Iraq Sweetens Deal for Foreign Oil Cos.; China, Shell Make Joint Bids

Oil reserves and infrastructure in Iraq. (image: eia.doe.gov)

After six years of conflict and infrastructure devastation, Iraq is seeking investors to pump cash into their weak economy.

Luckily for Iraq, the world’s third largest oil reserves exist within its borders. Because new sources of crude are perpetually in demand, the Iraqi government has attracted dozens of investors to two bidding rounds, the first of which will occur in June, according to Bloomberg News. They’re aiming to award the field development rights by the end that month.
Iraq only had one major oil deal with a foreign firm (China) since the fall of Saddam Hussein. Now, Shell (Royal Dutch Shell Plc RDSA.L) has teamed up with the two biggest state-supported Chinese oil firms to jointly bid for a project, according to Reuters.  Bloomberg reported a pairing of Total SA and Chevron Corp.

According to The Wall Street Journal, Shell and the Chinese companies are eyeing the Kirkuk oil field in northern Iraq for development.
When Iraq first opened up its doors to foreign investors last year, many companies were skeptical, saying the terms of the formal process lacked incentives.

But Iraq’s ability to majorly invest in these projects has since diminished. Iraq’s oil minister, Hussain al-Shahristani, suggested for the first time that Iraq would consider allowing foreign companies to share directly in the profits from oil production, rather than the fixed fees in the joint ventures that are now offered, according to The New York Times.
Now, the government may give oil companies up to 75 percent stakes in the developments, a concept that was once, according to Time magazine, a “radical notion among the heavily nationalistic oil-producing states.”

Thirty-five international companies were pre-qualified to take part in the sales and nine have been added to the list so far this month.

The United States may take the prize for world’s biggest oil consumer. But in Iraq, a whopping 90 percent of the country’s government income depends on oil revenues.

Iraq’s 2009 budget assumed that oil prices would remain above $62.50 a barrel. But during the first quarter of this year, oil prices stayed closer to the $50 per barrel mark. On April 16, the price of crude closed at $49.94 a barrel.

Stateside, we’ve enjoyed lower prices at the pump this year. Cheap gasoline and lower heating bills translates to a major blow in Iraq, though, where dwindling oil revenue has already forced the government to cut back on reconstruction projects, such as food and clean water services.

It’s actually in our best interest that oil prices recover from their slump. Certainly no one is hoping for a return to $150 per barrel, but a small price increase could support self-sufficiency and security in Iraq.  In a country alarmingly dependent on this highly volatile product, stability would allow a decrease in U.S. intervention.

In March, Iraq’s oil minister, Hussain al-Shahristani said the country aims to boost oil output to about six million barrels a day by 2015 from about 2.5 million barrels currently. He estimated that the additional production would require an investment of $50 billion.

We can’t yet predict how and when this will affect crude oil prices, especially considering the global economic climate and a reduced demand for oil. Increased production worldwide means more supply, which could drive down prices even further.

It remains to be seen, though, whether or not Iraq can produce enough to have a discernable effect. Iraq’s reserves certainly seem promising – but oil exploration and production is always a risky business.