International oil companies in Iraq are negotiating to revise their contracts with the government, as new production targets undermine the profitability of their operations.
BP and other major oil firms seek new terms in Iraq
Iraq's government earlier this year revised down its national oil output targets to 9.5 million barrels per day (bpd) by 2020, up from about 3 million bpd today, as part of a new blueprint for the development of its energy sector.
The new strategy is a more realistic reflection of the obstacles faced by international oil companies (IOCs) ramping up production in the country, but it renders the technical service agreements (TSAs) struck with the government unprofitable.
TSAs entitle oil companies to a fee per barrel produced. They were signed when Iraq was pursuing a target of 12 million bpd or the even more ambitious initial post-war target of 16 million bpd by 2020. With expected future production now lower than originally projected, the per barrel fees are unlikely to recoup the massive IOC investment into Iraq's oil sector, and companies are seeking to revise the terms.
"We are talking to the government about the right commercial basis," said Andrew McAuslan, the vice president of negotiations and upstream business development at BP. "Do we expect to end up in a place with a different plateau and be compensated for that? Yes."
BP is the lead operator at the Rumaila super major field near Basra, where production stands at 1.4 million bpd. The company will steadily increase investment to up production by an additional 750,000 bpd by 2017. This year, the company will invest about US$2.6 billion in the field and annual investment will grow until it reaches about $5bn in 2016.
Because the costs involved in reviving Iraq's oil sector, which was in severe disrepair after the two Iraq wars and years of sanctions, are huge, BP is not the only oil company in negotiations with the government.
"We've moved to a really good conversation that all of the IOCs are having," Mr McAuslan said on the sidelines of the Iraq Energy conference held in Abu Dhabi yesterday.
The Russian company Lukoil, which operates in West Qurna 2, another southern megafield, in January agreed to cut production targets by a third. In return, the period in which the company is allowed to produce at full capacity has been extended by five years.
Experts believe that other IOCs will similarly be compensated for revised output targets with longer peak production periods.
Baghdad is under pressure to improve the terms of its contracts, which have left IOCs disgruntled for some time.
Iraq's TSAs are regarded as some of the least lucrative in the industry. Nevertheless, IOCs flocked to the country after the second Iraq war, drawn in by the promise of huge production figures.
As it became clear that initial targets would not be met, Iraq's oil sector lost its shine, and companies began looking around for alternatives. Last year, ExxonMobil became the first oil major active in Iraq to commit itself to oil production in the Kurdish region of Iraq, in spite of Baghdad's policy of blacklisting IOCs operating in the autonomous region.
Chevron and Total have also signed oil contracts with the Kurdish Regional Government, which are more generous than the TSAs, and tensions between Exxon and Baghdad have escalated to the extent that the oil major is looking to sell its stake in West Qurna 2.