BP, CNPC Win Iraq Oil Field Contract as Others Fail

BP Plc and China National Petroleum Corp. were awarded an oil field development contract by Iraq today as the war-torn country rejected bids for other licenses in its first international tender for more than thirty years.

Iraq awarded the development contract for Rumaila, the largest of six oil and two natural gas fields in today’s bidding round, after rejecting an initial offer by Exxon Mobil Corp. and Malaysia’s national oil company. Eight of the world’s top 10 non-state oil producers were among more than 30 companies vying for $16 billion worth of technical service contracts.

“The bidding round in Iraq went differently than we had expected, especially due to the fact that there was a large gap between Iraqi expectations and the companies’ willingness to bid at a low cost of production per barrel,” said Mari Dotterud, a spokeswoman for Stavanger, Norway-based StatoilHydro ASA, which was in a group that offered to develop the West Qurna field.

The Middle Eastern country, holder of the world’s third- largest oil reserves, hopes to increase production more than 60 percent in the next five years. The fields on offer have potential to yield $1.7 trillion in profit over 20 years for the country, Oil Minister Hussain al-Shahristani said in a speech broadcast on live television at the start of the round.

“Iraq wanted to squeeze the margins as much as possible for investors, and they squeezed too much,” said Samuel Ciszuk, an analyst at IHS Global Insight in London. “It’s a very high financial exposure with a very high level of uncertainty.”

Destroyed Infrastructure

International oil companies are being invited back into the country after they were kicked out in 1972, when the party of late dictator Saddam Hussein nationalized concessions.

Iraq is struggling to raise output and revenue from crude sales after six years of conflict and prior sanctions destroyed the economy and infrastructure. The government aims to boost oil output to 4 million barrels a day within the next five years, from about 2.4 million barrels.

“We’re satisfied with Rumaila,” Oil Ministry spokesman Asim Jihad said by telephone today. “It’s a big field and we gave the contract on our terms.”

The BP-led group beat a bid from Irving, Texas-based Exxon and Malaysia’s Petronas Carigali Sdn. Bhd. for Rumaila after improving their offer, the ministry spokesman said. The group agreed to develop the field at a cost of $2 a barrel after recovering investment, lower than the prices BP and Exxon initially bid, the ministry said in a statementtoday.

Largest Field

Rumaila, which now produces 956,000 barrels of oil a day, was the largest field on offer and the only one awarded. The BP group proposed to boost output to a plateau of 2.85 million barrels of oil a day at an average cost of $3.99 a barrel, according to the initial bid presentation.

Companies including Exxon, the Hague-based Royal Dutch Shell Plc and ConocoPhillips failed to meet Iraqi terms as the government asked bidders to cut production costs during the bidding ceremony, parts of which were shown on state television. Iraq failed to agree with companies for six sites, including the Kirkuk and West Qurna oilfields.

Iraq received no bids for the Mansuriya natural gas field, the second it offered. Houston-based ConocoPhillips, the only bidder for the Bai Hassan oil field, refused to agree to the terms sought by the government. Bai Hassan lies in territory disputed by Iraq’s Kurds, who have said their approval is needed.

“We continue to negotiate, and as a matter of policy we don’t comment on ongoing negotiations,” Janet Grothe, a ConocoPhillips spokeswoman, said today in a telephone interview.

Zubair, Kirkuk

Groups led by Italy’s Eni SpA and China National dropped their proposals to develop the Zubair oil field in southern Iraq after rejecting the maximum fee being offered.

Shell abandoned a bid to develop the Kirkuk oil field, together with China Petroleum & Chemical Corp. and Turkish Petroleum Corp. Exxon and Shell withdrew their offer to develop the West Qurna field in the country’s south after being asked to reconsider their bid. Total SA and groups led by OAO Lukoil, Repsol YPF SA and China National also bid for West Qurna.

The fields set to be awarded collectively produce a total of about 2 million barrels of oil a day, al-Shahristani said at the start of the licensing round.

Iraq later this year plans to hold a second auction round for 11 oil and gas fields with the aim to boost production to about 6 million barrels a day by 2015. Saudi Arabia, the world’s biggest oil exporter, produces 8 million barrels a day.

The license round was set to start yesterday and delayed one day after sandstorms closed Baghdad’s airport, preventing oil executives from reaching the capital with their bids.

“It’s been a waste of a year from the Oil Ministry’s point of view,” said Global Insight’s Ciszuk. “Shahristani has put his reputation, his political persona, at stake in this. He’s fought for this and it’s become a major disappointment, and a lot of people will feed on that.”