Mr Jiyad is an independent development consultant and scholar. He is the founder of Iraq/Development Consultancy and Research (Norway) and Associate with the Centre for Global Energy Studies (CGES), London, with 40 years of international experience in Iraq, US, UK, Norway and with UN organizations in Uganda, Sudan and Jordan. He is now based in Norway, and can be reached at: mou-jiya@online.no

Introduction

After many postponements, Iraq’s fourth bid round took place on 30-31 May 2012 (MEES, 4 June). Twelve exploration blocks were offered, but only three were awarded. With two-thirds of the offered blocks receiving no bid, this must be a disappointing result for the Ministry of Oil. Many commentators would see this as obvious failure, and the ‘blame game’ has begun. But as always, there are different ways to look at the event and interpret its outcomes, from different perspectives, as this brief paper attempts to do.

A Replica Of The First Bid Round?

It appears, at the outset, as if we are witnessing a replica of the first bid round of June 2009, when only one field was awarded (Rumaila); then 100 days later international oil companies (IOCs) began the race to accept the ministry’s maximum acceptable remuneration fee (MARF) for West Qurna-1, Zubair and the Misan oilfields (Buzurgan, Faqa and Abu Gharab), despite the big margin between the offered remuneration fees and the MARF.

However, the likelihood of such a repetition is remote indeed, for variety of reasons. Many of the IOCs competed keenly in June-October 2009 to gain footholds in the Iraqi upstream sector. Also, all the offered oil fields were producing with a long known history, and have minimum business risk.

Unlike the case of the first bid round, most known IOCs did not demonstrate keen interest in this fourth bid round, and thus there was no serious competition. Also, except for one block, there were no pending offers on the remaining eight blocks. Finally, the business risk associated with exploration is much higher than with the blocks in first bid round, despite high prospectivity in Iraq generally.

As for Block 12, the remuneration fee requested by the consortium PetroVietnam/Premier Oil/Bashneft is $9.85/barrel of oil equivalent (boe), while the MARF is $5/boe. The consortium refused to reduce its fee to that of the ministry during the bidding day. Now, since MARF is known the consortium has two options: either reduce their fee and accept the MARF or face possible competition if and when the block would be included in a future fifth bid round. For the consortium to accept the MARF they might change the participation interests of its partners, say through increasing PetroVietnam’s share, possibly at the expense of Premier Oil, for a cost consideration (similar to what CNPC did for Rumaila oil field).

Differentials In Remuneration Fees

As was the case in the previous three bid rounds, this round demonstrates differentials in remuneration fees (RFs), though the cases are few due to limited number of bids.

The first RF differential is among the competing consortiums. For Block 8, the RF differential is $5.15/boe, representing 96% of the lowest RF. But Block 10 exhibits a lower RF differential of $1.08/boe or 18% of the lowest RF.

The second RF differentials relate to ministry-MARF, especially when it is over the bid RF by the IOCs. Information indicates that MARF was higher than the bid RF for all three awarded blocks. The case was more surprising for Block 8, if the above information proves correct. The winner, Pakistan Petroleum, offered $5.38/boe while the competing Japex-Itochu consortium offered $10.57/boe, but MARF was reported to be higher than even what was proposed by Japex-Itochu. This actually could raise two questions: the first is about the Pakistan Petroleum economic model and its calculation; and the second is what could happen if this operator decides to withdraw? Should the ministry accept the Japex-Itochu offer or re-bid the block?

Surprising Block 9!

Another surprising case is oil-prone Block 9. Since the announcement of these exploration blocks most industry sources expected fierce competition on this block due to its high prospectivity, as it is close to infrastructure and numerous producing and appraised oil fields in Iraq and Iran.

Twenty-eight IOCs bought the data package, but only one consortium – Kuwait Energy/TPAO/Dragon Oil – made a bid and won it. The consortium offered $6.24/boe, which apparently lower than what the ministry was ready to pay, as one reporter claimed. It is worth recalling that Kuwait Energy/TPAO had acquired Siba gas field during the third bid round, which is in close proximity to this block, and this might have affected the economic calculation and contributed to making the bid lower than MARF.

Purchase of Data Packages

Data packages were purchased for all blocks, but with different levels of interest. The number of IOCs buying the data packages ranged from 13 to 36 per block. However, the average number of IOCs who bought data packages for gas-prone blocks was 17 compared with 28 for oil-prone blocks. Moreover, three bids were on oil-prone blocks (9, 10 and 12). Even Block 8, which is considered as gas-prone in this bid round, was formed by enlargement of smaller blocks that were previously considered as “moderate oil” blocks.

Obviously, IOCs are more interested in oil than gas despite the possible seven years moratorium on the development of the field in case of oil discovery. The implications are obvious: the Ministry of Oil has to give the priority to gas-prone blocks in its exploration program under its current plan for 2011-14.

IOC Participation

IOC participation provided few indicators. Japanese firms registered the highest participation with nine companies, giving the impression they would drive hard to gain a significant presence in Iraqi petroleum. In reality, one company (Inpex) gained a minority interest of 40% in the oil-prone Block 10. Again reality seldom coincides with expectations!

This bid round saw for the first time in Iraq the absence of big western IOCs. In fact, western-hemisphere companies would have been fully absent, had not Premier Oil (UK) been a partner in a bid for Blocks 10 and 12, although without success.

On the other hand newcomers increased the number of IOCs involved in upstream petroleum in Iraq. Pakistan Petroleum, Inpex (Japan) and Dragon Oil (UAE) are among the successful newcomers, while PetroVietnam, Bashneft (Russia),Itochu(Japan) andPremier Oil are among the unsuccessful newcomers. The IOCs which consolidated their positions during this bid round are Lukoil (Russia), Japex (Japan), TPAO (Turkey) and Kuwait Energy.

Signature Bonuses

Signature bonuses were of moderate double-digit values compared with the three-digit values in the first and second bid rounds and zero signature bonuses for the third (gas fields) bid round. Signature bonuses in Round 4 are: $15mn each for Blocks 1, 8, 11 and 12; $20mn for Blocks 3, 4, 5, 6 and 7; and $25mn for Blocks 2, 9 and 10. Consequently the ministry would collect $65mn in signature bonuses for the three awarded blocks.

Minimum Obligations

Each winning consortium is obliged during the first five years of the exploration period to spend a “minimum expenditure” to execute a “minimum work program.”  The minimum expenditure ranges between $90mn for Block 9 and $130mn for Block 6. The minimum work program comprises one exploration well for each block and seismic surveys (2D or equivalent in 3D) in the contract area, including processing and interpretation. The scale of the seismic surveys ranges between 900km for Block 9 and 2,250km for Block 6.

Comparison Of Remuneration Fees

The comparison of the remuneration fees of this bid round with those offered in the previous bid rounds and concluded directly, such as al-Ahdab oil field, is an important measure to assess this bid round.

As mentioned above the RF for the oil-prone Block 9 is $6.24/boe and for the oil-prone Block 10 is $5.99/boe. While the RF for Block 9 is slightly higher (by $0.24/boe) than the highest RF for al-Ahdab (awarded in 2008) and Najma (awarded in bid Round 2), the RF for Block 10 is less by one cent than those for al-Ahdab and Najma.

The comparison of the gas-prone Block 8 is more significant. Pakistan Petroleum offered $5.38/boe, and this is lower than all RFs for the three gas fields offered during the third bid round – 'Akkaz ($5.50), Siba ($7.50) and Mansuriya ($7.0) – the latter being located in the same geographical area of Diyala Province. If the signature bonus of $15mn, which Pakistan Petroleum will pay, is added it becomes clearer the performance of this bid round from the ministry viewpoint.

The above clearly indicates that the ministry scored, once again, good results regarding the remuneration fees of the newly awarded three exploration block in this bid round.

The Way Forward

In the immediate aftermath of the bid round the Minister of Oil 'Abd al Karim al-Luaibi made two statements, one related to a new fifth bid round and the other on the exploration program.

Regarding the proposed new fifth bid round he reportedly said Iraq has more than 60 blocks ready to be offered, and preparations would start in few months for the launch of a fifth round in which 10-15 oil and gas blocks would be put on offer and that this requires more than a year to prepare for bidding.

Actually there are no compelling reasons for holding a fifth bid round at such a pace. With the three new exploration service contracts the ministry has now a total of 18 contracts covering 17 oil and gas fields and three exploration blocks. Managing these contracts in an orderly and effective way is not an easy job considering the human and institutional capacity constraints the ministry encounters. As many signals indicate, some of the concluded contracts might be subject to revision pertaining to their plateau production target, which could entail serious renegotiation of the related contracts. This, if it happens, would require more time and effort and could stretch the ministry’s capacities to the limit. Moreover, the ministry has many other important fields and sub-sector projects to manage as outlined in its current plan. Finally, if eventually the ministry reduces the plateau production target for the first two bid rounds to a level commensurate with what many industry sources envisage, then the “resource replenishment” argument becomes less convincing for such a hasty fifth bid round, though admittedly developing unexplored blocks has a long lead-time.

A few remarks are worth making regarding the minister’s second comment on the exploration program. The said program is already incorporated in the ministry’s plan 2011-14, the summary of which was dated February 2011. In addition to holding this recent fourth bid round the exploration program involves launching massive exploration operations throughout the country using national efforts and capacity, and drilling 12 exploration wells across the country. The investment allocation of the program would be split 18.6%, 22.4%, 26.8% and 32.2% across its four years respectively. In this regard the ministry’s Oil Exploration Company (OEC) has increased the number of its seismic operational divisions to three and an additional two will come soon. However, so far only one exploration well was completed, in al-Dheima oil field east of Misan province, as stated by the minister in his interview with the government owned al-Sabaah newspaper on 2 June (http://www.alsabaah.com/ArticleShow.aspx?ID=28344).

Obviously more is needed to accomplish the number of exploration wells targeted in the program. Moreover, neither the exploration program nor the plan of the ministry envisages a fifth bid round for exploration blocks.

Final Remarks

Probably the outcome of this forth bid round was rather disappointing for some, judging by the number of awarded blocks, and many attribute this to what they call “poor” or “tough” terms. However, the comparative analysis of the remuneration fees could indicate otherwise. Though big IOCs were absent, nevertheless many newcomers, although with less established credentials than known IOCs, are getting involved in upstream petroleum in the country.

Instead of working on preparing another fifth round for more exploration blocks, it is much better for the Ministry of Oil to abandon this idea for many years and focus its attention and channel its resources into the many important contracts concluded already on one hand and energize its exploration program to deliver stated targets. Finally, serious thinking should be given to exploration of gas-prone areas through ordinary term-defined service contracts to support the OEC efforts.