A very dear piece of cake
Iraq oil: Dream investment or worst nightmare?
Analysts stress bidding foreign energy firms will either accept massive investment risks or give up lifetime opportunity.
By Prashant Rao - BAGHDAD
International energy firms thinking of bidding for a piece of Iraq's oil fields face a tough choice, analysts say. Either they accept the massive risks of investing in the still-fragile country or they give up the opportunity of a lifetime.
One analyst even likens it more to a marriage proposal than a business deal.
"You've got Iraq, you've got the best fields in the world, and in some respects, from an oil man's perspective, Iraq is the woman of your dreams," Alex Munton, Middle East analyst for research group Wood Mackenzie, said.
"But the wedding is going to cost a huge amount of money, and she has a lot of troubled relationships that you're going to have to deal with. What are you going to do?"
It is those "troubled relationships" that will give investors pause when deciding how much to bid, if at all, for service contracts offered by the Iraqi oil ministry on 10 fields in an auction that kicks off in Baghdad on Friday.
Though Iraq has the world's third-largest proven crude reserves, behind only Saudi Arabia and Iran, there has been little exploration or development of fields in the past three decades.
As a result, several of the fields on offer in the auction ending on Saturday are enormous. The two biggest, West Qurna-2 and Majnoon, have reserves of 12.9 billion and 12.6 billion barrels of oil respectively.
But concerns remain.
On Tuesday, coordinated bombings against mostly government targets in Baghdad killed 127 people and wounded around 450, the third such attack since August.
That was a grim reminder that insurgents remain capable of large-scale violence, and that security remains fragile.
In addition, exports of oil to the Turkish port of Ceyhan have been interrupted numerous times in recent months, most recently in November, because of sabotage against pipelines in northern Iraq.
Tuesday's violence "could increase the risk the companies factor in their assumptions of cost and return," said Ruba Husari, the Baghdad-based founder and editor of www.iraqoilforum.com. "But at the same time, it's worth noting that the fields' areas have been totally safe."
"Iraq sums up as a place of huge opportunity and big risk, and the oil business is always risky. It has never been risk-free."
Oil ministry spokesman Assem Jihad has insisted the attacks will not derail the bidding.
"Preparations for the auction are ongoing," he said. "The explosions will not have any effect on the procedures or the auction. In fact, there is an even stronger insistence that we hold the auction."
As if to complicate the situation further, Iraq is also waiting on a key hydrocarbons law, discussion of which has been delayed until after elections slated for March 7.
Adoption of the law, which would regulate the sector and divide responsibility between Baghdad and Iraq's provinces, has been held up for three years due to disagreements between MPs from the country's various communities.
Foreign firms might also be dissuaded by the small profit margins that Iraq's service contracts offer. Successful companies will be paid a fixed fee per barrel, not a share of the profits, and the fee will only be paid once an agreed production threshold is reached.
It was the disparity between the Iraqi government's offered fee and the bids from foreign energy companies that led to only one deal being agreed during the first such auction in June, though two more have since been reached.
However, Baghdad is likely to be buoyed by increased participation from Asian energy companies, which are more willing to accept tighter margins, said Samuel Cizsuk at IHS Global Insight in London.
"The Chinese companies and Indian companies and some other Asian IOCs (international oil companies) or NOCs (national oil companies) are likely to bid very strongly," he said.
"These companies, especially the Chinese companies, have a willingness to accept much lower profit margins than the Western companies."
In this week's auction, the ministry will open bidding on fields one at a time. When a field is called out, investors will be invited to drop envelopes with details of their bids in a box.
The ministry will then open the envelopes and assign a score to each bid, depending on the fee each firm requests and the output it says it can produce.
The firm with the highest score will then have its fee compared to what the ministry is willing to pay, and if its bid is accepted, the company will have a brief period to consider whether or not to go ahead with the deal.
