Iraq - First Look
In December 2009, the government of Iraq held a competitive auction for the rights to develop 60 billion barrels (bbls) of proven crude oil reserves across 10 major fields. The output requirements under the awarded contracts yield a production plateau of 9.6 mm b/d by 2017 in addition to current production. By any standard the Iraqi auction represents a major event in the history of the world oil market – it is the largest single transfer of petroleum reserves into the production stream of the oil market since the beginning of the petroleum era. Iraq’s proven reserves are estimated at 115 billion barrels which ranks the country third in proven reserves behind Saudi Arabia and Iran. However, credible estimates of Iraqi reserves suggest Iraq contains over 200 billion barrels of recoverable reserves and potential resources of over 400 billion barrels.
The production commitments for these reserves among the winning bidders, through a contracting vehicle called technical service contracts (TSC), are only partially transparent. It is known that companies will receive a fee of $1-$2/bbl plus cost recovery of incurred capital, operational and supplementary expenditures. International oil companies have said that the Iraqi contracts provide them with double digit returns of approximately 15 percent.
Although such returns might also be available from other projects in company project portfolios with lower risk profiles, the IOCs likely view Iraq as also providing an opportunity to substantially improve returns through access to new ventures. The Iraqi government expects to receive over 95% of total revenues generated by the auctioned fields. This has already diffused early political opposition to the auctions as proposed. There are important unknown aspects of the contracts, such as the ability to renegotiate fees for both contracted and newly discovered reserves and how cost efficiency is rewarded under the contracts. There has been no mention of the mechanism to accommodate any possible conflict on the government’s contractual commitment to the companies should Iraq curtail national production in concert with OPEC. Also unresolved is the issue of responsibility for making massive logistical and infrastructure investments required to produce such large volumes of crude in the next six to seven years.
Admittedly, a large array of external and internal threats and more traditional obstacles could derail Iraq’s prospects for a massive increase in crude oil output. Nevertheless, the prospect that Iraq could potentially bring about a “supply shock” to world oil supplies can no longer be dismissed out of hand. An alternative view is that expanded Iraqi production may provide essential new supplies to prevent a “price shock” if non-OPEC production experiences sustained output declines. In this scenario the role of Iraqi supplies may be more as a brake on rising prices rather than a catalyst to a lower price path. In any case, the Iraqi auction clearly opens the door for a careful review of the conventional wisdom on the outlook for oil prices over the next 20 years.
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