Scrambling for Iraq's Oil - Independent (UK) 23 Feb 2007

[Ralph Johansen <mdriscoll@xxxxxxxxxxxxx>]

In case we were wondering, the Independent explains why big oil decided
Saddam had to go: "it is thought that its actual reserves could be
anywhere up to 300 billion barrels - which would make it bigger than
Saudi Arabia .... '*Iraq has 70 discovered, undeveloped fields. You'd
die for any one of them. Even the small ones have a billion barrels. If
this isn't the holy grail, it's right next door to it' .*... *The PSAs
are the deals most favoured by big oil, as they allow the foreign
company to book the reserves. *"It costs $1 a barrel to get oil out in
Iraq. If you're getting $60 for it, that's good economics..." The law
awards much power to the regions for negotiating contracts ... and one
that he believes will play into the fracturing of Iraq .... Saddam
Hussein cut Iraq off from foreign oil technology, first by pursuing the
war with Iran in the 1980s, then the international sanctions of the
1990s. Advanced oil recovery techniques, such as water injection, passed
the country by."


 Scramble for Iraq's oil begins


     By Saeed Shah


       The Independent (UK): 23 February 2007
       http://news.independent.co.uk/business/analysis_and_features/article2296884.ece
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*We are about to find out if the invasion of Iraq really was a war for
oil.* The country is on the verge of passing a petroleum law, which will
set down rules for investing in its oil industry. That will set off a
race among the foreign oil giants, scrambling for their slice of Iraq's
vast oil riches. Britain's two world-leading oil companies, BP and
Shell, both say they want to enter Iraq. Exxon, ConocoPhillips, Total,
Russia's Lukoil and the Chinese will also form part of the rush.

Even while the security situation in Iraq remains dire, it seems the
prize will be just too great for the oil majors to resist. The country
has proven reserves of 115 billion barrels of oil, around the same as
Iran, but it is thought that its actual reserves could be anywhere up to
300 billion barrels - which would make it bigger than Saudi Arabia. Much
of the west of Iraq remains unexplored.

John Teeling, chairman of Petrel Resources, the explorer listed on
London's AIM market which has had interests in Iraq since 1997, says:*
"Iraq has 70 discovered, undeveloped fields. You'd die for any one of
them. Even the small ones have a billion barrels. If this isn't the holy
grail, it's right next door to it."*

It is hard to exaggerate the scale of the opportunity in Iraq,
especially given the fact that foreign companies are, essentially, shut
out of the rest of the Middle East and Russia is increasingly hostile to
international players.

"It costs $1 a barrel to get oil out in Iraq. If you're getting $60 for
it, that's good economics. You don't have to go to Harvard to figure
that out," Mr Teeling says.

War-torn Iraq is currently producing less than 2 million barrels a day,
well down on the 2.8 million barrels before the 2003 invasion by the US
and Britain.

Tariq Shafiq, a former executive in the Iraq National Oil company and
one of the experts called in to draft the country's petroleum law, says
Iraq could "very easily" get to 3.5 million barrels a day. He says it is
"physically" capable of producing 10 million barrels a day - around the
current output levels of Saudi Arabia, the pre-eminent producer today.

Mr Shafiq, who now works for the consultants Petrolog & Associates, says
that foreign involvement in Iraq's oil industry is needed for its
technical knowledge, not capital - given the high price of oil,
investment is pretty much self-financing. "Iraq has been left behind,"
he says.

The former president Saddam Hussein cut Iraq off from foreign oil
technology, first by pursuing the war with Iran in the 1980s, then the
international sanctions of the 1990s. Advanced oil recovery techniques,
such as water injection, passed the country by.

*The petroleum law, which is now in its third draft and is expected to
go before the Iraqi parliament soon, allows wide-ranging and deep
involvement in the sector. It envisages three types of international
contract - buy-backs, production-sharing agreements (PSAs) and service
contracts.*

*The PSAs are the deals most favoured by big oil, as they allow the
foreign company to book the reserves. Buy-back contracts typically
require upfront investment from the international company, with a
guaranteed rate of return to repay the money.*

Mr Shafiq says that the draft law does not specify a figure for the
permitted rate of return, it talks of a "fair" return. This he
interprets as being no more than 20 per cent.

The law awards much power to the regions for negotiating contracts, with
the central government given an oversight role, a feature that did not
exist in the Mr Shafiq's original draft and one that he believes will
play into the fracturing of Iraq. However, the oil revenues will be
shared between the provinces, according to their populations, not their
oil resources - that gives the oil-poor Sunni areas a big stake in the
success of the industry.

While the oil industry's majors and super-majors are not currently in
Iraq, the minnows such as Petrel and the Norwegian group DNO, which is
actually producing oil in the relatively safe Kurdish north, have shown
that it is possible to operate in the country.

*The lack of a law setting out the rules for the oil industry and the
extreme security problems have kept the big operators formally away. But
they have been active behind the scenes and, once the petroleum law is
enacted, it is expected that all of them will rush to the Iraq oil
ministry's negotiating table.*

Shell and BP, for instance, have obtained precious knowledge of two of
Iraq's biggest oilfields by providing free assistance. These projects do
not involve having company personnel on the ground in Iraq. BP has
studied the reservoir data from the Rumaila field in the south, to
advise on how to maximise future production.

BP says: "Once the security situation permits, and the Iraqis seek
assistance, we would consider opportunities there, as we would elsewhere
in the world."

Shell is currently undertaking a reservoir study of the Kirkuk field, in
the north, "in order to assist the Ministry of Oil to enhance production
from this field".

Shell is more forthright. It says: "Shell has a very long history of
working in Iraq. We would welcome the opportunity to help Iraq re-build
its energy industry, but we will only enter the country once security,
living and working conditions are improved. We have had discussions with
Iraqi officials from the Ministry of Oil from outside the country, in
order to better understand the complex situation in Iraq. We have
experience with the technical and operational challenges that Iraq will
face in future. This is based on our experience with similar situations
in the Middle East. We aspire to establish a long-term presence in Iraq
and a long-term relationship with the Iraqis, including the newly
elected Government."

The Western oil majors will almost certainly have to wait until the
security situation in Iraq improves before they are prepared to put
their people on the ground. However, they are likely to tie up the
Ministry of Oil in negotiations over projects until that happens -
assuming that Iraq does not simply dissolve into all-out civil war. And,
as the south and the north of the country, where most of the oil lies,
are relatively less violent, it may be possible to operate in the
country even while the central region around Baghdad continues to be a
bloodbath.

The Russians and Chinese are almost certain to send their people in, no
matter what the risks. Here the US group ConocoPhillips has pulled off a
clever arrangement. Lukoil negotiated with the regime of Saddam Hussein
for rights to the giant undeveloped West Qurna field. ConocoPhillips has
taken a 20 per cent equity stake in Lukoil - a deal approved by the
Kremlin - and it has apparently negotiated a 50 per cent share in
Lukoil's West Qurna interest. So the Russian personnel would take the
risks but Americans would still benefit.

*Iraq's oil wealth is just too great for the majors to miss. The
question is not if they will go in, but when. *