Iraq opened the doors to foreign investment in its vast oil industry Monday, as it revealed the terms for contracts in its first round of oil bidding since the U.S.-led invasion of 2003.
Oil Minister Hussain al-Shahristani met with executives from 35 international oil companies in London, setting out the conditions of 20-year service contracts to develop six of the country's oil fields and two new natural-gas fields.
"This is a very important milestone in the history of the Iraqi oil industry," Natik al-Bayati, director general of Iraq's Oil Ministry, said after the meeting.
Mr. Shahristani said Iraq wasn't producing enough oil to fund the reconstruction of the country. "Thus we felt the cooperation of international oil companies is needed to fast-track the development of Iraq's potential," he said. He added the country could no longer wait for a much-delayed oil law to be passed before it moved ahead on awarding licenses.
Iraq has 115 billion barrels of oil reserves, the third largest after Saudi Arabia and Iran. But more than a decade of sanctions and two wars have left its oil infrastructure in tatters.
The country has ambitious plans to more than double its current production of around 2.2 million barrels of oil a day within four years. That will require massive investment.
The World Bank has estimated Iraq needs to commit an additional $1 billion every year to the oil industry just to sustain current production.
There were hopes that the long-awaited hydrocarbon law would unlock Iraq's potential by setting the terms for foreign companies wanting to work in the oil industry and explaining how oil revenues would be shared by the country's regions. But the law has been bogged down for months in Iraqi parliament amid debate about the role of Western oil majors. Nationalists worry Iraq could become the only big oil-producing country in the Middle East to allow foreign control of its oil projects.
Meanwhile, frustrated by the delays, Kurds in the north of Iraq have gone ahead and signed a slew of oil deals with Western companies, over Baghdad's objections.
Investors encouraged by the improved security have shown renewed interest. But they faced a setback earlier this year when, after months of negotiations, the government abandoned a plan to sign a series of technical-support agreements with Western oil companies. Instead, it decided to focus on more long-term contracts.
The fruit of that switch was Monday's meeting. Mr. Shahristani said the ministry had decided it could no longer wait for parliament to act. "We've spent over a year waiting for the hydrocarbon law to be passed," he said. "We don't think the country can really afford any more debates."
The contracts could be approved even if the law weren't adopted, he said, since they require only cabinet approval.
Officials said they had received about 120 offers from companies wanting to take part in the bid round, and 35 of them had qualified. They said bidders would have to pay signature bonuses of at least $10 million per field and commit to a strict work program. Firms are to submit their bids within six months and the contracts will be signed by June next year.
The oil fields on offer are some of the biggest in Iraq and are already in production.
Oil companies will be required to help rehabilitate the fields, increase output and improve recovery rates which have fallen sharply in recent years due to a lack of investment.
State-owned companies will have 51% stakes in the entities operating the fields and foreign companies would hold 49%. Foreign firms would recover their costs and earn additional revenue from any oil produced above current output levels at the fields -- and could choose whether to be paid in oil or in cash. "The cost of investment will be recovered dollar for dollar," Mr. Bayati said.
Oil companies have traditionally steered clear of such service contracts, preferring deals that give them equity in the oil in the ground. That allows them to book reserves. But the majors have been squeezed out of so many oil producing regions, such as Venezuela, Russia and the Middle East, that they can't turn up their noses at the conditions Iraq is offering.
"Frankly, the international oil companies don't have anywhere else to go these days," said Muhammad-Ali Zainy, senior energy economist at the Centre for Global Energy Studies in London. "This is a great opportunity for them to gain access to low-cost reserves."