Tags: Iraq, Lukoil, Oil, Oil Prices, Peak Oil, Petronas, Royal Dutch Shell, Statoil Hydro ASA

If U.S. Oil Companies Aren't Winning Bids in Iraq, Who Is?

By , Money Morning •

Iraq has auctioned off more proven oil reserves in the past six months than are collectively held by the United States, Mexico, and the United Kingdom.

But U.S. oil companies have signed surprisingly few development contracts – foreign rivals have swooped in to scoop up major deals.

Take last weekend, when Iraq wrapped up the biggest oil-field auction in history. Major new deals were announced by Europe's Royal Dutch Shell PLC (NYSE: RDS.A , RDS.B), OAO Gazprom (OTC ADR: OGZPY), Lukoil (OTC ADR: LUKOY), China's China National Petroleum Corp. (CNPC), and Malaysia's Petroliam Nasional Berhad (Petronas).

The U.S. oil majors – ExxonMobil Corp. (NYSE: XOM), ConocoPhillips (NYSE: COP) and Chevron Corp. (NYSE: CVX) – were nowhere to be seen.

In fact, of the more than 40 companies to take part in the licensing round, only seven firms present at the auction were American and only one actually entered a bid.

"We haven't really seen U.S. companies, and that is because of intense competition," said Thamir Ghadhban, a prime ministerial adviser and former oil minister. "The issue is financial and technical and not at all political. This confirms Iraq can manage its oil policy and activities without politicization."

At a time when concerns about the long-term viability of the world's oil supplies have started to escalate, some industry observers had feared that the underlying goal of U.S.-led invasion of Iraq was to gain control of that Middle Eastern country's oil reserves. But Lukoil, Petronas, Shell, and Norway's Statoil Hydro ASA (ADR NUSE: STO) – not U.S. Big Oil – were the big winners when the bidding closed Saturday.

Lukoil and Statoil will redevelop West Qurna-2 for a production fee of $1.15 per barrel. That's significantly lower than the $1.90 a barrel the government sought in its June licensing round, which was the first since the 2003 U.S. invasion.

West Qurna-2 is believed to hold more than 12 billion barrels of oil reserves. At current rates of consumption, that's about how much oil the United States uses in a 600-day period.

"We are going to make a profit out of West Qurna Phase 2," said Torgeir Kydland, Statoil's senior vice president for international exploration and production in the Middle East. "We're glad we won the field."


Meanwhile, the rights to develop Majnoon, a similar-sized oil field, were awarded to Royal Dutch Shell and Petronas. Petronas, Malaysia's state-owned oil company, is headquartered in the world's tallest twin buildings, the Petronas Twin Towers in Kuala Lumpur. In addition to the Majnoon field, Petronas will be cooperating with other global oil companies on the Halfaya, Garraf, and Badra fields.

Malaysia isn't the only Asian player making a splash in Iraq's energy sector either. Petronas will join France's Total SA (NYSE ADR: TOT) and CNPC on the Halfaya field, which has proven reserves of 4.1 billion barrels.

CNPC in the first licensing round in June joined British oil giant BP PLC (NYSE ADR: BP) as the first companies to win an Iraqi oil contract in more than three decades. The two oil giants signed a deal giving them the rights to Iraq's Rumaila field, one of the nation's largest 17.7 billion barrels of proven reserves.

Under terms of the 20-year contract, BP and CNPC have six years to boost the field's production to 2.85 billion barrels per day (bpd).

Some analysts have suggested that Western oil majors have not been active in Iraq because they aren't satisfied with the terms being offered. That is, foreign oil majors will be paid a fixed fee per barrel of oil produced, as opposed to sharing in the profits of the oil's sale. And that fee will only be paid when the operated field reaches a production quota set by the government.

CNPC and BP, for instance, will be paid $2.00 for every barrel of oil they produce beyond current levels.

On the other hand, ConocoPhillips (NYSE: COP) reportedly wanted $26.70 per barrel to work the Bai Hassan oil field, but the Iraqi government only offered the company $4.00 per barrel.

Security is also an issue. Some Western oil companies are more reluctant to put their money, or their employees, in a politically volatile nation.

"Politics – international, domestic, ethnic and party-based – has dominated every aspect of discussions of Iraq's post-invasion oil development," the Middle East Economic Survey (MEES) said in its weekly newsletter. "Given the size of the potential revenues at stake this was probably inevitable. But in the end the oil development itself and by extension that of Iraq's economy, will probably suffer."

Ethnic feuds, political strife, underdeveloped infrastructure, and a lack of domestic support have left most Western oil majors "unimpressed" by the prospects awaiting them in Iraq, MEES said.

However, smaller oil companies in fast growing emerging markets aren't quite so particular. Many of them are state-owned – and thus influenced by government policy objectives – and they are running out of places to find accessible oil reserves.

Exploration costs have more than quadrupled since 2000, as oil producers have been forced to take on more complex projects, and the costs of both labor and materials have skyrocketed.

But for all its shortcomings, Iraq offers the world's third-largest oil reserves with about 115 billion barrels of black gold bubbling within its borders.

Additionally, many analysts believe Iraq will soon leapfrog Iran, which has about 137 billion barrels of proven reserves.

While the country boasts proven petroleum reserves of 115 billion barrels, the Energy Information Administration (EIA) estimates that up to 90% of the country remains unexplored. Only 2,000 wells have been drilled in Iraq, versus approximately 1 million in the state of Texas alone. Iraq could easily have another 100 billion barrels of oil buried beneath its uncharted territories.

Indeed, the nation that currently produces just 2.5 million barrels of oil a day hopes to be pumping 12 million barrels daily within the next few years, said Hussein al-Shaharistani, Iraq's oil minister.

After the recent bidding round, which Shahristani described as "very successful," the Iraqi oil minister underpinned his optimism by acknowledging his country would soon be willing to discuss compliance with the quotas set by the Organization of Petroleum Exporting Countries (OPEC).

Iraq, which is a member of the crude cartel, has been exempt from oil production quotas as it rebuilds its political and economic infrastructure. But as it takes its place back among the world's top oil producers, the country will have to make the transition back into OPEC compliance.

"Iraq is a very active member of OPEC," said Shahristani. "We will be coordinating with its effort to make sure Iraq and all other countries can maximize the revenues from oil sales."

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