The recent auctions for the rights to develop Iraq’s oil fields have had many onlookers baffled; the politics are complex, and the prices agreed seemed incredibly low at first glance. Meanwhile the question of whether Iraq’s large and easily-accessible fields can be brought to much higher production levels very quickly is a vexxing issue for energy watchers everywhere – it could have a significant impact on total world output in the next decade.
Can these production rates actually be achieved in Iraq? On the ‘yes’ side of this case are the following arguments:
- The IOCs had good information about these fields
- The Contractor’s remuneration fee is based on a per-barrel fee which creates an economic incentive to achieve the PPT
- The Contractors have a contractual obligation under the TSCs to reach the PPT. If they fail to do so, there are non-performance penalties under the TSC that grind down the already-modest remuneration fees, and other possible consequences
The following are reasons why these production levels may not be achieved:
Iraq may choose to comply with an OPEC quota at less than 12 million bbl/day. The TSCs expressly permit MoO to take less than the PPT. This triggers certain other consequences under the TSC to protect the Contractor’s interest (such as relief from the penalties associated with failing to acheive the PPT, and the right to extend the contract term so that the expected total remuneration fees can ultimately be earned at lower production rates). There is now an active debate in Iraq regarding what might happen with its OPEC quota. Some Iraqis think that OPEC will give Iraq a generous quota in recognition that it has underproduced for more than a decade. Personally, I think that is an unrealistic expectation– I don’t see Hugo Chavez cutting back Venezuelan production rates to compensate Iraq for problems of its own making. Other Iraqis think that they will quit OPEC if they don’t get all the quota they need; but others point to the fact that Iraq was one of OPEC’s founders, so quitting will not be a decision to be taken lightly. While IOCs are very good at achieving their committed goals, the TSCs (particularly for the First Round fields) give them quite limited control over ensuring that operations are successful. It is up to MoO to develop the transportation and export infrastructure to take away all the produced oil, and MoO’s performance record since 2003 in increasing Iraqi production is less than stellar. Security issues in the fields or attacks on pipelines may prevent the Contractors from being able to fulfill the PPT.
There’s more in the full comment.
Iraqi oil field development: A tale of two interpretations (FT Energy Source)
BP hearts Iraq, even at $2 a barrel (FT Energy Source)