x Abu Dhabi, UAEMonday 24 July 2017

Iraq holds oil auction amid security fears

Iraq's hope of luring international oil companies gets mixed results as security fears weigh on the country's second oil auction this year.

Iraq has awarded two big contracts to foreign firms at the midpoint of its second postwar auction of oil licences, paving the way for the country's oil output in time to rival that of Saudi Arabia. A consortium of Royal Dutch Shell and the Malaysian state-owned firm Petronas won a 20-year deal to boost output from the Majnoon oilfield to 1.8 million barrels per day (bpd) from a token 45,900 bpd currently. Majnoon in southern Iraq, one of the two biggest fields offered in the two-day auction, contains 12.6 billion barrels of proved reserves. A group led by China National Petroleum Corporation (CNPC) won a contract to develop 545,000 bpd of oil production from the Halfaya field, just north of Majnoon, which has 4.1bn barrels of reserves. The consortium also included Petronas and the French oil group Total. Despite its significant size, the Halfaya field is unexploited. No bidders stepped forward for oilfields on offer in eastern Iraq, one of the country's most violent regions. The East Baghdad field near the Iraqi capital also failed to attract interest, while the Qaiyarah oilfield in northern Iraq received only one bid, from the Angolan national oil company Sonangol. The Iraqi oil ministry rejected that offer as too high. A resurgence of violence in Iraq cast a pall over the bidding round, which was held under tight security at the ministry's headquarters in Baghdad just three days after co-ordinated bombings in the capital. Analysts said security concerns were discouraging some firms from bidding on the 10 groups of largely undeveloped oilfields, with combined reserves of more than 35bn barrels, offered in what could be the last major auction of Iraqi oil licences. "For the companies involved, this is it," Alex Munton, an analyst at the UK consulting firm Wood Mackenzie, told Reuters. "Rounds one and two to a large extent cover all of Iraq's biggest fields. There is no round three." Nevertheless, the bidding round has already been more successful than the previous one held in June. In that auction, only one of eight possible contracts was awarded. Hussain al Shahristani, the Iraqi oil minister, said the results so far were a "great success". He noted that the payments the winning companies agreed to receive were satisfactory for Iraq and that the production targets were higher than Baghdad had sought. Indeed, it would be hard to view the Majnoon deal as anything but a victory for the government. The project will entail billions of dollars of capital costs and requires the payment of a $150m (Dh550m) signing bonus, but Shell and Petronas will receive just $1.39 for each barrel of additional oil they pump from the field. Their bid beat a rival offer by Total and CNPC to develop Majnoon for $1.75 per barrel. It would be challenging for Shell and Petronas to make a competitive return on investment, Jason Kenney, an analyst with the Dutch bank ING, told Dow Jones. Their project, he suggested, was "maybe not as attractive as other international opportunities". The payoff, however, could be future opportunities to participate in more lucrative exploration and development deals in Iraq. Today's leg of the auction features another huge prize, West Qurna 2, with proved oil reserves of nearly 13bn barrels. tcarlisle@thenational.ae