In the interests of the Iraqi labor market and the development of domestic expertise in oil and gas management, the government should try to become more attractive to the major Iraqi oil and gas companies – and not only to the Chinese companies that are currently attracted to their offers.
From 11 to 13 May 2024, a combined “Fifth Plus” and Sixth Oil and gas supply Licensing round. The combined offers of oil and gas contracts had been May 2022, when the Ministry of Oil (MoO) announced the round of thirty exploration blocks. Of these, sixteen blocks were originally offered in the fifth round of bidding (Fifth Plus), including eight proven oil discoveries and eight prospective blocks without discoveries. The remaining fourteen blocks were new “Sixth Round” opportunities, including three proven gas discoveries and eleven prospective gas blocks without discoveries. These gas opportunities were “free gas” or “non-associated gas,” that is, pure gas projects without oil that could be fully exploited even if Iraq cuts its oil production due to OPEC quotas or falling demand.
The Ministry of Oil attached great importance to the geographical distribution of projects and therefore involved all governorates of the country in order to contribute to the security and economic prosperity in these areas.
In addition, the government pursued three further objectives with the tender round:
- to increase the exploitation of non-associated or free gas fields whose urgently needed gas production is not a by-product of oil production but can be limited by OPEC quotas.
- to revive international investment in the Iraqi energy sector at a time when Western energy investors are losing interest
- to replenish Iraq’s oil reserves through a pipeline of new discoveries
- ensure that contracts include provisions for capturing and transferring associated gas to the state rather than flaring (burning) it.
Did the tender round achieve its objectives?
It is fair to say that interest in the round of bidding was underwhelming. Of the thirty possible bids, only ten were awarded, and more than half of the blocks received no bids at all. Of the ten awarded bids, seven went to Chinese firms and three to a single Iraqi company. In contrast, the world’s largest oil companies have shown only moderate interest in the ministry’s latest terms. Of the non-Chinese companies that qualified for the fifth and sixth rounds of bidding – including BP, TotalEnergies, Shell, Eni, ADNOC, QatarEnergy and PETRONAS – only two have submitted bids so far. Shell and ADNOC had bid jointly for Maysan’s Al Daimah oil field but lost to KAR Group.
Also, the bidding round did not focus on free or unassociated gas. The author, head of Iraq’s Reservoirs and Fields Development Directorate, suggested that the sixth bidding round (gas exploration) should focus exclusively on free gas projects. Gas projects are considered riskier and more difficult than oil projects; therefore, focusing the bidding exclusively on gas would prevent investors from relying on oil offers. Unfortunately, in the merged fifth and sixth licensing rounds, the gas exploration blocks were mixed with oil fields, allowing investors to focus on the easier oil projects and not creating a contractual model to optimize unassociated gas exploration for the investor and Iraq.
The Oil Ministry changed its standard contract model in 2018 with its fifth licensing round after receiving negative feedback from international oil companies (IOCs) operating under the technical services contracts awarded in four rounds of bidding starting in 2009. The newer model, which also formed the basis for the fifth and sixth rounds, is a profit-sharing contract. And while a certain level of geographic coverage was achieved, it did not meet government expectations, as northern and western Iraqi fields remain viewed with caution for security reasons.
On the other hand, the latest round of tenders by the Ministry of Oil presented a great opportunity for Chinese companies to further expand their dominant position in Iraq. The successful bidders included large, state-backed companies such as Sinopec and China National Offshore Oil Corporation, as well as other service companies not specialized in oil and gas production, such as Geo-Jade, Zhenhua Oil, ZPEC and Antonoil.
The lack of Western investors attracted to the bidding round is a loss for Iraq – in terms of training, technology transfer, geopolitical relations and local engagement. Chinese companies in Iraq are notorious for hiring foreign personnel and leaving Iraqis unemployed. Most of the foreign workers employed by Chinese companies who are not Iraqis do not have technical qualifications. Chinese companies routinely fail to hire Iraqis even for simple tasks for which they are trained, such as drivers, and monopolize everything – building facilities, providing materials and supplying technical labor from China – leaving Iraqi private small and medium-sized enterprises unable to compete.
In addition, most of the companies involved had no experience in oil production that would have qualified them to develop the fields. Among them were drilling companies or service companies financed by the Chinese state. Obtaining contracts with these companies to develop Iraqi oil fields and provide services simply because they offer a lower price is a dangerous turning point for Iraq in the development of its industry, because lower prices could mean lower quality.
Chinese companies lack experience and are acquiring it through Iraq’s oil fields – probably at Iraq’s expense. Because of this inexperience, operational errors are likely, and Iraq’s regulatory models are unable to address these potential slip-ups before they cause real damage. In the future, it is better to accept higher price offers from established companies than lower price offers from inexperienced companies.
Fixing the problems in the new licensing round
Given the return to oil in previous rounds, Iraq needs an independent round of gas deals in the near future that focuses exclusively on the US-backed goal of Iraq’s gas self-sufficiency. This is a multi-stage process; even if Iraq were to absorb all the gas it currently produces, it would need more gas in the future.
There are reasons why Iraq has resorted to the more attractive oil offers this time. Iraq is not a free gas country and has little experience in exploring and developing free gas fields. This means high geological risk for unrelated gas exploration and development, as well as additional challenges related to infrastructure, pipelines, end users, security and regional stability.
The economic model must therefore be very profitable, with a high internal rate of return and a very positive net present value relative to the challenges. It might even be possible for the Ministry of Oil to contribute to the costs of exploring wells if no free gas reserves are found, in order to encourage international oil and gas companies to choose to explore free gas reserves.
In addition, to avoid delays in payments to contractors that occurred in the early years of the previous contracts due to disputes over what qualifies as petroleum costs, and unlike previous provisions that required the Department to pay the disputed costs first and resolve the dispute later, the new contracts stipulate that only undisputed costs will be considered petroleum costs.
Replacing remuneration with profit sharing creates a hybrid of service contract and production sharing terms. The key question is what maximum net revenue share does the Oil Ministry have in mind when (and if) the IOCs bid with their best net revenue share? Will the government be able to turn these bidding sprees into a real development opportunity? Time will tell, but continuing with the same approach will only lead to further challenges and disappointments.
In addition, Iraq must prioritize diversification and not just rely on cheap Chinese investors. Over the past twenty years, Iraq has spent a total of more than $1.5 trillion on substandard imported materials, instruments, household supplies, services and infrastructure, and continues down this path with unqualified energy companies.
The Directorate for Reservoir and Field Development has proposed that Iraqi oil companies such as Basra Oil Company, Midland Oil Company and others should develop small and medium-sized fields rather than contracting Chinese oil companies. In the interests of Iraq’s labor market and developing indigenous expertise in oil and gas management, the government should try to become more attractive to large oil companies than to the Chinese firms currently attracted to its offers. This may be more expensive in the short term, but in the long term Iraq’s current approach to its oil and gas offers will prove much more costly.
