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Snuggling-up time

Caution still pervades the public comments of senior international oil company (IOC) executives when it comes to Iraq. Given the absence of the two key conditions for IOC investment—a stable political/security situation and a transparent and fair regulatory system—expectations for speedy IOC entries are still low, writes James Gavin

BP CHIEF executive John Browne's statement earlier this year that Iraq was on 'no-one's radar screens right now' seemed to sum up the IOCs' tepid interest in the country. Even the more limited projects that require no presence on the ground are not making progress. The oil ministry's recent invitation to bid for a technical survey of the Rumaila and Kirkuk reservoirs, which attracted the interest of 14 IOCs, has yet to make much headway in light of the continuing security crisis.

Minnows lead the way

With the exception of Russia's Lukoil, which has taken a more active role, because of its need to shore up a pre-regime-change contract to develop the West Qurna field, much of the initial running has been made by minnows. Ireland's Petrel Resources has been in detailed discussions with the ministry over plans to develop the Khurmala Dome, Hamrin and Subba/Luhais oilfields. Canada's Ivanhoe Energy and the US' Sonoran Energy signed memorandums of understanding for various oil and gas developments in October.

The smaller players have made much of their willingness to take risks in Iraq, in contrast with their larger counterparts' reticence. 'We need a government, we need laws and we need decisions. We have none of that yet,' Browne told BP's shareholders in April.

But the IOCs' public reservations belie a looming corporate battle for influence in a country that boasts the world's second-largest oil reserves. The search for early advantage has begun, with majors positioning themselves for a time when the climate for investment is more propitious.

This is partly a reflection that many of the country's most dangerous areas do not coincide geographically with the main areas of upstream interest to the majors. For example, there have been relatively few sabotage attempts at southern fields.

Positioning strategies have seen the IOCs attempt to cultivate relationships with oil ministry decision-makers and throughout the state-owned oil sector. These have been augmented by the provision of training courses and free technical assistance.

The consensus view is that these contacts are necessary, but not sufficient conditions for a future Iraqi position. 'It helps to be in contact with the ministry and what's left of Iraq National Oil Company (INOC), but you need a government, you need time for them to write some oil law, and until that happens there will be some manoeuvring around the edges, but nothing serious,' says Adam Sieminski, chief oil analyst at Deutsche Bank.

Confirming their reticence, IOCs steered clear of a series of tenders to upgrade established fields at Subba/Luhais, Khurmala Dome in the north and Hamrinthe latter near the notorious Sunni Triangle—leaving the minnows a free run to proceed with their bids.

BP and Shell submitted bids for the revaluation of reservoir data at Kirkuk and Rumaila, worth an estimated $10m, although BP says its study would not require any staff to be present in Iraq. Shell has also been retained to draft a major gas blueprint for the ministry, for which it is offering its services free of charge.

Others have opted to provide the Iraqi authorities with gratis assistance. ChevronTexaco signed an agreement with the ministry in October to provide free upstream technical assistance. The US major will study several Iraqi oilfields and installations in the south and north of the country and train local engineers and oilfield specialists.

For now, IOCs seem content to limit themselves to offers of co-operation, although BP and Shell's presence among the bidders for the Kirkuk and Rumaila studies could point to longer-term ambitions to participate in the development of as-yet untapped and under-evaluatedbut probably extremely attractiveacreage. But few are kidding themselves that the studies will do anything more than acquaint them more closely with the fields' geology. France's Total, which opened an office in Baghdad in 1998 and signed agreements to develop the Majnoon and Nahr bin Omar fields, did not take part in the technical-study tender.

The year of dialogue

Time is not yet of the essence, as the evolution of an Iraqi constitution will be a lengthy process. This is not expected until 2006-2007 at the earliest, as the interim assembly, due to be elected in January, faces an arduous task in forging consensus around constitutional issues. But the Iraqi authorities may need to draw in the IOCs before then. The interim oil minister, Thamer al-Ghadhban, wants to start talks with IOC leaders about boosting capacity in 2005, termed 'the year of dialogue'. Aside from informal meetings, dialogue has, until now, been lacking.

But if a benign political situation is to develop by 2007, IOCs must be ahead of the game now. Some analysts say strategic investment decisions must be made over the next 12-18 months, whatever the security situation in the interim. Others, including Sieminski, are doubtful there is much that IOCs can achieve now given the well-known dangers on the ground.

The issue is complicated by growing divisions within Iraqi oil circles. Prime minister Iyad Allawi raised the stakes in August by appearing to restrict INOC's future role to managing the existing output capacity of up to 3.5m barrels a day. As part of a wider overhaul of Iraq's oil-policy regime, which envisages the state relinquishing direct management of commercial operations and the re-establishment of INOC, Allawi said new and undeveloped oil and gas projects should be realised through private-sector investment 'with international oil and gas companies'.

The enhanced role for IOCs suggested by this plan, ahead of any serious discussion about the likely regulatory framework for investment in hydrocarbons, ruffled many feathers in the ministry. A restricted role for INOC could prove unpopular with Iraqis and undermine confidence in any putative deals with IOCs.

'If Allawi wants production-sharing contracts (PSCs), then with whom will private firms share production if INOC is excluded? Something appears to be missing,' says Mohammed-Ali Zainy, a Centre for Global Energy Studies analyst and a former oil adviser to the US administration in Iraq.

And the thorny issue of the ownership of Iraqi oil still awaits resolution. Kurdish secession ambitions remain an unknown factor. Given that the Kurdish autonomous authorities drafted a model PSC in 2002, the temptation to go it alone may prove strong for some IOCs. Some have made tentative attempts to build relations with the Kurdistan Regional Government, such as Norway's DNO, which has negotiated an agreement to explore and develop hydrocarbons in the north of the country. But in a firm warning issued in July, the oil ministry said IOCs must not circumvent the central government in oil talks.

With the future political dispensation still an open book and likely contract terms far from clear, substantive negotiations over future positioning strategies are still some way off. Yet this does not disbar the cultivation of relationships. Says Sieminski: 'The IOCs will be watching closely what anyone who looks like being a leader is saying. They'll be putting their base cases for why their company ought to be involved, whether through leases, joint ventures or PSCs.'

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