Energy pioneers face test of strength
Roula Khalaf in London | Wednesday, 9 July 2008
International oil groups are rarely deterred by troubled environments. But their foray into Iraq will present more than a security challenge. Five years after the US invasion, the country's political future remains uncertain with new legislation regulating access to its oil reserves yet to be passed.
Until now, international companies have been working with Iraq's oil ministry by remote control, meeting officials outside the country and communicating through video conferences. It is on the same basis that the technical service agreements expected to be soon awarded will also operate.
But companies that win bids for longer-term development contracts of the fields announced by the oil ministry on June 30 last will have to have a more active presence with staff on the ground.
Hussein Shahristani, the oil minister, has made clear that international companies will have to open an office in Baghdad as well as have a local partner.
These decisions are still some way off. Companies still have to bid for the contracts and negotiations are likely to take at least a year.
"There are a few hurdles to jump before we see any of the investment in Iraq," says Raad Alkadiri, senior director at Washington-based PFC Energy, a consultancy. "There is a question over when companies will commit to sizeable investment and put people on the ground."
Despite a significant reduction in violence, Iraq's army and internal forces remain weak, means security improvements may be compromised when the US starts withdrawing troops.
But Terry Hallmark of IHS, another consultancy, said: "Oil companies work in some tough places, and so long as they understand the lie of the land, they can be pretty much comfortable."
International oil companies, however, are facing going into Iraq without new hydrocarbons legislation.
The US has long maintained that a hydrocarbons law that fairly distributes the country's major resource amongst its sectarian groups - particularly as 80 per cent of proved oil reserves are in the Shia south and little is found in Sunni areas - was an essential ingredient to national reconciliation.
But the draft law agreed by the cabinet last year has languished in parliament, with no one expecting a breakthrough any time soon.
One reason for the deadlock is rising nationalist sentiment among Iraqi Arabs, amid lingering suspicions that the US-led invasion was driven by a desire to control the country's oil. Another obstacle is Kurdish insistence that its regional government in the north has the right to manage exploration and production from new oil fields, an interpretation rejected by Baghdad.
Frustrated that the Kurdish regional government had gone its own way, signing contracts with smaller firms to explore for oil in the north, while the central government's plans were paralysed, Mr Shahristani decided earlier this year to sidestep the oil law.
He moved ahead with negotiations of the technical service agreements, under which Iraq pays international companies to help upgrade oil fields.
The second phase involves inviting foreign companies to develop existing fields, a process that began on June 30 last with the announcement of the fields and the companies pre-qualified to bid.
To limit the political fallout in Iraq, the oil ministry is confining itself now to service contracts, rather than production sharing deals preferred by international companies. Even those have proved controversial. Late last month, a group of US Democratic senators urged the US administration to stop the Iraqi government signing short-term technical support agreements, arguing that "signing contracts without a revenue sharing law is a recipe for disaster".
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Until now, international companies have been working with Iraq's oil ministry by remote control, meeting officials outside the country and communicating through video conferences. It is on the same basis that the technical service agreements expected to be soon awarded will also operate.
But companies that win bids for longer-term development contracts of the fields announced by the oil ministry on June 30 last will have to have a more active presence with staff on the ground.
Hussein Shahristani, the oil minister, has made clear that international companies will have to open an office in Baghdad as well as have a local partner.
These decisions are still some way off. Companies still have to bid for the contracts and negotiations are likely to take at least a year.
"There are a few hurdles to jump before we see any of the investment in Iraq," says Raad Alkadiri, senior director at Washington-based PFC Energy, a consultancy. "There is a question over when companies will commit to sizeable investment and put people on the ground."
Despite a significant reduction in violence, Iraq's army and internal forces remain weak, means security improvements may be compromised when the US starts withdrawing troops.
But Terry Hallmark of IHS, another consultancy, said: "Oil companies work in some tough places, and so long as they understand the lie of the land, they can be pretty much comfortable."
International oil companies, however, are facing going into Iraq without new hydrocarbons legislation.
The US has long maintained that a hydrocarbons law that fairly distributes the country's major resource amongst its sectarian groups - particularly as 80 per cent of proved oil reserves are in the Shia south and little is found in Sunni areas - was an essential ingredient to national reconciliation.
But the draft law agreed by the cabinet last year has languished in parliament, with no one expecting a breakthrough any time soon.
One reason for the deadlock is rising nationalist sentiment among Iraqi Arabs, amid lingering suspicions that the US-led invasion was driven by a desire to control the country's oil. Another obstacle is Kurdish insistence that its regional government in the north has the right to manage exploration and production from new oil fields, an interpretation rejected by Baghdad.
Frustrated that the Kurdish regional government had gone its own way, signing contracts with smaller firms to explore for oil in the north, while the central government's plans were paralysed, Mr Shahristani decided earlier this year to sidestep the oil law.
He moved ahead with negotiations of the technical service agreements, under which Iraq pays international companies to help upgrade oil fields.
The second phase involves inviting foreign companies to develop existing fields, a process that began on June 30 last with the announcement of the fields and the companies pre-qualified to bid.
To limit the political fallout in Iraq, the oil ministry is confining itself now to service contracts, rather than production sharing deals preferred by international companies. Even those have proved controversial. Late last month, a group of US Democratic senators urged the US administration to stop the Iraqi government signing short-term technical support agreements, arguing that "signing contracts without a revenue sharing law is a recipe for disaster".
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