration would be offered again Thursday, but did not name the companies.
The Iraqi Oil Ministry had approved 47 international energy companies to participate, but only 39 companies paid the participation fee.
Top among the approved companies are the Anglo-Dutch Royal Dutch Shell, UK's BP, Chevron and Occidental of the U.S., China's CNOOC and CNPC, Japan's Japex, Russia's Lukoil and others.
The blocks had been expected to add about 29 trillion cubic feet of natural gas to the current 126.7 trillion cubic feet in reserves, and about 10 billion barrels of oil to the current proven 143.1 billion barrels of proven reserves.
Nearly 70 percent of them hold natural gas and the rest a combination of oil and gas.
Five of the blocks are in Iraq's western Anbar province or shared between Anbar and neighboring provinces; two are in the northern Ninevah province; one is shared between central Diyala province and neighboring Wasit province while the rest are scattered throughout southern Iraq.
Since 2008, Iraq has awarded 15 oil and gas deals to international energy companies, the first major investments in the country's energy industry in more than three decades.
The goal was to boost daily production from about 3 million barrels now to 12 million barrels by 2017. But Iraq is mulling whether the target should be revised downward to fewer than 10 million barrels, considering a possible drop in demand on oil in the international market and infrastructure bottlenecks.