Anatomy Of Iraq’s Exploration Auction – Bid Round 4
Published on Monday, 11 Jun 07:00 am
Dr Uqaili is an exploration and production consultant and technical director of the Iraq Energy Institute, London.
After two postponements of the original date of the Round 4 bid, the Iraqi Ministry of Oil concluded a two-day hydrocarbon exploration auction during 30-31 May 2012. Expectations following the road show in 'Amman on 11 September 2011 were that only a few companies out of the 39 (47 prequalified) that paid to bid were intending to do so. Several reasons prevented the bidding on the planned date of the auction, besides the relatively tough contractual terms. Although the Ministry of Oil softened some of the terms, including dropping the 25% state share, and included compensation of Libor plus 3% on costs incurred during any holding period of field development, other risks continued to prevail (MEES, 19 September 2011).
This article discusses the factors that led to the disappointment of the Ministry of Oil in the bidding process for the 12 blocks and what should be done for better results in the coming auctions.
The 12 blocks were of variable exploration risk and required further assessment using data over and above what the Ministry of Oil had offered to the international oil companies (IOCs). The limitations have been:
- Only one block out of the 12 had an exploration well drilled, with no clear discovery results.
- Drilling results of some nearby wells indicated either a negative outcome or semi-commercial finds.
- Limited and mostly inferior seismic data.
- Insufficient consideration of supporting regional geology-stratigraphy data/studies.
In the absence of necessary reliable seismic and regional geological data, the many small prequalified bidders lacked the sufficient knowledge and experience to improve the risk rating in targeted blocks. Contacts with several bidders showed that the general disappointment with the bidding conditions might have been a reason for those possible bidders not having the will to purchase available and relevant independent studies on the 12 blocks and Iraq.
The results of the two-day bidding on 30-31 May were:
- No bids for eight blocks: Blocks 1, 2, 3, 4, 5, 6, 7 and 11.
- Two bids for Block 8, awarded to Pakistan Petroleum at an RF [remuneration fee] of $5.38/B.
- One bid for Block 9, awarded to a consortium led by Kuwait Energy Company (KEC) at $6.24/B.
- Three bids for Block 10 and award to a consortium led by Lukoil at $5.99/B.
- One bid for Block 12 by a consortium led by Premier Oil, not awarded due to high RF of $9.85/B.
Independent evaluation as part of a detailed study by the author (Annex 1) throws light on the exploration risk, adding to it other factors that played roles in the poor bidding in the Ministry of Oil’s auction and rating them on a 10-point scale. The evaluation is summed up as follows:
- Low Risk: three blocks were rated at 8-9.
- Medium Risk: three blocks were rated at 5-6.
- High Risk: six blocks were rated at 3-4.
For a bidder to choose the right block(s) the above rating, based on the best available data, should be looked in connection with a detailed regional geology-stratigraphy of Iraq.
Exploration And Development Economics
Improved economics can be achieved through a revised strategy by both the Ministry of Oil and bidders in preparation for the coming bids. More bids, as announced by the oil minister at the end of the recent auction, will include new blocks from the original 65 Oil Exploration Company (OEC) blocks in Iraq. For successful exploration bidding by Iraq and IOCs, a new strategy must take into consideration the Exploration Risk Factor (ERF) and the economics:
1. Signature Bonus
Current signature bonuses of $15-25mn (Annex 1) are relatively high for exploration and are not linked to the block’s risk factor. Revision of the bonus is justifiable.
2. Exploration Period
The main cost here is the seismic and the first exploration well ‘wildcat’. Annex 1 shows total cost of $40-45mn for each block. Some compensation to the awardee must take place in case of no discovery. The following options are possible:
2.1 - 50% of the cost is paid back by the ministry to the awardee.
2.2 – Ministry of Oil and awardee share the cost of seismic data acquisition equally.
- Sliding scale RF is agreed prior to award.
- Awardee, after studying results of the seismic data, has the option to go ahead to drill wildcat or to relinquish the block without penalty.
2.3 - OEC carries out new reliable seismic data acquisition for selected potential blocks in an intensive program before the Ministry of Oil opens a new exploration auction(s) with improved contracting terms.
3. Field Development
Field development cost is expected to be in excess of $12,000 per plateau barrel especially in the case of blocks far away from the current production/export facilities. There is no clarity, in case of discovery, regarding:
- Possible outlet to transportation of the gas in the absence of a utilization plan by the Ministry of Oil.
- Start of production and therefore the completion of field development of the discovered oil, as production may be put on hold depending on Iraq’s total throughput. Delays will prevent income to the awarded consortium.
The minimum expenditure assigned to any of the blocks of $90-120mn (Annex 1), not related to the exploration risk, does not look justified:
- There is no certainty that hydrocarbons will be discovered.
- Unknown size of discovery if there is any.
4. Magnitude Of RF
The expectation of the Ministry of Oil for the RF was highly influenced on what happened in Round 3 (Fig 2). In Bid Round 4, the Ministry of Oil announced an RF of $5/B for Block 12, which seems to be the overall indicator the ministry was thinking of. RF for exploration blocks:
- Should be higher than 5 as compared to discovered fields where there is no risk involved.
- No fixed value, but variable and linked to size of discovery (Figs 1 and 2).
The distant locations of the blocks may or may not add a security concern to the present environment:
- Blocks 1 and 2 are near the Syrian border.
- Blocks 3, 4 and 5 are in Anbar Governorate and close to Rutba City and the Jordanian border.
- Blocks 6, 11 and 12 are distant and near the Saudi border.
- Block 8 is in Dyala Governorate (security concerns) and near the Border with Iran.
This leaves Blocks 7, 10 and 9, which that are High Risk areas (Annex 1).
Ministry of Oil Hydrocarbon Strategy
Looking at the above anatomy, the Round 4 auction was a tough one for the Ministry of Oil in the absence of clear strategy:
1. Oil Production
Rounds 1 and 3 involved giant producing fields that are well known to the Iraqi experts and operators and many argue that they should not have been awarded. Production operations could have been managed by the Iraqis and necessary services from consultants and contractors in the same way fields are managed by the awarded IOCs. Instead of awarding the producing fields, the technical service contracts could have been applied to selected discovered but not yet developed fields.
2. Gas Fields Development And Production
This needs a national plan involving exploration of free gas fields including deep accumulations in Southern Iraq and the Western Desert, possibly through acceptable production sharing contracts to encourage international bidders. Gas utilization and export, whether dry gas or LNG, should be clearly addressed.
The role of OEC, once a strong arm of the Ministry of Oil, has been minimized post-April 2003:
- Iraq requires intensive modern field data acquisition in the Western Desert, Jezira Area and other locations. OEC should have been reconstructed and backed by equipment, systems and experts with generous budget looked at as an ‘infrastructure mission’.
- The first exploration/production targets should have been the intact marginal and sub-commercial discoveries, exceeding some 20 sites, and not the producing fields of Bid Rounds 1 and 2.
The production sharing agreement (PSA) model, with the improved conditions of those signed by the Kurdistan Regional Government (KRG), would have been the key for such a strategy.
- The second production target should have been the Western Desert. Instead of waiting for nine years since 2003, OEC should have taken the initiative to concentrate on this part of Iraq.
4. What Is After Round 4?
The Ministry of Oil needs to adopt new approach to exploration making use of the lessons learnt from the Round 4 biddings.
A revision of EOC strategy should include:
- A start of intensive seismic data acquisition in a two-five year program.
- A new selection of blocks including the remainder from the 12 Blocks of Round 4 and others from the existing 65 OEC blocks.
- Exploration drilling taking into consideration the 12 sites reported in OEC paper submitted to the 2nd Basra International Oil and Gas Conference and Exhibition of 25-28 November 2011 (‘Review of Iraq Hydrocarbon Exploration Activities’).
- Better contracting terms with the possibility of applying PSAs.
- Participation of former Iraqi oil officials and experts in exploration, production and contracting. A start would be for the ministry to organize an open conference on Hydrocarbon Strategy and Contracting, to be attended with by a selected list of Iraqi presenters.
Annex 1: The 12 Blocks Of Bid Round 4
1. Risk rating out of 10.
2. Signature bonus in $Mn.
3. Minimum expenditure in $Mn.
4. Ministry of Oil: Should be discovery-related (DR), on a sliding PPT-RF (plateau production target-remuneration fee] scale.
* Seismic and wildcat costs are estimated by author.
Figure 1: S Fields RF ($/B Vs PPT In '000 B/D)
Figure 2: Round 3 Gas Fields RF ($/B Vs PPT In Mn CFD)