Concern Over Iraqi Oil Bids

APS Diplomat Operations in Oil Diplomacy, Jan 26, 2009

There are mounting concerns over interest in Baghdad's first field two rounds of international bidding launched in 2008, one for TSAs launched in June and the other for engineering, procurement and construction contracts (EPCCs) launched later last year. With Middle East sour crude oils at the $30-40/b mark, not all IOCs are going to proceed with what remains a very risky play.

Several prominent IOCs pre-qualified to bid in the two rounds warn they will not proceed with firm bids. Senior Asian and Western executives say the oil glut and an unprecedented global squeeze on bank credits are deterring them from making offers.

This raises significant doubts over Baghdad's ability to attract much-needed investment and expertise from Western oil majors. The problem is that the terms in TSAs and EPCCs on offer to IOCs to develop fields already discovered are not attractive enough for banks worldwide to bend the rule and fund their projects in Iraq, whose security situation remains risky despite major improvements since late 2006.

In two bidding rounds launched in 2008, the Oil Ministry offered TSAs for six oilfields and two gas fields, and EPCCs for another 11 fields. The difference between the TSAs and EPCCs is considerable.

The TSAs are for up to 20 years and carry risks, while the service fee is fixed. The Oil Ministry has pre-qualified 35 IOCs to bid. Several IOCs say the fee is too low, in view of the difficulty of most companies to raise the capital required for the projects from the banks, in view of a global credit crunch. In many cases bank loans have become too high. Many international banks are refusing to lend for projects in Iraq also in view of the security risks, which remain high.

The EPCCs are turnkey jobs, at a fixed price, which only last until the project has been completed under the terms of the contract. But even this category of contracts is no longer attractive because IOCs cannot raise the money unless the EPC cost estimates made by the Oil Ministry have been raised.

(This part 35a covers the policy issues related to these two categories of oil and gas development projects and the way they are being promoted from the Iraqi side, as well as a new regional environment caused by the severity of the global economic recession. Details on the TSAs and EPCCs, their award and the IOCs involved both in the bidding process and in those projects which have been contracted are covered in Part 35b in ood2-IraqOil-2-Feb2-09).

In Iraq, meanwhile, there is a money war between the pro-Iran groups and the pro-US/EU/Arab groups - among both the Shi'ite and Sunni Arabs of the country and among the Kurds in the autonomous north which is ruled by the Kurdistan Regional Government (KRG). A confrontation between the KRG and the Maleki government over the oil-rich region of Kirkuk could help the US forces stay in Iraq for many years beyond the end-2011 deadline under the Status of Forces Agreement (SOFA) signed in Baghdad on Dec. 14, 2008, between President Bush and PM Maleki.

This money war has major implications for the country's petroleum sector. The global recession has caused prices of commodities, including crude oil and refined petroleum products, to collapse. As a result, project costs around the world have fallen sharply. But for the petroleum sector, project costs have not fallen to the same extent and contractors have been complaining that prices for some of the materials have not fallen as steeply and the cost of human resources in the Middle East has remained relatively high.

As a result, the people in charge of the upstream sector at the Iraqi Oil Ministry have become somewhat confused, particularly with regard to evaluating the costs of projects requiring EPCCs. Even projects under the TSA category have been affected. The uncertainly caused by these factors have added to problems, leading to further delays in project movement.

Another negative factor is competition from Iran in efforts to attract IOCs from Asia, Russia and other non-Western parts of the world. Although Iraq remains relatively more attractive than Iran in terms of incentives on offer, Tehran now is trying harder to rule such companies to its country.

The Tehran effort is intensifying in view of severe problems encountered by Iran's imploding economy, as a result of falling oil prices and high spending being continued by the government of Mahmoud Ahmadi-Nejad, who is seeking to boost his popularity in his effort to gain a second term in the country's June 12 presidential elections (as explained in news4ObamaOilJan26-09).

The intensification of Tehran's competition in E&P offerings also has resulted from a drastic change in the position of most politicians in Iraq in favour of secular currents. Even Iraq's Shi'ite Arabs disillusioned with their religious politicians have switched to secularism. This has affected Iran's power base in the country. Iran has been capitalising on the sectarian element of Iraqi society in its attempt to control the country. The shift from sectarian to secular currents is expected to have a major impact on local elections in 14 of Iraq's 18 provinces due on Jan. 31.