Investment opportunities in Iraq await permanent government, legal structure

Sept. 15, 2004
Definitive laws and regulations that would outline terms for investment by international companies in Iraq await the establishment of a permanent government, an energy attorney said. Iraqi elections are slated for 2005.

Paula Dittrick
Senior Staff Writer
HOUSTON, Sept. 15 -- Definitive laws and regulations that would outline terms for investment by international companies in Iraq still await the establishment of a permanent government, an energy attorney said. Iraqi elections are slated for 2005.

It's estimated that billions of dollars worth of investment will be needed to help Iraq unlock its vast oil and natural gas potential. But violence in Iraq combined with lack of a legal structure has most international oil companies on hold from doing business in Iraq.

"We're seeing some reticence from major oil companies in dealing with the interim government," said Lori A. Feathers of Haynes & Boone LLP's Dallas office. In particular, companies fear that Iraq's future government could void contracts signed with the interim government, she said during an industry briefing in Houston Tuesday.

"No rules or regulations have been provided for upstream investment," by international investors yet, said Feathers. She advises public companies on international trade and investment as well as corporate transactions.

Reconstruction
Meanwhile, the Iraqi Oil Ministry is expected to award a contract in October for reservoir and engineering evaluations in Rumaila field and Kirkuk field.

The US Army Corps of Engineers is working to develop more reconstruction contracts, Feathers noted. Halliburton Co. subsidiary KBR has a contract to restore Iraq oil infrastructure in southern Iraq. For reconstruction in northern Iraq, USACE awarded a contract to a joint venture between Parsons Corp., Pasadena, Calif., and Australia-based Worley Group (OGJ Online, Jan. 19, 2004).

Meanwhile, US major ChevronTexaco and Italian ENI have signed technical support deals with the Iraqi Oil Ministry. Others, including ExxonMobil Corp., BP PLC, OAO Lukoil, Royal Dutch/Shell Group, and Total AS have offered technical support.

"It's thought that this might be a first step in terms of some of those big oil majors forming relations and alliances with the Iraqi government and getting their foot in the door," Feathers said.

Future contract models
Currently, two types of contracts are being discussed for Iraq. The first is the buyback service model contract that already used in Iran.

Under the buyback contract, an interested foreign contractor, operating through an Iranian affiliate, signs a contract with state-owned National Iranian Oil Co. (NIOC). The contractor develops the field, and NIOC repays costs. Additionally, the contractor receives a remuneration fee, normally through entitlement to a certain volume of produced hydrocarbon (OGJ Online, Sept. 14, 2004).

"The buyback service model seems to be the most politically viable course for investment in the midterm because production-sharing agreements can be quite political¿and usually require some type of legislative or other initiative to get the proper laws," Feathers said of contract models being proposed for Iraq.

Iraqi Oil Minister Thamir Ghadhban told reporters at an OPEC meeting in Vienna Wednesday that Iraq seeks to raise its oil output to 3.25 million b/d by yearend 2005.

Meanwhile, the Iraqis have indicated a long-term production capacity target of 6 million b/d.

"For some of the big fields, production-sharing contracts will probably be in order," Feathers said of the 6 million b/d goal. "The [investment] need is definitely there, and the evidence is there that the early players who get their foot in the door first are going to have the most potential to really reap the rewards."

Her comments reaffirmed other experts's earlier comments. Iraq's oil and gas industry has suffered from a lack of investment since nationalization in 1975, said Bayphase Ltd., a UK-based investment analyst (OGJ, Mar. 24, 2003, p. 30). An estimated $100-150 billion worth of investment will be required to unlock Iraq's massive reserve potential, Bayphase has said.

Kurdish officials
In March, a transitional administrative law (TAL) was implemented to serve as an interim constitution pending ratification of a new permanent constitution, tentatively slated for next year.

The TAL established Iraq as a federal government and recognizes the authority of the Kurdish regional government.

"The Kurds have seen the TAL as fortifying their assertion of control over the oil wells of Kirkuk oil fields. There have been reports that Turkish and Norwegian companies already signed production-sharing contracts with the Kurdish regional government to explore for and develop oil concessions," Feathers said. "Not surprisingly, the Iraqi Ministry of Oil has denied the validity of those contracts and said that companies that negotiate with the Kurdish regional authority will be barred from participation in contracts with the Iraqi National Oil Co."

Oil supply, demand
Emad Elrafie, senior advisor to Gaffney, Cline & Associates, said additional Iraqi oil production will be needed to balance anticipated future global oil supply-demand needs.

"Unless there is a stunning demand shock, the supply-demand balance should remain tight. There is a lot of need for supply today," Elrafie said.

Security costs discourage companies that are considering doing business in Iraq, he noted. But global oil demand combined with Iraq's vast potential oil resources and its low-cost oil production figures are bound to lure international investors, he said.

Walter H. Pierce, a consulting geologist and director of Houston-based WHPierce Exploration, said Iraq has "excellent diverse reservoirs" waiting to be tapped. He sees Zubair field as having the biggest potential for future exploration and development.
Contact Paula Dittrick at [email protected]