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Iraq's attempt to bring foreign investors into oil industry comes up dry

Development deals were being sought for eight oil and gas fields. But at a widely anticipated (and televised) auction, international firms and the government are far apart on the price.

July 01, 2009|Liz Sly

BAGHDAD — A much ballyhooed effort by Iraq to lure foreign investment and expertise to help its battered oil industry fizzled Tuesday after it became clear that the government is not prepared to pay the prices international oil companies are asking for their services.

Iraq was seeking bids for the development of eight of its existing oil and gas fields, but only one contract to work one oil field was awarded at a public auction televised live from Baghdad's Rashid Hotel in the heavily fortified Green Zone.

The disappointing outcome to the widely anticipated event, which was planned a year ago, suggested that international oil firms aren't as eager to invest in Iraq as the government had hoped and that there will be no quick fix for the nation's looming financial problems.

"It's pretty much a total disaster," said Peter Kemp of the New York-based Energy Intelligence publishing group. "It seems the Iraqis totally miscalculated the commercial realities of this process."

The sole contract was awarded to a consortium led by Britain's BP and including China's CNPC International Ltd., marking the first time foreign companies have been permitted to invest in Iraqi oil since 1972, when the country's oil industry was nationalized. Iraqi Oil Minister Hussein Shahristani called it a "historic day" that coincided with the withdrawal of U.S. troops from Iraq's cities.

The auction drew dozens of executives from the world's top oil firms and was being closely watched for signs of how the new Iraq is likely to go about developing its vast proven oil reserves, the third-largest in the Middle East after Saudi Arabia and Iran.

But as the bids were unsealed, it quickly became clear that there was a wide gulf between the maximum price the Iraqi government was prepared to pay investors to develop the oil fields and the minimum price oil companies were prepared to accept.

A Chinese consortium sought 10 times the price offered by the Iraqi government to develop the Maysan field in southern Iraq, and a consortium led by U.S. oil giant ConocoPhillips sought five times more than the Iraqi offer to develop the Bai Hassan field in the north.

Under such contracts, oil companies would be paid a fixed fee per unit of oil or gas produced, above a certain threshold, in return for much-needed technical expertise and investment in infrastructure to increase production.

Four of the eight fields on offer received only one bid each, and a gas field in troubled Diyala province received no bids, indicating that oil companies are less keen to enter the potential quagmire of Iraq than had been anticipated, despite recent security improvements.

Shahristani acknowledged that oil companies investing in Iraq will need to pay hefty fees to security companies to ensure the safety of employees, which may explain why their prices were so high.

"Some of the oil companies are not very comfortable with the security situation, and this is why they didn't offer acceptable bids," he said.

The process also has been bitterly opposed by some Iraqi politicians, who believe that the fee structure being offered to foreign oil companies represents a surrender of national interests. Shahristani was under intense pressure not to concede too much, said Ruba Husari, founder of the Iraq Oil Forum website.

"In political terms, he can say it wasn't a sellout, that we did not give our oil fields to the international companies at any price," she said.

Shahristani said he thought the prices offered by the government were realistic but he also hinted at the political pressure, saying that his government had sought to balance a fair price for the oil companies with the need "to have a fair deal for the Iraqi people."

But Iraq is equally under pressure to do something to bolster its oil production, which has been sagging as the country's antiquated oil infrastructure erodes after decades of neglect. The government, which is running an $18-billion deficit this year, is being funded by surpluses accumulated in previous years, but it could face difficulties next year, officials say.

Shahristani said he was confident that the contract awarded would be enough to generate an extra $1.7 trillion over the next 30 years from southern Iraq's vast Rumaila oil field. But Husari said she thought the production targets set for the field were "overambitious."

Companies whose bids were rejected by the government were invited to resubmit their offers, which would then be considered by the Iraqi Cabinet. But it was unclear what the time frame would be, or whether a middle ground could be found given the differences that emerged.

The Oil Ministry also plans a second public auction by the end of the year, seeking investments in previously undeveloped oil fields.

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liz.sly@latimes.com

Times staff writer Caesar Ahmed contributed to this report.

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