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Few takers in Iraq's latest energy auction

Baghdad, May 30, 2012

Iraq awarded only one out of six new oil and gas blocks to foreign companies on Wednesday after tough contract terms dampened interest during a fourth energy bidding round the Opec-member hoped would further expand its energy sector.

Baghdad had offered the auction as the latest step to rapidly build up Iraq's energy sector after years of war and sanctions, but officials and executives said economics of the contracts especially on gas deals, kept companies away.

During the first day of auctioning on Wednesday, foreign companies made no offers on four oil and gas blocks and a group led by UK-based Premier Oil rejected a government offer on the fee for a fifth block, scuttling an agreement there.

Only a consortium led by Kuwait Energy and partners Turkey's TPAO and Dubai-based Dragon Oil secured a deal to explore Block 9, a mainly oil area in southern Basra province. They offered a remuneration fee of $6.24 per barrel of oil equivalent.

Block 9 is adjacent to neighbouring Iran's huge Azadegan oilfield. Western geologists say there is discovered oil in the block and add it may be part of the Azadegan reservoir.

"We believe the contracts.. serve the interests of the companies and Iraq. But they have a different view," Abdul-Mahdy al-Ameedi, director of the ministry's contracts and licensing directorate said. "That is why only one block was awarded."

Another six blocks were scheduled to go up for auction on Thursday, alongside at least of the two blocks initially rejected on Wednesday.

Bidding was decided according to the remuneration fees offered, with the lowest bids winning blocks. Industry sources had said companies would have to offer $10 to $20 a barrel for the service fee to compensate for risks involved.

Iraq had eased the terms on the service contracts in an attempt to lure interest, but companies are generally more wary of service agreements - where they are paid a fee - rather than production-sharing deals that allow them to profit jointly from the output.

"With tough gas contract terms, and all the other risks around these blocks, we don't expect much interest from companies," said one senior company executive involved in the bidding, who asked not to be identified because of the sensitive nature of the negotiations.

Large reserves

Iraq has the world's fourth-largest oil reserves and the tenth-largest gas reserves, and still offers potentially rich unexplored territories after its industry was left under-developed for years.

Violence from the country's war has ebbed sharply, and major international oil companies like BP and Exxon have already signed major deals to develop oilfields in the south, where current average exports are 2.13 million barrels per day and output 2.35 million bpd.

But companies entering new deals must weigh still tough service contract terms and the risks from Iraq's ongoing political instability against the potential gas and crude developments on offer in the bidding, mostly in remote parts of western and central Iraq.

Oil explorers winning blocks will immediately be able to extract gas discovered at their sites, but the Iraqi government has retained the option to pay compensation to companies to keep crude in the ground to help boost its reserves.

Investors may shy away from blocks in more remote areas due to concerns over security in a country where Sunni Islamists tied to al Qaeda are still active despite a drop in the violence and bombings at the height of Iraq's war.

Another hurdle could be the failure of Iraq's parliament to pass a long-delayed national oil and gas law that could provide a stronger framework for protecting oil investments.

Baghdad's central government and the autonomous Kurdistan Regional Government in the north are also locked in a dispute for control over oil in areas which both authorities claim.

Baghdad rejects deals signed by the Kurdish region as illegal.

Exxon Mobil was dropped from the 4th bidding round after it announced deals to develop oilfields in Kurdistan, a move Baghdad criticized. US-based Hess Corp was also blocked from competing after it signed for Kurdish oil deals. – Reuters




Tags: Oil | Iraq | Baghdad | Auction | Bidding | Gas block |

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