U.S. Oil Company and Iraq Government Struggle to Reach Contract in First Major Auction

The U.S.-led invasion of Iraq was widely perceived by critics as a war for oil. But as countries compete for the world's third largest oil reserves, a major U.S. oil company has turned down a lucrative oil deal with Iraq worth hundreds of billions of dollars in profits.

British Petroleum and China's CNPC won a contract Tuesday to develop the Rumaila oil field in Iraq -- the largest of the country's six oil fields in the the Shi'ite south estimated to hold 3.3 trillion cubic feet of oil reserves.

Foreign oil executives attended an auction at a Green Zone hotel for eight oil and gas fields in the country's first major energy contracts for almost four decades -- aimed at raising funds for reconstruction as the U.S. military withdraws from Iraq's cities.

The BP and Chinese deal came after an ExxonMobil-led group declined to accept the Iraqi government's proposed fee for the 17-billion barrel field, arguing the fee was too high and the payoff too low.  Foreign oil companies also have expressed concern over security risks within the country -- and some have questioned whether a contract eventually will be made void by a future government.

Iraq's oil industry endured years of neglect under Saddam Hussein's rule, and U.N. sanctions have long prevented the U.S. and Britain from sharing in the profits enjoyed by companies from France, Russia and China. After the U.S.-led invasion in 2003, U.S. advisors had a heavy hand in drafting Iraq's constitution to include language that guarantees a major role for foreign companies.

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 to repair an abysmal economy.

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.

Thirty-two firms, including the United States' ExxonMobil and Shell and companies from China and India, are vying for a service contract to develop oil and gas fields in Iraq, but so far no U.S. oil company has struck a deal.

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.

The White House declined Tuesday to comment on individual business decisions made by ExxonMobil.

In an e-mail statement sent to FOXNews.com, ExxonMobil reassured that the oil giant was actively engaged in contract negotiations -- though it said details of its global exploration program investment strategies are confidential.

"ExxonMobil has participated in the recent First Petroleum Licensing Round, and we are waiting on the government of Iraq to announce the awards," ExxonMobil spokesman Len D'Eramo said in a statement.

"Consistent with our long-standing global business strategy, ExxonMobil will pursue profitable business opportunities that meet our investment criteria as they arise in countries in which we are permitted to operate," D'Eramo said.

Despite intense competition to control Iraq's lucrative oil fields, some environmental groups say Tuesday's deal will put needed pressure on the U.S. to end its reliance on foreign oil and increase its development of alternative energy resources.

"Oil is not the future," said David Landecker, executive director of the Environmental Defense Center in Santa Barbara, Calif.  "Oil is our past and perhaps a good chunk of our present, but any enlightened view about the world's energy needs is going to include a diminished reliance on oil and petro-chemicals.  If this is going to force us to be more serious about investing in alternative energy, it's only advancing the inevitable."

The Associated Press contributed to this report.