When Eni last week clinched the deal to develop the Zubair field in Iraq two clear camps emerged: One that believed the oil company and its partners had finally caved to Iraq’s financial terms and another that believed Iraq had sweetened its terms enough so that Eni, which had refused to accept a deal at the June auction, was willing to come on board.
The critical headline figure of $2 a barrel – the sum Iraq is willing to pay for every extra barrel Eni is able to pump once Zubair reaches the production plateau of a little more than 1bn barrels a day compared to today’s 200,000 barrels a day – remains. That has given Hussein Sharistani the ability to argue he won the battle of wills. Publicly, the oil companies are not entirely unhappy about giving him the victory lap. That is because they feel far safer – physically and financially – starting work in Iraq with a politically strong Sharistani and a country that largely welcomes them. Entering a country that doesn’t want you there increases the risks of kidnappings, sabotage and unpleasant changes to the tax rate.
Privately, oil executives say Iraq sweetened other fiscal terms that brought the entire project’s economics to about half way between the minimum Eni was willing to bid and the maximum $2 Baghdad was willing to pay during the June auction, in which every western oil company except BP walked away complaining about Iraq’s unrealistic terms.
In June Eni was willing to accept no less than $4.80 a barrel. The new terms make the deal equivalent to the Iraqis paying about $3.80, one executive said.
Mees, a newsletter that specialises in oil and the Middle East, suggested a third possibility. In its most recent newsletter it said oil companies in June may have misunderstood the details surrounding the 35 per cent corporate tax Iraq intends to charge for all these projects.
One expert notes that the tax only applies to the remuneration fee, not to the companies’ net profits as some thought, which will significantly improve their calculated rates of return.
All this raises the question of whether BP got the short end of the stick for having agreed to accept the terms in June or whether it was just better than all the others at reading contracts. BP’s press officers would not be drawn on the issue and said the details would eventually be made public when the deal was finalise.
But here is what Tony Hayward, BP’s chief executive, told Petroleum Intelligence Weekly, the industry newsletter, about BP’s terms. It is probably the most detailed explanation to date.
Q. You’ve made a very bold move with the Rumaila contract in Iraq, halving your fee in the bidding which none of your peers were prepared to do. Why did you go so low and isn’t the margin so small that it’s almost immaterial to you as a company?
A. No, is the simple answer. Let’s recount the history. It’s a 65 billion barrel oil-in-place field, the third or fourth largest in the world, of which 12 billion bbl have been recovered and we estimate there’s probably 20 billion bbl to be recovered — the range is probably 17 billion-25 billion bbl — taking recovery factors to 40%, which is perfectly credible for that sort of field. We discovered the field in 1952 and operated it for a long time. Over the last five years we’ve worked with the South Oil Co. (SOC) exclusively, providing technical support to the field, so we know a lot about the reservoir. That’s the first thing — we understand the rocks. We are confident that the returns from this investment will be compatible with other opportunities in our portfolio. That means a 15%-20% return.
Q. A return of 15%-20% even with this fee-based structure of $2 per barrel?
A. Yes. It’s material because it’s a small margin times very many barrels. We are going to take the field from around 1 million barrels per day to nearly 3 million b/d, so 2 million b/d will be incremental production and that adds up to a lot — it’s material for BP.
Q. But you’re sharing that with China National Petroleum Corp. (CNPC) and carrying the Iraqis — they have 25%?
A. We are not carrying the Iraqis. The way the contract works, it’s not really a carry.
Q. Of the $2/bbl fee, how much of that is net to BP?
A. $2. CNPC gets $2 on their barrels. You don’t take the $2 and divide it by the three players. Of the 2 million b/d of incremental production, getting on for 1 million b/d is BP’s.
Q. So close to half of the daily production when you hit the plateau will be revenue to you?
A. Exactly. Now, people don’t really understand the contract and we haven’t sought to explain it because we haven’t signed it yet. When we have concluded it we will explain it to the investment community. Of course, it has some interesting characteristics because the field is already in production. As you get cost recovery immediately you never have to make very large investments, so even to go from 1 million to nearly 3 million b/d the amount of capital we have to expose at any one moment is not very great as we’re getting our money back as production grows. The second thing I would say is that one of the big levers is what level of capital investment goes in, in terms of how much you make. It’s probably a fair estimate that midway between $10 billion-$20 billion is required. What we have agreed with CNPC is that we’ll use the Chinese supply chain at Chinese prices to deliver the activity so CNPC is providing rigs, valves, pipes, pots and pans. The Chinese supply chain is going to turn up in Iraq. The model we have agreed with the Iraqis is to carve out of SOC, which currently operates the field, the operating part for Rumaila.
Q. Is this the field operating division (FOD)?
A. No, things have moved on from that. We are going to create a Rumaila operating company which will be principally Iraqi staff into which we are going to put BP technical specialists, much as we did in TNK-BP. So, sprinkle BP and CNPC technical specialists and then have the leadership populated between BP, CNPC and Iraq. It means we get an enormous amount of leverage from not having many people there. So we don’t have to deploy hundreds of people to Iraq. The model is exactly what we did with TNK-BP, particularly what we have done at Samotlor. We feel very confident about what can be achieved and that the returns will be the kind we want to make.