Iraq has lured big oil firms into new service contracts on some of its giant oilfields by cutting taxes and sweetening terms to make the deals more profitable, industry sources said on Wednesday.International oil companies are close to striking deals that would almost triple Iraq's output and catapult it up the table of global producers. The firms walked away from those deals at an auction just over three months ago.
Lower taxes were the main factor that convinced firms they could turn a profit where they previously saw too much risk on punishing terms, executives at international oil firms said.
"The contract has been massaged so the oil firms can work at the fees Iraq wants to pay," said one executive, who spoke on condition of anonymity. "The most important change was in taxes."
Oil firms had previously expected to pay 35 percent tax on both cash they received to repay their costs as well as on their remuneration fee per barrel. The sweetened contract requires companies to pay tax only on their per barrel remuneration fee.
"Previously it was tax on everything, on all revenue," said another executive. "Now the tax will be limited to profit. It makes a big difference."
The gains in the final deals from the model deals were made in negotiations by the consortium of BP and China's CNPC as they hammered out the small print for the contract they won for the Rumaila oilfield at the auction in June, executives said.
"All contracts are now mirroring that contract," said one executive.
BP and CNPC were the only firms to win a contract in the bid round, the first chance for foreign oil firms to compete for Iraqi oil since the US-led invasion in 2003. Seven other oil and gas fields failed to attract bidders on the terms Iraq offered.
But a consortium headed by Italy's ENI said on Tuesday it signed a deal to develop the giant Zubair field for a remuneration fee of $2 a barrel. At Iraq's oilfield auction in June, the consortium refused to go below $4.40 a barrel.
Two consortiums were still competing for a deal to develop the even larger West Quran oilfield, Iraq's Oil Minister Hussain al-Shahristani said on Tuesday. They were Russia's LUKOIL and ConocoPhillips and another consortium headed by Exxon Mobil.
Royal Dutch Shell was still working with Exxon on the bid for West Qurna, as it had in June, industry sources said. Shahristani had not mentioned Shell on Tuesday, and the company had not clarified whether it was still involved with Exxon. The two fierce competitors rarely work together.
Both the Exxon and LUKOIL consortiums had accepted a fee of $1.90 a barrel, Shahristani said. That was less than half Exxon's best bid in June and less than a third of the LUKOIL consortium bid.
The other fields offered in the first bid round, including the giant Kirkuk field in the north, were not being renegotiated, executives said.
Baghdad had decided to leave any further talks on Kirkuk until after Iraq's upcoming election in January. The semi-autonomous Kurdish Regional Government (KRG) in Iraq's north has demanded a say on Kirkuk, complicating efforts by the federal government to boost output from the field.
Baghdad and the KRG have been involved in a long-running and bitter dispute over control of oil that has delayed the passage of federal legislation on the industry and prevented any national consensus on how to boost output and spend oil cash.
Kirkuk would also likely require a higher remuneration fee than the maximum $2 a barrel offered by Iraq, even with the improved terms of the contract, executives said. That made it harder to renegotiate, they said.
"It has been producing for longer, it needs more work than some of the other fields," one executive said.
Other areas of the contract that had caused concern that have been clarified include security and fiscal stability.
Security was seen as a huge risk by foreign oil firms after years of conflict and sectarian violence in Iraq. Initially, Iraq had said foreign oil firms would have to rely on Iraqi forces for security.
New terms make that arrangement more flexible, and if firms feel security measures are insufficient, they can bring in their own teams.
Iraqi officials are also looking to guarantee contracts would remain unchanged, so local governments would be unable to slap more taxes on the deals.
Uncertainties and risk remain, especially over the legality of contracts, executives said. Oil firms remain concerned that future administrations or parliaments may deem old contracts as illegal. (Reuters)