Production sharing contracts (PSCs) could become a thing of the past if Iraq’s tough approach to striking deals with international oil companies (IOCs) seeking to exploit the country’s resources gains traction among national oil companies (NOCs), according to the Economist Intelligence Unit.
It was BP’s decision to bust the stalemate over Iraq’s fee-based approach and accept a deal with its Ministry of Oil two years ago that opened the door, the ECU said in research commissioned by engineering consultancy GL Noble Denton.
The tough fiscal terms on offer – CNPC and BP will receive just a $2 per barrel remuneration fee for Rumaila, while CNPC, Petronas and Total will get $1.40 per barrel for the Halfaya field in Iraq – are seen as an important pointer towards possible future ICO versus NOC relationships.
The fee-based approach would appear to have significant implications for offshore exploration and production, where PSCs between incumbent NOCs and the somewhat freebooting IOC community are the norm.
This is, in part, because of the growing number of resource-starved national companies stalking the planet for fresh opportunities. Also, many of the best offshore prospects are in the hands of NOCs – companies such as Sonangol, of Angola, Soacar, of Azerbaijan and Petrobras, of Brazil.
The latter is already thought to be considering adopting a fee-based approach to oil & gas resource exploitation contracts with IOCs.
ECU said of the situation in Iraq: “Asian NOCs tend to be prepared to accept lower rates of return than IOCs, and this has an influence on the negotiating stance of BP and others.
“Once BP broke the logjam and settled terms with Iraq’s Ministry of Oil in 2009 for the Rumaila development, the other companies soon followed with fee-based deals. This indicates a substantial change in the way big oil will develop future resource opportunities.
“This new fee-based Iraqi model – once seen as deeply unattractive compared to production-sharing contracts – may prove more tempting to IOCs in the future,” the ECU said.
Indeed, the ramifications of the Iraq service contracts could be substantial, according to Sadad Husseini, the former executive vice-president for E&P at Saudi Aramco, now an independent consultant.
He told the ECU: “The Iraq bidding process has set a new practice that states you can do business for a fee. It’s not unholy or something to be frowned upon if the rewards are attractive enough.
“Petrobras will start thinking about that and the Russians will be thinking about that. That’s been a subtle change we’ve seen unfolding here and it’s very logical – you have the technology and the opportunity.”
The ECU said such views were “clearly supported” by survey respondents. A majority expected the use of fee-based service contracts to increase in the coming months. Less than one in ten expected them to decrease.
Energy believes this may play in favour of powerful western contracts, a number of which are armed with most, if not all, the capabilities that an IOC can bring to bear except for one – access to big capital.
As well as competing, IOCs and Asian NOCs collaborate in key resource opportunities in the Middle East, putting into practice the Harvard Business School theory of competitive collaboration, going by the unfortunate neologism, “coopetition”.
In Iraq, China National Petroleum Corporation and Petronas (Malaysia) both won substantial stakes in five fields in Iraq’s first two licensing rounds, securing recoverable crude resources estimated at 13billion barrels.
The ECU said: “The two NOCs joined with BP and Shell, respectively, in Iraq, forming formidable IOC-INOC partnerships that represent a potentially seismic change in the relationship between resource holders and foreign oil companies.
“BP’s action plan with CNPC on the super-giant Rumaila field in southern Iraq aims to reverse decline, and bring it to an output of 2.85million barrels per day within seven years, spending at least $15billion in the process.
“For CNPC, the service contract with BP is a model for its future overseas involvement, granting it a sizeable contract where it can develop its own technical skills through exposure to the IOC partner.
“There remains a substantial role for IOCs, even if the terms and conditions are tougher and the opportunities more difficult and complex to access.”