Iraq’s oil ministry is reportedly in advanced talks with three to four IOCs – apparently Chevron, StatoilHydro, Total and one other – about a development contract for the 6.5billion-barrel Nahr Bin Umar field.
The ministry is also again trying to raise investor interest in its two ongoing licensing rounds. According to analyst AT IHS Global Insight, while IOCs still sound unconvinced that they will be able to make a profit in Iraq under the current licensing-round terms, news that Nahr Bin Umar is now being offered to such companies adds new questions as, in recent weeks, the field has been targeted for rapid development by Iraq’s state-owned South Oil Company. Moreover, SOC has tendered a drilling services contract.
IHS says that, with no clear bidding model contract drawn, it is hard to envision IOCs being able to structure their bids and submit them before the expiry of the first licensing round’s deadline this month.
“Meanwhile, it seems that the oil ministry is promising domestic groups that they may proceed alone on some fields while actually inviting investment regardless.”
As for Nahr Bin Umar, IHS believes this 6.5billion-barrel giant is being offered to several IOCs through what looks like a “bilateral bidding process” for a few chosen companies, with Chevron plus Total bidding in a consortium against StatoilHydro and the fourth unnamed company. Nahr Bin Umar currently produces about 50,000 barrels per day of oil, but could be up to 450,000bpd within a few years.
“The field has never been properly developed, with production after the 2003 invasion being as low as 10,000bpd before it was ramped up to current levels in late-2007 and early-2008,” says IHS.
“The field was expected to be part of the second licensing round … officially scheduled to be awarded by the end of the year (2009) … but late last year it was removed from the preliminary discussions in favour of including a host of smaller fields in Iraq’s border regions in order to bring about those fields’ rapid development and defuse fears that Iraq’s neighbours are stealing from its reserves. Nahr Bin Umar has, however, been singled out over the past few weeks as one of the fields to be targeted by a capacity-boosting programme pursued by domestic Iraqi capabilities in order to rapidly reverse the country’s sliding production decline.”
But IHS questions Iraq’s ability to undertake swift development after decades of political mismanagement, brain-drain and under-investment.
“Furthermore, the announcement of a 10-well drilling programme on the field (with a connected tender) – and political pressure from members of parliament and Kurdish factions to follow through on the Iraqi-only programme – renders news that the field is now being offered to IOCs confusing and politically controversial.
“The political process necessary to build IOC confidence in Iraqi contracts remains at an impasse, making it hard for IOCs to sign long-term contracts of questionable legitimacy. Improved terms are a necessity.”
While it seems that steps are being made in the right direction, “the irony is that, with every improvement of the terms in favour of IOCs, the terms become more politically controversial” in the eyes of Iraqis and their political machine.
“With a shaky legal basis for the deals in the absence of a national oil law, this could be a big problem when governments change during the course of the companies’ long-term contracts,” warns IHS.