Iraq's oil power grows, but firms eye election

Iraq has taken a step closer to becoming a giant on the global oil stage, but political manoeuvrings either side of elections in January may yet stall plans to nearly triple oil output.

Baghdad is near to signing off on deals to pump millions more barrels per day from the world’s third-largest reserves, potentially vaulting it to third from 11th position in the league of top oil producers.

But for foreign oil firms, politics threaten the legitimacy of contracts and are a big investment risk. Disputes have already hindered attempts to attract the billions of dollars needed to overhaul an industry run down by years of sanctions and war.

“Contract legality is still unclear,” said an executive at a major oil firm bidding for Iraq deals. “That’s the major problem now. Iraq has gone a long way to clarifying other issues, the deals look better, but who will ratify them? And will ratification be respected by the next government?”

Iraq has awarded a deal to a consortium led by Italy’s Eni to develop the giant Zubair field and boost output by nearly a million barrels per day (bpd).

That deal — and another awarded to BP and China’s CNPC to boost output at Rumaila by another 1.8 million bpd — awaits ratification by Iraq’s cabinet.

But there is no agreement in Iraq on who has authority to approve the deals. The oil ministry says cabinet ratification is enough.

Some MPs say only parliament has the authority. Oil firms fear future governments could tear up old contracts.

The problem is part of a wider dispute. More than six years after the US-led invasion and the toppling of Saddam Hussein, Iraq has yet to reach consensus on how to develop and share oil wealth.

The stalemate has delayed a new oil law for years and left it struggling to keep output from shattered infrastructure at pre-war levels.

“With ratification [doubts] and the elections and so on, it’s probably too early to say Iraq is getting there,” said IHS Global Insight’s Middle East Energy analyst Samuel Ciszuk. “But it is a very interesting and quite positive step toward getting much bigger oil supplies to the market in the next seven to nine years.”Iraq has sweetened the terms of oil contracts, cutting tax to lure back big oil firms that had rejected what they saw as tough terms. A third deal was also close to completion, as consortiums led by Exxon Mobil and Russia’s LUKOIL compete to boost output from West Qurna oilfield by as much as 1.8 million bpd.

Iraq failed to strike deals for both Zubair and West Qurna in June at the first bidding round since the 2003 war, when it awarded only one of eight oil and gas fields offered.

Striking deals now and reviving oil company interest bodes well for the next bidding round, due to be held in December, observers and executives said. This round is for fields that are as yet untapped and could boost output even more.

“It’s positive from an Iraqi standpoint because it means the initially negative reaction to the first bid round, based on the fact that only one deal was awarded, no longer holds,” said Alex Munton, analyst at consultancy Wood Mackenzie. “It proves that these projects may be marginal financially but they are still economically viable and companies consider that the conditions for investment are acceptable.”

For some, the manner the new deals have been negotiated as well as the timing could cause problems later.

“It’s all geared to the elections,” said an executive at another international oil firm. “Shahristani wants to pull deals out of the hat to show he’s had some success.”

Oil minister Hussain Al Shahristani made much of the transparency involved in the first round, which was televised live, yet the new deals have been negotiated behind closed doors. Shahristani is due to appear in parliament for questioning on October 27, and could face a vote of no confidence over accusations of mishandling Iraq’s oil wealth.

The stakes are high for the minister, the country, the oil market and OPEC. With the new deals, Shahristani could claim progress toward boosting oil revenues to pay for reconstruction.

An additional 4.5 million bpd of oil exports at current prices would bring in $300m per day more revenue.

The increased supply is about 5 percent of daily global demand. That much new supply could dampen prices for years and assuage concern that future demand would outstrip supply.

Iraq is an OPEC member but exempt from its output targets due to the impact of war and sanctions. A programme to nearly triple Iraq’s capacity to 7 million bpd from around 2.5 million might make OPEC consider asking Iraq to curb output rather than flood the oil market, push down prices and steal market share from fellow members.