Iraq Nears First Major Oil Deals With Western Companies Since War Began

Published June 19, 2008

| Associated Press

Iraq is on the verge of approving its first significant deals with major Western oil companies since the war began, the government said Thursday — a move that could give big firms like BP, Shell, ExxonMobil and Total an important boost as the country's oil industry expands and grows more lucrative.

The deals, expected to be signed by the end of June, are designed as an interim way to boost Iraq's oil output until the country can agree on a new national oil law, stalled by political squabbles among Sunnis, Shiites and Kurds.

But the deals also could create an important long-term preference for the big Western companies that win them, by providing a bidding advantage over others in future years.

Iraq's Oil Ministry spokesman would not name the companies set to get the deals.

But last December, four major companies — Royal Dutch Shell PLC, BP PLC, ExxonMobil Corp. and Chevron Corp. — submitted technical and financial proposals for the five oil fields and received counterproposals from the Iraqi side.

The New York Times reported Thursday that Shell, BP and Exxon Mobil, plus Total, were the four major companies close to signing deals, along with Chevron and some smaller companies.

Ministry spokesman Assem Jihad told The Associated Press in a telephone interview that the names would be announced June 30, after the proposals are sent to the Iraqi Cabinet for final approval.

The deals have been in the works since March, when Iraq's Cabinet gave the nod to the Oil Ministry to sign oil-services agreements worth around $500 million each.

A London-based spokesman for Shell, Adam Newton, said negotiations were ongoing but he declined to release more details, saying they were confidential.

Paris-based Total SA and Chevron also are in joint discussions with the Oil Ministry on a technical services agreement for the West Qurna stage one oil field.

The discussions are "to provide technical support for current operations," a company spokesman said, declining to give his name, citing office policy.

Without commenting directly on any negotiations, Texas-based ExxonMobil Corp. said it would be interested in participating if the Iraqi government decides it wants international oil companies to help develop the country's resources.

"At this time it would be premature to discuss specifics about any potential opportunity with Iraq," ExxonMobil spokesman L.A. D'Eramo said by telephone from in Houston.

The other companies could not immediately be reached.

Baghdad hopes the deals will soon add another 600,000 barrels a day of output to its current 2.5 million barrels a day. The deals are for oil services, such as providing technological help and access to specialized equipment. Such expertise would help Iraq's dormant or neglected fields get up and running more quickly and efficiently.

Jihad, the ministry spokesman, would not discuss details of the contracts but said the deals will be for two years, renewable for a third.

The Times reported that the first two years of the deals were issued on a no-bid basis. In the third year, the contracts would be opened to competitive bidding — but the original holders would have an advantage, through a clause that would allow them to match bids from competitors to retain the work, the Times reported.

It cited the Iraq country manager for a major firm, who spoke on condition of anonymity so as not to publicly discuss the terms.

Such a clause would give the original contract holders a leg up precisely when Iraq's oil industry is most likely to take off.

Muhammad-Ali Zainy, an energy analyst with the London-based Center for Global Energy Studies, said the deal is good for the companies involved because it would give them a headstart to tap into future oil rich with little risk.

"They would give the necessary technical direction and advice and ... procure equipment for the contracts. But those who carry out the work are the Iraqis themselves on the field so the companies will not be subject to any insecurity," he said. "In that process they probably will secure some kind of a foothold for deals to come in the future."

But Zainy said the oil law needs to be passed and security restored before the Iraqis can fully develop the oil industry.

"The main future problem will be probably security and political stability," he said. "Iraq is a lucrative place and there are plenty of reserves and many oil fields to be developed."

The deals take place against the backdrop of sky-high oil prices, caused in part by worries over long-term supplies and increasing demand by countries including China and Russia. As companies seek new sources of production, access to undeveloped oil fields is highly prized.

Oil prices were at about $136 per barrel in trading on Thursday.

Iraq sits on an estimated 115 billion barrels and it also has an estimated 112 trillion cubic feet of natural gas reserves, according to the ministry.

Production dropped sharply in the years after the 2003 U.S.-led invasion that toppled Saddam Hussein, but has bounced back a bit as violence has ebbed. Many fields still lie either unexplored or dormant and neglected, however.

The oil law — stalled for years — would set the rules for investors and foreign firms, and determine how oil revenues are shared and used. Its passage has been a key benchmark set by the Bush administration to achieve progress toward national reconciliation.

The re-entry by firms like ExxonMobil and BP would mark an important turning point in Iraq's oil industry, even though the first contracts are relatively small.

The predecessors of the four "majors," as they are called, first had a presence in Iraq in 1920 when they were the original partners in Iraq's Petroleum Company. They lost their licenses when Iraq's oil industry was nationalized in 1972.

Another ministry official, speaking on condition of anonymity because the information is sensitive, said Shell wants to develop the Missan and Kirkuk oil fields, while BP is interested in Rumaila, ExxonMobil in Zubair and Chevron in West Qurna stage 1.

The official added that the Australian BHP Billiton has joined talks through Shell, while French Total has joined through Chevron.

Anadarko, leading a consortium of Vitol Holding and the United Arab Emirates' Dome, has also joined these talks to develop Luhais oil field, he said.

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