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Iraq violence threatens oil deals

Aug. 27, 2009 at 5:23 PM   |   Comments

BAGHDAD, Aug. 27 (UPI) -- Recent events in Iraq have cast a pall over the government's plans to have a November auction for potentially lucrative oil contracts that are vital for the country's reconstruction.

The surge in violence of the last few weeks, political uncertainty caused by this week's breakup of the ruling Shiite coalition and Iraqis' refusal to give Big Oil the terms it wants are likely to drive off the international companies that see the country's untapped reserves as the big prize.

Iraq's oil reserves total an estimated 115 billion barrels, ranked third after Saudi Arabia and Iran. But it is believed that there may be as much again in untapped reserves, which would give Iraq the largest reserves in the world.

With the rest of the Middle East closed to foreign ownership and the world's energy reserves shrinking, no other new fields of any significance are likely to emerge. So Iraq could be the last frontier.

Iraq had its first oil field contract auction in June in Baghdad. It was a flop for all concerned. The oil companies that participated wanted more for every barrel they produced than Iraq was prepared to offer.

Result: The oil majors snubbed all but one of the eight contracts on the table, and Iraq did not secure the deals it needed to acquire billions of dollars in investment to upgrade its long-neglected oil industry.

BP and the China National Petroleum Corp. won the contract for the Rumailah field in southern Iraq, but only by agreeing to cut their fees after development costs to $2 a barrel instead of the $3.99 they demanded.

All the other majors -- Exxon Mobil, Royal Dutch Shell and Chevron Corp. among them -- refused to lower their demands. The government too refused to budge.

The June auction involved only established fields, where the Iraqis want to crank up production as soon as possible. The upcoming round will be radically different.

It will focus primarily on six partly developed fields and four undeveloped "green field" zones. These reportedly include Majnoon, Iraq's largest undeveloped field.

Iraqi officials unveiled the next round for some 45 prequalified companies in Istanbul Tuesday. The Iraqis say they have lowered their fees and that contracts can be signed before the country has parliamentary elections scheduled for January.

"We expect a better match between our expectations and what the companies will bid in the second round," Iraqi Oil Minister Hussain al-Shahristani said in Istanbul.

The companies allowed to bid include BP, Exxon Mobil, Chevron, ENI SpA of Italy, Gazprom of Russia, Total SA of France and Turkey's state energy company Turkiye Petrolleri AO.

But recent developments in Iraq have produced a situation that is more fraught with danger and uncertainty than existed in June, and analysts say this could have an impact on the bidding.

U.S. forces have withdrawn from Baghdad and other urban areas, leaving Iraq's nascent post-Saddam Hussein armed forces responsible for security.

The results have been calamitous. Hundreds of people have been slaughtered in a wave of suicide bombings with which the Iraqi forces have been unable to cope. A new scourge of sectarian bloodletting is threatened.

The oil and gas industry, Iraq's economic mainstay, is a clear target: Destroying pipelines and other facilities, particularly if in foreign hands, would shut down much of the economy.

Iraqi Prime Minister Nouri al-Maliki is increasingly beleaguered as the U.S. withdrawal proceeds. Shiite political factions that were key members of his coalition have abandoned him and formed a new alliance to run against him in the January elections.

The most notable are the Iranian-backed Supreme Iraqi Islamic Council and the bloc headed by firebrand cleric Moqtada Sadr.

This has raised the prospect of a sharp increase in Iranian influence in Baghdad just as U.S. forces are withdrawing and could possibly point to a new oil policy.

An Iranian hand on Iraq's oil wealth would give Tehran control of a fearsome amount of the world's oil supply, surpassing even Saudi Arabia's reserves.

That could scare off potential Western investors already chastened by U.S. sanctions against the Islamic Republic and heighten tension with Washington.

The defections leave Maliki, who rose to power in 2006, increasingly isolated and undermine his efforts to portray himself as the nation's security bulwark at a time when it is clear his forces aren't yet capable to protecting the country.

If the new alliance wins in January, it would be the most pro-Iranian government that has emerged since Saddam Hussein was toppled in 2003 and seriously reduce U.S. influence.

None of this is likely to convince Big Oil that it has a future in the new Iraq.

© 2009 United Press International, Inc. All Rights Reserved. Any reproduction, republication, redistribution and/or modification of any UPI content is expressly prohibited without UPI's prior written consent.
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