January 2007 00:18 Home > News > Business > Business News
Iraq poised to end drought for thirsting oil giants
After 35 years, the third-largest reserves in the world are to be opened to American and British companies
By Danny Fortson
Published: 07 January 2007
For more than three decades, foreign oil companies wanting into Iraq have been like children pressed against the sweet shop window - desperately seeking to feast on the goodies but having no way of getting through the door.

That could soon change.

The Iraqi Council of Ministers is expected to approve, as early as today, a controversial new hydrocarbon law, heavily pushed by the US and UK governments, that will radically redraw the Iraqi oil industry and throw open the doors to the third-largest oil reserves in the world. It would allow the first large-scale operation of foreign oil companies in the country since the industry was nationalised in 1972.

It would also be a shot in the arm for the global petroleum industry. The biggest oil companies are finding it ever harder to uncover new reserves to replace those that are going dry. Iraq sits on a sea of easily tapped, high-quality crude.

For a sector desperate for a panacea, the stakes couldn't be higher. By conservative estimates, Iraq represents about one-tenth of the world's reserves at 115 billion barrels. Most of this is untapped or under-exploited. Former oil minister Issam Al-Chalabi was quoted recently saying that a fully functioning Iraqi oil industry could generate $100bn (52bn) in annual revenue.

The new legislation "is a redrawing of the whole Iraqi oil industry into a modern standard," said Khaled Salih, a spokesman for the Kurdish Regional Government, a party in the negotiations. "It will allow new technologies to come in to revitalise the oil industry and allow foreign investors to invest long-term in Iraq and upgrade infrastructure."

Iraqi government sources say the hope is to have the law on the books by March.

No one expects big players such as Exxon, BP and Shell to jump into the country until the security situation stabilises. They are jockeying to stake their claims now for exploitation later. "It's a mad rush to get something there," said James Paul, the executive director of Global Policy Forum, a New York watchdog group. "The companies are saying, 'Before any troops are withdrawn, we have to have these contracts.' "

So why are the oil companies so desperate to get a foot in the door? For one, they are struggling to keep production increasing in line with demand, which last year rose to more than 82 million barrels a day. Those rises have been driven in large part by the growth of the Chinese economy. The tide of oil nationalism in places such as Venezuela, where the stranglehold applied by President Hugo Chavez on the industry has led to lower production, has shifted more pressure on to the rest of the industry.

Also, the cost-per-barrel of extracting oil in Iraq is among the lowest in the world because the reserves are relatively close to the surface . This contrasts starkly with the expensive and risky lengths to which the oil industry must go to find new reserves elsewhere - witness the super-deep offshore drilling and cost-intensive techniques needed to extract oil form Canada's tar sands.

"The majors are finding it increasingly difficult to locate actual black oil resources," said Praveen Martis, an analyst at research firm Wood Mackenzie.

The most coveted sites in Iraq are the Majnoon and West Qurna fields, both close to Basra in the south of the country. Together, they fields represent nearly a quarter of Iraq's proven reserves. Total and Russia's Lukoil had deals in place with Saddam Hussein's government on the Majnoon and West Qurna fields respectively.

It is arguable whether these contracts are still valid, and Exxon is now seen by insiders as the frontrunner to nab the rights to the Majnoon field.

Other parts of the country, such as the Western desert, remain virtually unexplored and could be home to large reserves.

Critical to whether the petro-leum industry will be able to exploit Iraq's buried treasure will be the introduction of production-sharing agreements (PSAs). These are contracts that allow the state to retain legal ownership of its reserves but let international companies share in the profits from extracting oil, in exchange for investing in the infrastructure and operation of the wells, pipelines and refineries. The agreements would be the key to the sweeping development of the Iraqi industry by international companies.

According to an early draft of the legislation that was sent to oil companies this past summer and obtained by The Independent on Sunday, PSAs are the centrepiece of the new legal framework.

Their introduction would be a first for a major Middle Eastern power and is sure to be highly contentious. Saudi Arabia and Iran, the world's number one and two producers, both control their industries tightly with no appreciable foreign company collaboration. According to the Iraqi draft legislation, the PSAs could be fixed for as long as 30 years, which would provide a welcome framework in which the companies could work. Though they are preferred by the oil industry, PSAs don't always guarantee profits for Western companies.

The Russian government depended heavily on PSAs in the 1990s when it was far weaker economically than it is now. The Kremlin has since made moves to wind back these agreements. The most notorious instance came last month when Shell was forced to cede a controlling stake in the $20bn Sakhalin 2 oil and gas project back to the Russian state-owned gas giant Gazprom, after months of brinkmanship from the Kremlin.

Yet for all the black gold that lies under the sand of the Iraqi desert, any potential payoff for Western oil giants is years off. An enormous amount of work remains to be done. The infra-structure is decrepit and patchy after years of neglect, and there is the risk of sabotage and wars. The country is in a state of near anarchy and the debate about the ownership and exploitation of its main asset, which accounts for nearly all of Iraq's GDP and export revenues, is still to be had.

But if the new hydrocarbon proposals pass through their fledgling parliament, the Iraqi people will be forced to share their buried treasure with the West's oil giants.

...................... and this would pretty much go against the grain of what every other non-western country is currently doing.


Think I'll pass for now thanks. Climbed on the PET thing a couple of years ago. Decent profit, but the dumb masses are a little wiser now as regards small explorers.

big al..the hoodie insider?

Get into CHP before its too late, GOO is quite cheap at the moment, MRP has had a good month or so of rises and they may continue, OEX has dropped off lately, absolute bargain, PELE is also looking good as pipeline itself is worth the shareprice, TXO has halved in price recently, dosn't everyone hate a ramper using the wrong threads to put forward their case?............ Please MAESTRO stop using other threads to push your case for PET...........use this one.........thank you.

oily,the more i can get to buy monday the higher petrel shareprice...bugger morality ,as long as i make loads i couldn't care a toss...its pay back time,a few scores to settle

http://royaldutchshellplc.com/2007/01/07/sunday-telegraph-where-majors-fear-to-tread/

Avoid PET at all costs. It is being ramped by MAESTRO for his own ends. As he states above, it is pay back time. He is obviously locked into a bad investment and is trying to encourage others, so as to increase SP so that he can get out. There is a 20% spread on this one, so the chances of being locked in are good.

Have no fear, I won't be touching any Teeling firm however well they do, and I don't suppose many others will who have had experience.

Good luck to them.

Iraq will have a Civil War at some point, so it's best avoided for the long term any way.

http://news.independent.co.uk/business/news/article2132467.ece

"Iraqi government sources say the hope is to have the law on the books by March."


Not tomorrow then!

Only invest in Iraq if you think that the yanks are going to stay for a long time. If they pull out, as per the post above, the next step will be the break down of law and order - and the current government won't stand a chance.

In any event, we all know that Maestro in = all sensible investors out.

as i posted on SEY just now .....

my sentiments too SWW ..... Iraq is currently so unstable (actually much worse) that it is inconceivable that any meaningful legislation can be passed, let alone any relating to the one major asset owned by this artificial agglomeration of disparate states ....... all of which are likely to go their separate ways in due course.

I have shares in PET bought around 3 years ago, missed a great opportunity through greed and still have them through fear. I can't say I know much about Teeling although I am aware of his involvement in other companies, but I have a great respect for David Horgan. I have a profit of about 20% on my PET holding atm, but guys like Maestro trying to ramp the shares very often have the opposite effect, as indicated on this thread. Blackdown, I always thought I was a sensible investor perhaps I should review my stance on PET.
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maestro are you still at school?....is this the last attempt to get some of your cash back.....how much are you down on this one???

george..is that your lodge number?lol!

treble...sold out last time at 52p while suckers held...ride the waves

maestro of the mouth and little else by the look of it.

'Scuse me while I put me hood up. ;-0

Maestro-----no it's my price target for PET.
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No chance ha ha

Am I being dense, but surely the thread heading is grossly misleading, for per the article, this law has patently NOT been signed .... though sp has indeed rocketed this morning, the volume is very small ..... would strongly recommend a trailing stop, though if sp starts to fall, even that may not be able to be triggered at your indicated price

oilyrag-----do you think I'm being just a tad too optimistic.
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Rather

Published: 09/01/2007 12:00 AM (UAE)

Treading into a war zone
The Telegraph Group



New Year's Day was like any ordinary day in Iraq: 15 bullet-riddled bodies were found behind a mosque in Baghdad, a roadside bomb exploded in the capital and the toll of US soldiers killed passed 3,000.

In the flurry of headlines and stories detailing the carnage, another development went almost unnoticed. A small Norwegian company announced that an exploration well in northern Iraq had produced several thousand barrels of oil. The company, DNO, is the first Western group drilling for oil in post-war Iraq under a deal struck two years ago with the Kurdistan regional authorities.

DNO is among a handful of companies risking capital - both financial and, in some cases, human - to help rebuild and develop Iraq's oil industry.




The sector has been devastated by years of violence, a lack of investment and chronic corruption. Three years after the official end of hostilities, production - at around 2.2 million barrels per day - is still below pre-war levels. Since 2003, there have been more than 380 attacks on Iraq's oil assets: pipelines blown up, terminals set on fire and key personnel killed.

While the world's oil majors have so far shied away from investing, minnows such as DNO and Petrel Resources, an Aim-listed Irish explorer, have taken the plunge. State-owned oil companies from resource-hungry countries such as China, India and even Russia have recently started dipping in their toes.

For these companies, the obvious risks are mitigated by the prospect of getting first dibs on a slice of Iraq's vast oil riches: not only is the country blessed with the world's second largest petroleum reserves after Saudi Arabia but much of it is "easy" oil because it is simple to extract from the ground.

Minnow

"It's about cost-benefit analysis - for a minnow, it all stacks up," says Martin Rudd, vice president of business development at the Olive Group, which provides security to some of the world's leading oil companies. "It can be easier for them to operate in a country like Iraq as the level of their investment is smaller and the reputational risk is less than that of the oil majors."

Until now, disputes over how to carve up the reserves have helped fuel political tensions between the country's three main communities, the majority Shiite and minority Sunni Arabs and Kurds. Iraq's oil is unevenly distributed, with the bulk of the reserves in the Kurdish-controlled north and Shiite south. With oil making up nearly 70 per cent of Iraq's economy and more than 95 per cent of government revenues, virtually every problem facing the country has its wellspring in hydrocarbons.

It was a point not lost on the Iraq Study Group, the bipartisan body led by James Baker, the former US Secretary of State. In its report last year, the group warned that "the politics of oil has the potential to further damage the country's already fragile efforts to create a unified central government".

But there is growing speculation that the Iraqi parliament is about to pass crucial oil legislation that would regulate the industry and distribute its revenues more fairly. One of the key stumbling points has been who should sign oil contracts with international companies in the Kurdistan region.

A deal on a hydrocarbon law is likely to be seen by many as a sign that some kind of normality is returning to the region.

Opportunity

"It will impinge on the question of Iraq as a nation, as a federal system," predicts John Teeling, the chairman of Petrel Resources.

The company, which this year celebrates its 10th anniversary in the country, is among the handful of independent oil and gas companies that decided early on that Iraq was simply too big an opportunity to miss. Historically, it has always been the independents that blazed a trail in difficult operating environments and were the first to sign deals with governments in those regions. Teeling argues that Iraq is no different.

Petrel, he explains, decided to go to Iraq because of the "scarcity of energy". He argues that the demand for resources from developing countries such as China is such that supplies are at a premium.

"You go where the minerals are. The majors work differently. It's wild-catting, just more sophisticated,"he says.

He cites three conditions which need to be met before going in. "The critical thing in all these countries is, can you get title? Number two is, are the rules of the game understandable and can you work within those rules? Thirdly, does it have the geology that can enable you to make a profit?"

John Dorrier, the chief executive at Gulfsands Petroleum, a Texas-based company also listed on Aim which has signed a memorandum of understanding with the oil ministry to explore a deal to capture flared gas on a southern Iraqi oil field, echoes that view.

"If you're a smaller company, a large project in Iraq could be a transformational event," he says. "We think that companies that have been there for a long time will be at the front of the queue [when lucrative exploration licences are ultimately awarded]."

Both companies believe the exploration potential in Iraq is simply too great an opportunity to miss.

"Iraq is the last great frontier in the Middle East. The striking thing about other new frontier areas is how poor their record has been over the past three years in terms of discoveries. In Iraq, 80 per cent of the oil wells ever drilled have been discoveries," says David Horgan, Petrel's chief executive.

The company was last year awarded a three-year $197 million contract to redevelop the Subba and Luhais fields in southern Iraq. Petrel hopes the ratification of a hydrocarbon law will lead to the government confirming a contract, dubbed Block 6, which covers 10,000 sq km in Iraq's Western Desert.

Earlier this year, the company joined forces with Japan's Itochu to work under a technical cooperation with the Iraqi oil ministry for the 760 million barrel Merjan field in central Iraq.

Despite the opportunities, security remains a major issue. While Petrel uses local militia, Gulfsands uses private security companies to help protects its employees when needed.

Nor has it all been plain sailing, admits Horgan, and Petrel has had its own security scares in the past.

In September 2003, for example, the company got the "obligatory letter", warning that anybody who collaborated with the foreign invaders would be "decapitated and burnt". Somewhat incongruously the sender of the letter ended by apologising for any inconvenience. Petrel took the precaution of closing its head office in Baghdad and consolidating its offices across the border in Jordan. Today, its country manager tends to work from home.

"It does [impact] your day-to-day operations in Iraq, says Horgan philosophically. "But in the south, where our operations are, things are okay."

Security issues have arguably been less of a concern for Norway's DNO which set up operations in the Kurdistan-controlled north of the country, removed from the day-to-day violence of Baghdad. The company signed two production-sharing agreements with the regional government in June 2004 and "spudded", or began drilling, its first exploration well a year later. Last week, it announced that one of its test exploration wells had flowed more than 8,000 barrels per day.

DNO argues that provisions in Iraq's new constitution ratify the validity of these agreements.

"Our experience is that the Kurdistan region is working relatively well," says Helge Eide, DNO's chief executive. "We consider all agreements to be legally safe."

The company still needs to get formal access to export the oil but Eide insists that if everything goes to plan, it should be able to produce oil during this quarter.

But Teeling, Dorrier and Eide are not the only ones active in Iraq. India's largest state-run and private-sector companies are in talks on the joint development of a field in the country. ONGC and rival Reliance are believed to be in preliminary discussions to develop the Tuba oilfield in southern Iraq. ONGC had previously won approval to develop oilfields in Iraq but activity was halted last year.

Meanwhile, Lukoil, the Russian oil company, was given a contract to develop the giant West Qurna-2 oil field by the regime of former president Saddam Hussain. France's Total and the China National Petroleum Company were granted similar contracts at the time.

But executives at the world's major oil companies have not been sitting still. While none has yet committed any hard cash to the country, most have tried to foster relationships with Iraq's government, mainly by providing training and technical expertise.

"There is a misconception that the oil majors are not there," says Dorrier. "They are not able to send people to Iraq so they hold meetings outside."

Assessment

In recent years, both BP and Royal Dutch Shell (which has had a presence in the country since the 1920s and was a shareholder in the Iraq Petroleum Company), agreed to provide free assessments of the geological and technical data on Iraq's two main oil fields, Kirkuk in the north and Rumaila in the south. Others, such as Chevron, have organised training sessions for Iraqi engineers outside Iraq.

Executives say there is a significant skills shortage in Iraq. Many of those that were trained are either reaching retirement age or fled the country.

Once the hydrocarbon law is ratified, two of those conditions will arguably have been met. Security, however, remains the stumbling block.

According to Dr Gal Luft, director of the Analysis for Global Security in Washington, the insurgents have changed their tactics over the past 18 months. Whereas before, they targeted the basic infrastructure such as the export pipelines, they have now turned their attention on people such as security personnel. Many of the export terminals are also still in ruins from the first Gulf War.

Luft concedes that if the hydrocarbon law is passed, it will have benefits but he believes the general outlook won't change.

"No doubt it will be a net positive development but I doubt it will change the fundamentals. My main concern is the stability and continuity of the government and whether it would be able to convince investors that Iraq provides a hospitable investment climate."

"The common thinking in the industry is that Iraq is bad news, stay out of there," he says.

Kevin Rosser, oil and gas consultant at Control Risks, is equally gloomy in his outlook on the situation. "The problem is the industry is so opportunity-constrained as a whole, when it comes to Iraq there is a tendency for hope to triumph over reality. Iraq's oil industry is moving in the same tragic direction as the rest of the country. I am pessimistic about the prospects, at least for the forseeable future."

Others, however, such as Petrel's Teeling, predict that it is inevitable that once the situation stabilises, Big Oil will be queuing up for a slice of the action.

Says Teeling: "Our problem is going to be to make sure when the big lads come charging in, which is as sure as the sun rising tomorrow morning, we're not going to be trampled all over. Our job is to make sure when the steamrollers come that hopefully we are on the roller and not under it."

http://www.gulfnews.com/business/Business_Feature/10095453.html

once the situation stabilises .... and to my way of thinking that is the key to the whole issue of Iraq ..... for sure the likes of Petrel are well placed, but if anyone thinks normality or even semi-stability will return to Iraq even within the next 24 months, then they are even more of an optimist than I am by nature.

optimist?

But you are a cynic!

I broadly agree with you though.

It could take much more than 24 months however but then I am a pessimist by nature.

cynically, i say i am an optimist!

They reckon that after WW2, it took over a decade for "resistance" to properly subside and that was with a relative minority guerilla movement of ex SS. A little talked about bit of history there, folks.

Think I've got better places to invest for the next 6 years or so.

;-))

What a beautiful smile and such nice eyes......

..............What?

Oh yes, sorry.

TRP.

LOL

Yep that's me!

Ha ha ha ha ha!

Ravin'

HCL should be announced tonight in Bush`s speech,then we have lift off

HCL????? ..... hydrochloric acid in my books, but am sure you don't mean that

HCL or not, it is going to be civil war and curtains for PET.

agree about civil war ...... must be 90% chance that it will happen (officially!) much sooner rather than later ...... whether that would actually be curtains for PET is another matter, but sure as hell won't do sp any favours ....... At the end of the day, it will be the bloody hypocritical French who cash in here

Cynic , a good post especially on those double xing french shits who always look after No 1.

I agree about the French. Whenever there is a war anywhere they surrender just in case.

why else do you think they opposed war in iraq .... sure as hell wasn't on moral grounds ..... but then, of course, why did bush and blair walk in there ..... if they were so deeply concerned about saddam's morals (gassing the kurds), why have they not recommended an invasion of zimbabwe

mmm.
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