ANALYSIS - Now or never for Big Oil in Iraq

BAGHDAD Thu Dec 10, 2009 5:25pm IST

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BAGHDAD (Reuters) - Iraq is offering some of the world's largest remaining untapped oilfields in an auction that will spark fierce competition as the world's largest energy companies fight for rare access to cheap Middle East reserves.

Iraq holds the world's third-largest oil reserves. The quality of the reserves -- sitting in huge fields that are cheap to pump -- offers an unparalleled opportunity for oil giants.

It is is one of the largest auctions ever held, with around the same reserves on offer as all the oil in OPEC-member Libya.

Iraq's second bidding round since the U.S.-led invasion of 2003 offers the last of Iraq's supergiant oilfields, so Big Oil's most powerful deal makers are under pressure to walk away with a contract. This may be their last chance to secure access to billions of barrels of easy oil.

"For the companies involved, this is it," said Alex Munton, analyst at consultancy Wood Mackenzie. "Rounds 1 and 2 to a large extent covers all of Iraq's biggest fields. There is no round three."

Firms that failed to win contracts in the first round were likely to push hardest. Among the empty-handed so far are U.S. major Chevron and France's Total. The two have paired up and Total has said it would bid for Majnoon, one of the supergiant fields on offer.

Russia's LUKOIL and U.S. ConocoPhillips were expected to bid for another of the giants, West Qurna Phase Two. The two lost out to Exxon Mobil and Royal Dutch Shell in the first round competition for West Qurna Phase One.

Both Total and Lukoil negotiated for the rights to develop the fields under Saddam Hussein. That may give them an advantage in reservoir knowledge, but their consortia will face tough competition from the other 40 companies in the race.

RACE TO THE LINE

The mood among oil companies heading into the second bid round is markedly different to round one in June, when only one contract was awarded to BP and China's CNPC.

Then, contract terms were unclear, oil firms had no idea of the fee Baghdad would pay and legal, security and political risks were perceived as so high that even some of the biggest firms stayed out of the bidding.

But as BP and CNPC thrashed out their final terms the contract model became more attractive to other firms, who have come back to the table to revive deals previously rejected.

"There is a sense that this will be very competitive," said Raad Alkadiri, head of global risk at Washington-based consultancy PFC Energy.

"Foreign companies are more familiar with the Iraqi government and vice versa. The bottom line is that massive reserves are in play and oil companies will want a piece of the action. This will be a keenly fought round."

Changes in the bidding parameters were likely to make competition even tougher. Greater weight would be placed on the fee per barrel in bids than the target production rate. Baghdad changed the formula due to concern bidders inflated output targets in the first round.

"This is a very big change," said a senior executive at a western oil company. "It means it will be a straight race based on the fee. I think this will be a photo finish. It will be very close and the competition will be very tough indeed."

With such stiff competition, the terms were likely to be as tough as they were in the first round. Baghdad may agree slightly higher fees than the $2 per barrel then because the fields are mostly untapped, so more work must be done to exploit them. But oil firms will not be expecting much better margins.

"I doubt it would be much more than $2-$4 per barrel," said an Iraq oil industry observer.

RISKS, NOC COMPETITION

Big risks remain for firms taking on Iraqi contracts. Plans to enact a new oil law have been delayed for years due to political disputes, leaving the possibility that contracts could be ripped up by future governments.

Still, firms are unlikely to get deals finalised before elections in March, so they would have no obligation to make investment before the poll and have little to lose through bidding. Even if terms are later revised, firms would be in a more powerful position if they had a preliminary deal.

"The legal risk is tremendous," said Samuel Ciszuk, Middle East energy analyst at IHS Global Insight. "There is no proper law, so you are basically relying on government understanding. But the companies will take a gamble and bid anyway. It won't cost anything so it is best to move now."

Majnoon, West Qurna, East Baghdad and Halfaya are the biggest fields on offer and likely to attract the most competition and bids from big oil.

The other six fields on offer were much smaller and more likely to attract bids from national oil companies and the smaller companies qualified.

(Additional reporting by Ahmed Rasheed; Editing by Michael Christie)

For a graphic of the fields click here

(For more news on Reuters Money visit www.reutersmoney.in)

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