LT asks, “What is your professional-grade suggestion for aligning the interests of oil ministry and oil drillers?”
Have the Oil Ministry pay the oil companies’ development costs. That way, the per-barrel fee turns into a true service fee, and the IOCs really are reduced the status of service companies. Which is exactly what the Iraqi government did in November, in the wake of failed auctions. (Perhaps they had a ringer from my old high school sitting in the HBS class? Omar? No, he was in the nuclear power class. Carlo!!)
Under the new terms, ExxonMobil and Shell retroactively agreed to the Iraqi government’s insistence on a fee of only $1.90. After all, if the government is going to subsidize most of their capex, then they can make money even at such a low fee. They signed a contract in November. In February, the Oil Ministry arranged auctions for a second group of fields.
Unsurprisingly, the next round was far more successful than the first:
|Field||Consortium||Percent||Fee per barrel||Target, mbbd||Bond||Annual revenue, $m|
|West Qurna 1||ExxonMobil||80%||$1.90||2.33||$400||$1,197|
|West Qurna 2||Lukoil||85%||$1.15||1.80||$150||$706|
The Rumaila field at the bottom is actually the successful contract from Round 1. I put it in for completeness. The “bond” is actually the “recoverable signature bonus,” in millions of dollars.
A few things stand out about the second round. First, no American companies made it. ExxonMobil got its foot in back in November, but that was technically during the first round. In fact, only one American company even bothered to bid, despite the phenominally good new terms. The other bidders were: B.P. (U.K.), CNOOC (China), CNPC (China), Edison (Italy ... although really France), Eni (Italy), Gazprom (Russia), Japex (Japan), KazMunaiGas (Kazakhstan), Kogas (Korea), Lukoil (Russia), Occidental (U.S.), Pertamina (Indonesia), Petronas (Malaysia), PetroVietnam (fairly obvious), Oil India (again, fairly obvious), ONGC (India), Shell (U.K.), Sonangol (Angola), Statoil (Norway), Total (France), and TPAO (Turkey).
Second, most of the bidders were state-owned, among them CNOOC, CNPC, Edison (indirectly, by France rather than Italy, via EDF), Eni (the Italian government owns a controlling stake), Gazprom, Japex (the Japanese government owns a third), KazMunaiGas, Kogas (owned by the Korean government), Pertamina, Petronas, PetroVietnam, Oil India, ONGC, Sonangol, Statoil, and TPAO.
Third ... Sonangol? In both fields, the company bid more than the Iraqi government would allow, and decided to agree to a lower price. But still. It is a good company, but this is going to be a reach. Qaiyarah (in Nineveh province, up near Kirkuk) has been in operation since 1936, but produces very heavy oil and poses a lot of technical difficulties. Najmah is a little easier, but not by a lot. And both are in a very politically fraught area.
(The fourth thing that seems to stand out is not really surprising, which is the presence of ostensible gas companies. Gazprom has an oil subsidiary, Gazprom Neft, which will be the operator on the Badra field; Kogas is just a financial partner. The field, by the way, spans the Iranian border.)
If successful, Iraq’s output will rise from 2.4 million bpd (figures vary) to 10.5 million bpd by 2015. That’s a lotta oil, considering as world production was only 84.4 mbpd in the third quarter of 2009, up from ... well, down from 84.5 mbpd in 2005.