Oil Giants Itching To Invade Iraq

The Big Players Have Been Shut Out Since Nationalisation In 1972. Now They See Their Chance To Get In

By Danny Fortson in Kurdistan
December 28, 2008
Courtesy Of The Sunday Times

(Noel Quidu/Gamma/Camera Press)

On guard: security is important for oil companies in Kurdistan, even though the region was largely untouched by the insurgency

THE residents of Shiwashok, a dusty village sprouting from the hard-scrabble landscape of Kurdistan in northern Iraq, have simple desires: drinking water; fuel for the electricity generator; a toilet for the primary school.

Sadi, the village chief, rattled off the wish list to Pradeep Kabra, an executive from Addax Petroleum who had flown in from Geneva to check on progress at the company’s Taq Taq oilfield.

“We’ll do whatever we can to help,” he said.

After covering the essentials, Sadi had one last, pressing request: a new volleyball court. The sport is hugely popular here and Shiwashok’s team are said to be the best of the surrounding villages. They have a game coming up and practising on an improvised mud patch is difficult. “We’ll look into it,” said Kabra.

For Addax, such quid pro quos are a small price to pay to operate in Iraq. The publicly listed oil group is one of only four foreign companies that are drilling in the country. It is a privileged position. Iraq sits atop a sea of 115 billion barrels of oil, the largest reserves in the world after Saudi Arabia and Iran; enough to produce for the next 126 years, according to Deutsche Bank.

Yet since the Iraqi government nationalised the industry in 1972, oil’s main players have been shut out. Years of war and violence have kept them at bay.

That may be about to change. In October the Baghdad government kicked off a round of bidding to allow international oil companies to exploit eight of the country’s largest oil and gasfields. BP, Royal Dutch Shell, Exxon Mobil and Gazprom are among the 35 companies that have put concerns about security to one side and thrown their hats in the ring. The deals would pave the way for the first significant foreign investment in the country’s biggest fields in more than three decades. Some side deals have already been signed — last month Shell announced a $4 billion (£2.7 billion) gas joint venture with the Iraqi government and opened a permanent office in the country.

For Iraq the timing couldn’t be better. As reserves dry up around the world and national governments tighten their grip on what is left, the industry is more desperate than ever to get its hands on the Iraqi honey-pot. The plummeting oil price, from a high of $147 a barrel this summer to a new low of $36 last week, has focused their minds.

Along with Saudi Arabia, Iraq is one of the cheapest countries to extract oil from, costing as little as $4-$5 per barrel thanks to the easy geology and high flow rates.

That is a long way from more exotic endeavours such as Canada’s tar sands, where extraction can cost $50 a barrel or more. Labour is also cheap. Addax, which has made $248m so far this year, pays $15 a day to the manual labourers who work at Taq Taq.

In terms of easily accessible and plentiful oil, Iraq is the final frontier. But if the experience of Addax and the other intrepid few who have ventured into Iraq is anything to go by, getting it out of the ground will be a long, tortuous process.

Security is a problem. Even in Kurdistan, a relatively tranquil region that was left largely unscathed by the recent war, foreign visitors have 24-hour armed protection and travel in armoured convoys. A suicide bomber in Kirkuk killed 46 people in a restaurant this month, while the Kirkuk-Ceyhan pipeline, the region’s main export route to Turkey, was shut twice in November after attacks by Kurdish rebels. Hotels and embassies in Erbil, the Kurdish capital, are surrounded by concrete blast walls and patrolled by guards wielding AK-47s.

Ivan and Stoyan, twin brothers who were once in Serbia’s special forces and are in charge of security for Addax executives and visitors, casually refer to having “eliminated” a group of men just a few weeks before. Of the 600 workers at Taq Taq, 250 are engaged in armed security, some of them stationed in guard towers that dot its perimeter. In the south, where the big fields are up for bidding, the security situation is much more shaky.

Iraq is still struggling to find its feet. Last week the UN passed a resolution barring companies and governments during the next year from suing the fragile government for damages suffered under Saddam Hussein’s rule. The fear is that a wave of lawsuits, from the likes of Kuwait, would decimate the government’s coffers just when it desperately needs to invest in rebuilding.

Then there is the issue of domestic politics. Outside Kirkuk, an unfinished 25km pipeline is a bleak testament to the role it plays for the few that have ventured into the country. DNO, the Norwegian oil group, stopped construction nearly a year ago with the pipeline just a couple of yards short of the Kirkuk-Ceyhan pipeline. Since then it has been waiting for government approval to lay the final section. Until that happens, the 50,000 barrels-a-day facility it built in Tawke to feed it remains idle. Every day that passes, $2m worth of oil — at today’s price — remains in the ground.

The problem boils down to a long-simmering row between semi-autonomous Kurdistan and the central government. Like Addax and its partner in Taq Taq, Genel Enerji of Turkey, DNO received its permission to drill from the Kurdistan regional government (KRG), not the oil ministry in Baghdad. In total, the KRG has signed a total of 20 so-called production-sharing agreements with western companies. The terms are generous, allowing developers to recoup their full development cost and then share the revenue.

The deals have infuriated Hussein Shahristani, the Iraqi oil minister. He has been trying to finalise an oil law that will govern rights and revenue-sharing for the whole country. Oil accounts for about 95% of the government’s revenue. The draft law proposes more stringent technical service agreements for new foreign entrants, which leaves the ownership of reserves in Iraqi hands and pays the companies a fee.

The KRG’s deals, he has said, are “illegal”. He has threatened to bar any company that deals with the Kurds from bidding for the giant fields in the south. That is why the likes of BP and Shell have kept out of Kurdistan. They are hoping they will now be repaid for their patience.

An industry source said: “The majors have made a conscious decision not to go because they don’t want to anger Baghdad. But the KRG is just getting on with it.”

The oil law has been stuck in Iraq’s parliament for nearly three years.

Jean Claude Gandur, chief executive of Addax, said he had been assured that because he signed before the draft oil law was published in February 2007, his deal with the KRG was safe.

“I understand Baghdad put some conditions on the law that the Kurds didn’t like and so the negotiations were frozen. But Baghdad has never put the legality of our contract in doubt,” he said.

It’s not a minor point. Taq Taq, discovered in 1958, is potentially a world-class oilfield. Addax expects to be pumping 150,000 barrels a day from it within two years, roughly double its global production today.

Some argue that the company will inevitably be forced to renegotiate on much less attractive terms.

“Why would anyone in their right mind give this as a production-sharing agreement. [They] are meant for risky things like areas that are virgin or new,” said Muhammad-Ali Zainy, senior energy economist at the London-based Centre for Global Energy Studies. “When you have a discovered field it doesn’t make sense. Production-sharing agreements are taboo with the Iraqi population. The central government won’t stand for it.”

Indeed, more than two years after starting work at Taq Taq, Gandur still has not received permission to build a pipeline. Shahristani indicated last month that he would allow both DNO and Addax to hook up to the Kirkuk-Ceyhan pipeline, and DNO recently began working on the final section.

But neither company has yet received official permission to start exporting. Without an export route for the oil, Taq Taq doesn’t make sense: 150,000 barrels is far more than can be trucked to the domestic market.

Gandur, who recently bought a stake in another Kurdistan oilfield, Sangaw, from Sterling Energy, admitted: “Nobody has the answer really. It’s not in the hands of the operators. The regional and central governments are actively working on this. We are confident. Discussions are ongoing and maybe with the lower crude price the chances of a resolution have increased. Something has to happen.”

He seems comfortable working amid the uncertainty. It is something that the rest of Iraq’s aspirants will surely have to get used to. That, and building the occasional volleyball court.