Iraq’s Oil Leases and the World Market

Last month, the Iraqi government held its second round of auctions for its oil fields. Mid-month, seven fields were awarded to international oil companies.  American companies did not win any new leases in this round, but Petronas, a state-owned Malaysian company; Sonangol, of Angola; and Lukoil of Russia and Statoil of Norway did. Petronas and Shell won the the Majnoon field with more than 12 billion barrels of oil; and Petronas, CNPC of China and Total (French) got Halfiya, in the south, with 4 billion barrels. Last week, it was reported that  Lukoil and Statoil had actually signed for their West Qurna oil field, much faster than BP and China signed for the Rumaila oil field this summer.

Oil companies are famously an optimistic bunch but still, the enthusiasm is surprising. There just isn’t much profit for them in Iraq. The June oil lease auction was a bust, with only one signing, because the profit margin was so thin (about $2 a barrel), and according to the New York Times, Iraq also demanded nearly $3 billion in “signing bonus” loans for the six under-producing or undeveloped oil fields. Iraq sweetened the deals marginally for the most recent round but still the AP reported in December that

Companies must accept 20-year service contracts and receive a flat fee per barrel produced for their services instead of production-sharing contracts, which are much more lucrative.

And in an unstable war zone at that.

So why the optimism that the Iraq investment will ultimately pay off? Between the weakened demand, the natural gas glut (with more coming online all the time and gas being the preferred hydrocarbon of the future), the effort at green energy, and several recent smaller oil discoveries  in Uganda, Ghana, Gulf of Mexico, Brazil, it’s hard to see the reason for their faith.

And when Iraq’s oil does finally hit its stride, how will this affect the market? Will prices drop catastrophically for the producers? Risk management and advisory groups (as in the link below)  are asking themselves, what will this mean financially for OPEC countries and OPEC’s free riders, like Russia? Will it help hold down prices or cripple those countries who depend on setting production quotas? If Saudi Arabia cannot cut back on its production sufficiently to accommodate Iraq’s output?  How will it affect OPEC itself?

This level of doubt about oil prices represents an amazing change from last year, when investors were told to look for $200  a barrel oil soon.

See the below link.