It is back to the drawing board for Iraq and Algeria, now that both have been snubbed by dozens of foreign oil firms.
Oil licensing snubs are a big loss for Iraq
It is back to the drawing board for Iraq and Algeria, now that both have been snubbed by dozens of foreign oil firms that were invited to help them develop their huge oil and gas resources and put them back on the road to prosperity. It is not that the likes of ExxonMobil and Royal Dutch Shell are against doing their bit for stability in the world's premier energy exporting region, as they clearly stand to benefit.
But they are commercial enterprises, not foreign aid organisations, and they have had enough of the resource nationalism that has sharply restricted their access to the world's most attractive oil and gas reserves. In walking away from contracts to rehabilitate Iraq's biggest oilfields and help Algeria boost gas supplies to Europe, many of the world's leading energy companies simply concluded that the commercial benefits on offer were not worth the accompanying risks.
It is beginning to look as though international oil companies, supported by the national oil companies of some big energy consumers - usually their fiercest rivals - are rebelling en masse against extortion by energy exporting countries. The firms are voting with their feet, after their arguments for fairer payment for superior technical competence have gone unheeded. By all accounts, the recent Iraqi and Algerian government offers were miserly, as the countries' political leaders, in each case facing elections, attempted to placate restive electorates with promises to keep a firm grip on national resource wealth.
"Iraq wanted to squeeze the margins as much as possible for investors, and they squeezed too much," said Samuel Ciszuk, the Middle East analyst at IHS Global Insight, after oil firms left seven out of eight contracts on the table on Tuesday in the country's historic first post-war oil and gas licensing round. The country's oil minister, Dr Hussein al Shahristani, under heavy attack in parliament, had taken the unprecedented step of televising the auction, expecting his oil policies to be vindicated before the world.
Instead, some observers declared the event "a fiasco": five of the six oilfields on offer and one of the two gasfields did not attract bids that the ministry was willing to accept. The remaining gasfield received no bids at all. That must have been déjà vu for the organisers of Algeria's much delayed bidding round, held late last year. It was the North African country's first under a 2006 oil law that sharply increased taxes on foreign companies' oil and gas output.
Last December, Alnaft, the new Algerian energy regulator, awarded only four oil and gas exploration permits to foreign firms, after 11 of the 15 areas on offer failed to attract bids. Algeria was more secretive than Iraq about its bidding process, declining to identify the companies submitting offers. But the result was the same. In Algeria, which was facing fierce competition from Libya and Egypt as it sought a bigger share of Europe's gas market, contracts went to some of the biggest private-sector gas companies - BG Group of Britain, E.On of Germany and Eni of Italy, as well as the Russian state-controlled gas monopoly Gazprom.
But Algiers had been courting many others for asset swaps to enhance its international portfolio. Most companies in a position to offer those walked away. In Iraq, an alliance between BP, the biggest UK oil group, and China National Petroleum Corporation, the largest Chinese state petroleum company, won the only contract awarded in the bidding round, giving them development rights to Iraq's biggest oilfield.
But Baghdad had hoped to tap the technological expertise of a number of international firms, seeking a box of tools to resolve problems at huge oil reservoirs damaged by Saddam Hussein-era mismanagement. Dr al Shahristani is putting a brave face on the auction's outcome, talking up the potential for a large production increase from the giant Rumaila oilfield, containing 17 billion barrels of reserves.
But whatever BP manages to accomplish at Rumaila will not help Iraq's state oil companies grapple unaided with different problems at other big fields with distinctive geologies. Seven months after its last bidding round, and with elections past, Algeria is ready to try again. Sonatrach, the state oil and gas company, is seeking to boost gas exports by 40 per cent within three years. On Monday, just one day before the Iraqi auction, the Algerian state energy agency announced a new licensing round, with contracts to be awarded in January.
This time, Algeria hopes to attract companies that can help it exploit technically challenging "tight gas" resources. If Algeria is anything to go by, Iraq may postpone its second oil licensing round, scheduled for December, until after its parliamentary election at the end of January. By then it will have lost valuable momentum, as well as the goodwill of potential oil industry partners. The International Energy Agency now predicts it will be at least five years before Iraq achieves any substantial oil production gains.
If there are any winners from the situation, they may be the smaller oil firms that cast their lots with the regional government of Iraqi Kurdistan in deals that Baghdad has refused to recognise. Now, Iraq's central government may no longer be able to justify shutting in Kurdish oil and gas. The shares of Dana Gas, a UAE company involved in a venture to export gas from Kurdistan, climbed 5 per cent yesterday on the Abu Dhabi Securities Exchange.