Face-Saving Exercise Begins as Iraq Mulls Aftermath of Failed Bidding Round

Saving Face

Iraq's Prime Minister Nuri al-Maliki yesterday told Agence France-Presse (AFP) that "we cannot talk about failure" regarding Iraq's first upstream biding round, adding that "some companies succeeded, others did not. The oil ministry will think about how to exploit the oil resources of Iraq". His comments were among strikingly few official comments emanating from the Iraqi Oil Ministry and cabinet about the tepid results of the first bidding round, in which six oilfields and two undeveloped gas fields—some among the country's largest—were offered to investors under highly restrictive technical service agreements (see Iraq: 1 July 2009: First Upstream Bidding in Iraq Disappoints and Iraq: 29 June 2009: Iraq Readies for Record Licensing Round Launch, with Last-Minute Hiccup).

From the initially quiet reactions in Iraq, it seems evident that most Iraqis—in both the pro- and anti-international upstream investment camps—were truly stunned by the low turnout. The general assumption was that Iraq's vast resources and large low-production-cost fields would attract a host of competing bidders virtually no matter how restrictive Iraq's investment terms. The notion that IOCs and NOCs prequalified for bidding would largely shun the offered contracts, or that the bids submitted would be so far from the government's required maximum production cost, seems genuinely to have been completely discounted by most political factions in the run-up to the auction.

With the government now trying to mitigate the criticism about to be levelled against it for having put virtually all of Iraq's hydrocarbon development strategy eggs in one basket, it is likely to attempt to paint the auction in a nationalistic light, portraying the low result as the government not caving in to IOC and NOC demands for far too high shares of the profits rightly belonging to the Iraqi people. While there is certainly a lot of resonance for that message throughout the Iraqi polity, the question of how Iraq should now proceed without the massive upstream investment that the bidders were being counted on to bring in will not be far away. Oil Minister Hussein al-Shahristani has already found himself under heavy criticism from different Iraqi political factions over the past six to nine months for having neglected quick and relatively easy repairs and developments on Iraq's massive producing fields and focusing too much on the licensing-round strategy as a means to all ends. He only agreed to the launch of a host of emergency projects using Iraq's own stretched domestic capabilities grudgingly earlier this year (see Iraq: 4 March 2009: Government Hopes Two-Pronged Oil Strategy Will Not Discourage IOC Investment in Iraq and Iraq: 13 February 2009: Oil Future Set to Move Up Iraq's Political Agenda as Oil Ministry's Vision Attacked).

Al-Shahristani will surely find himself under attack soon enough for the failure of a strategy into which he invested all his credibility, but given the support and protection given by al-Maliki over the past months, the prime minister is also unlikely to be able to place himself above the fray when oil issues are discussed—as he has before—when the political debate in the country starts to gear up for the forthcoming parliamentary elections.

Keep Moving, Don't Stand Still

While some development is getting under way at a few of Iraq's important producers, there is still a complete lack of a comprehensive development strategy in the country. Attaining Iraq's ambitious output targets—from today's 2.4 million b/d to 4 million b/d in two years' time and 6 million b/d by 2013—will not only require massive investments, which will not now come from foreign sources, but also a huge project launch and co-ordination effort, which the Oil Ministry and national oil industry lack the sufficient capabilities to project-manage. After decades of war, sanctions, and brain-drain, Iraq has too small a skilled workforce on all levels of its hydrocarbons industry, and those remaining in the country face huge deficits in technology, having been isolated from the last few decades of almost revolutionary technological evolution within the global oil and gas industry. Some help to attain the goals might be given by the BP and CNPC consortium's ambitious development of the Rumaila field, the only project taken in the first licensing round, where the companies said they were ready to far surpass the government's target of attaining 1.75 million b/d by lifting production to 2.85 million b/d. Given Iraq's current track record the project cannot be relied upon to begin just yet, as there are still hurdles to clear and political groupings in parliament that have promised to fight the contract.

Meanwhile, information seems to point towards the Nassiriya field mini-auction being further delayed, with the parties being "nowhere near an agreement", according to a Dow Jones interview with a senior official in Japan's Ministry of Economy, Trade and Industry today. The award of a development contract in the Nassiriya tender has been delayed since March, and although there is no official comment from Iraq or the bidders about the reasons, the large discrepancies between company bids and government demands in the first bidding round this week suggest that a similar situation exists in the negotiations over the Nassiriya field (see Iraq: 24 June 2009: Iraqi Oil Minister Under Fire; Nassiriya Tender Delayed Further).

Outlook and Implications

The second licensing round is now held aloft by the prime minister and the Oil Ministry as the next move, but all things being equal there is no reason to believe the offering of 11 significant Iraqi fields will fare any better than those in the first round, unless terms in Iraq are improved (see Iraq: 7 January 2009: Second Upstream Licensing Round in Iraq Clarified). Without Iraq offering a better risk/reward ratio to investors it will have to undertake all investment and development itself—a process that will be slow, laborious, and under-funded, and will result in volumes nowhere near those targeted and years from their hoped-for schedule.

Iraq needs to look not only at the reward side of its offering, however; it can make significant progress on lowering the investor risks. The government needs to direct its attention to passing a national hydrocarbons law in order to lay down a clear legal framework for the deals and give them greater political legitimacy than what is just—effectively—a mere pledge of contract allegiance from the currently serving ministers. This would also lower the political risk in Iraq, as the law in itself would require some form of broader political understanding between the leading factions and thereby to some extent bind much of Iraq's political forces into taking responsibility for long-term hydrocarbon policy. The process would take time, but automatically also allow potential investors to see the result of the forthcoming January/February 2010 parliamentary elections, and better assess Iraq's long-term direction, before any new licensing begins.

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