Iraq's Oil-Field Auction Falls Short

BP and its Chinese partner win a deal to develop the prized Rumaila field, but tough Iraqi bargaining deters other oil giants

By Stanley Reed

Iraq's historic auction on June 30 of contracts to develop major oil fields has not gone according to plan. So far, only BP (BP) and Chinese partner CNPC have struck a deal on Rumaila, Iraq's most important field. Seven other oil and gas fields went begging as the world's biggest oil companies shied away from tough Iraqi terms and political and business risks. "This is very, very disappointing for the Iraqis," says Samuel Ciszuk, an analyst at IHS Global Insight (IHS) in London.

The Iraqis certainly hoped for more. Their consolation is that if the Rumaila project succeeds, it will be hugely important to the country. A revived Rumaila field would more than double Iraq's oil production, currently around 2.5 million barrels per day. The aim is to bring the field, which lies under palm groves in steamy southern Iraq, not far from the Kuwait border, to 2.85 million barrels per day, making it one of the most prolific in the world. Currently it is producing just under 1 million barrels per day.

So why weren't deals reached on other fields? Though the likes of Royal Dutch Shell (RDSA) and BP have assiduously cultivated the Iraqis and tried to win their confidence through training and other help since the fall of Saddam Hussein in 2003, the Iraqis are almost paranoid about being taken for a ride. They drove a hard bargain, forcing the companies into the role of service contractors—not the equity investors they prefer to be. Edinburgh energy consultant Wood Mackenzie estimates that BP will need to spend $15 billion to $20 billion developing Rumaila, including a $500 million signing bonus. The Iraqis will pay BP only a skinflint $2 per barrel for every barrel the British oil giant produces at Rumaila above around 1 million barrels per day.

ExxonMobil, ConocoPhillips Rejected

BP wanted to be paid $3.99 per barrel, and ExxonMobil (XOM), whose overall bid the Iraqis preferred, wanted $4.80. But BP landed the deal by agreeing to the Iraqis' demands, while Exxon walked away. "It is economically viable but with a very narrow profit margin," says Wood Mackenzie analyst Alex Munton. (The Oil Ministry's official statement concerning the bids can be found here.)

Other fields attracted no bids at all—or the gaps between what companies bid and what the Iraqis wanted were huge. For instance, for Bai Hassan, a 2.3 billion-barrel field farther north, a group led by ConocoPhillips (COP) wanted $26.70 per barrel for their work. The Iraqis would stump up only $4.00.

The auction results are likely to increase frustration in Baghdad with the stagnation of Iraq's oil industry, the crown jewel of the economy. Because of political infighting, lack of security, and division about whether it needs foreign help, Baghdad is missing out on tens of billions of dollars in revenue by not taking the steps it needs to get production up.

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