Iraq Inks Deals With Cautious Oil Majors

(Dec. 11) -- Is Iraqi oil ready to flow again?

Two deals struck Friday with foreign energy companies to develop fields in Iraq demonstrate a renewed eagerness to exploit the country's vast petroleum reserves. But they also show the hurdles still hindering Baghdad's bid to again become a major oil producer.

Oil has been the main source of hope for Iraq's economic future to a succession of Iraqi leaders and their U.S. counterparts since the Bush administration ousted Saddam Hussein more than six years ago. But sanctions against the Hussein regime, along with the war itself and widespread looting, left the country's oil infrastructure in tatters. Any foreign firm that hadn't cleared out by the invasion was scared off by the bloody insurgency that followed, leaving Iraq financially dependent on Washington and other donors. In addition to the violence, the first post-Hussein governments' oil dealings were colored by suspicions in the Arab world and elsewhere that the U.S. had gone to war for the sake of oil. The most recent attempt to auction off development rights, earlier this year, drew scant bidding because of the steep prices sought by Baghdad.

The bidding that concluded Friday produced better, if mixed, results.

Royal Dutch Shell and Petronas, the state-owned Malaysian oil giant, won the bidding for Majnoon field, which holds an estimated 12.58 billion barrels. A second consortium led by Total, China National Petroleum Corp. and Petronas won the bid to develop the 4.1 billion-barrel Halfaya field.

The government got the best of the deal. The Shell-Petronas group agreed to accept just $1.39 per barrel produced at Majnoon, far less than what the major companies generally get for oil development in other countries. The bidders' willingness to accept that price shows how keen they are to get at least a toe in Iraq, which has the third largest known reserves in the world.

Shell-Petronas promised to take the Majnoon field from current production levels of 45,900 barrels a day to 1.8 million barrels in 10 years. The CNPC-Petronas-Total team offered to receive $1.40 per barrel, on the prospect of increasing the Halfaya production from the current 3,100 barrels per day to 535,000 barrels in 13 years, according to Oil Minister Hussain al-Shahristani, as quoted by The Associated Press.

Those deals will leave the lion's share of profit with the Iraqi government, which is almost exclusively funded by oil revenue and remains dependent on foreign companies' ability to develop its fields.

But driving a hard bargain didn't necessarily leave the Iraqi government flush. Majnoon and Halfaya were only two of eight fields in Friday's bidding; five drew no bids, and the remaining field attracted just one offer, which the government didn't accept. It's no coincidence that Majnoon and Halfaya are in the relatively peaceful south. The other fields are in regions where insurgent violence persists, a danger that was especially evident three days before the bidding, when bombings across Baghdad killed more than 120 people.

The government tried to play down the risks. Addressing bidders before the auction began, Prime Minister Nouri al-Maliki declared that "there is no security deterioration in Iraq even if a security violation took place here." But such reassurances apparently failed to persuade most oil company executives that the government's offers were worth the increased risk to workers and equipment still present in much of Iraq.

Shahristani, Iraq's oil minister, had promoted this round of bidding as a way to unlock up to an addition 2.6 billion barrels of oil per day for Iraq, more than doubling the country's current daily production of 2.5 billion barrels. But beyond those gains in production, a report last month by Cambridge Energy Research Associates found that recent discoveries of new oil fields could double Iraq's known oil reserves by 2020.

The mixed result of the bidding revealed the paradox Iraq faces as it tries to emerge from war. The government desperately needs more oil income to build its security forces and improve its infrastructure. But it needs that security and infrastructure to create a more hospitable environment for the companies that can help it tap that oil. Squaring that circle won't happen soon.