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Wed 8 Jul 2009 04:00 AM

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No black gold rush

Daniel Canty argues that the farcical televised auction has only let down Iraq and oil industry.

No black gold rush
Iraqivision Oil Contest drew great interest but failed to deliver on its promise of compelling viewing.

Last month saw a live auction of contracts to develop six of Iraq’s giant oil fields become the latest offering to the reality TV generation.

The uncharacteristically public process was driven by the underlying sentiment in Iraq that oil companies are out to pillage the nation’s resources. As misunderstandings of a critical issue go, it’s a big one and it required an elaborate, but ultimately unfulfilling day of television.

Foreign, particlarly Western, involvement in Iraq’s oil fields is contentious to say the least, and dangerously divisive amongst an already fractured population.

In the end only one of the contracts was awarded, with five major field developments left hanging. The contract to develop super giant 17 billion barrel Rumaila field to a consortium led by British supermajor BP. Good news for the consortium, but generally pretty poor television.

The wave of disappointment generated by the Iraqivision oil contest was perhaps to be expected. The terms of the contracts are rather unfavourable to international oil companies. It is estimated that, under the 20-year contracts, and based on a $50 price of a barrel of oil, the Iraqi government would get $1.7trn and oil firms just $16bn. Essentially, the BP-led group agreed to accept a fee of just $2 a barrel in return for the right to help develop the Rumaila field.

On top of that, with the withdrawal of US peacekeeping forces, the ability to safely produce in Iraq may have forced a cost-revision upwards. Private security doesn’t come cheap, after all.

The failure to sell some of the fields reflects the extremely narrow terms on which the development rights were offered for sale. And that reflects the huge pressure the Iraq government is under to get these highly emotive deals right.

Despite sitting on colossal resource wealth, Iraq simply does not have the ready cash to develop or exploit its biggest assets. IOCs should have been queuing up to empty their bulging bank accounts in exchange for access to the black gold beneath the desert. However, with (relatively speaking) so little to gain by paying for field development, the oil ministry has scored something of an own goal.

Either this is the ministry playing hardball with the oil giants, or a shocking miscalculation. Only time will tell.

Daniel Canty is the group editor of ITP Business’ energy tiles.

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