As multinational military forces have left Iraq, international petroleum companies have eagerly descended -- seduced by the long-term potential of vast oil reserves off-limits to foreigners for decades. Yet lingering violence, legal questions and political uncertainty make doing business in this country a gamble.
In the first international oil auction held last June, widely seen as a failure, the Iraqi government awarded a firm contract to only a consortium of British Petroleum and the China National Petroleum Co. to further develop the Rumaila field over 20 years. Iraq recently forged an initial agreement with a group comprising Exxon Mobil and Royal Dutch Shell to develop the West Qurna field, and one with an ENI-led consortium of Occidental Petroleum and Korea Gas for the Zubair oil field.
Under ratified deals, firms stand to gain a mere $2 profit on each barrel added to production because the Iraqi government wants to convey "they're not going to let the oil companies take over," said Robert Ebel, a senior adviser in the energy and national security program at the Center for Strategic and International Studies (CSIS), a Washington-based think tank.
The operator of each 20-year service contract, which may be extended for five years, "will still make a rate of return in the double digits," said Ruba Husari, founder and editor of the Web site Iraqoilforum.com, via e-mail from Baghdad. The country's proven oil reserves were last estimated at 115 billion barrels. These massive reservoirs, and the low costs linked to such an uncomplicated operation, essentially make it "easy oil" for firms, Husari said.
Iraq will boast some six million to 10 million barrels a day over the next several years, analysts tell Oilprice.com. This scenario illustrates why oil companies perhaps are now more willing than last summer to gain an initial foothold in the industry on the government's strict terms and thus build a long-lasting relationship that may lead to a production-sharing contract "for some discovered-but-yet-undeveloped oil field," Ebel said. "It's a hopeful assumption; I don't know how realistic it is."
Yet as companies salivate over Iraq's potential, legal and political issues are still problematic to doing business. The war-ravaged country's "weak and ill-defined legal structures," and uncertain moves by the next government slated to be elected in January, may result in canceled service contracts, warned David Bender, an analyst in the Middle East practice of the Eurasia Group's Washington office.
Through conversations with oil firms, Bender has gleaned that Iraq is probably not "quite at the point in which legal details are the most important aspect" and is focused instead on the larger political process. As a result, he said, members of a newly elected government, influenced by their own interest groups and "power politics," may annul contracts despite the associated penalties.
Finalizing a long-awaited hydrocarbon law governing the oil industry will be a top priority of the next government, said Mishkat al-Moumin, an adjunct scholar at the Washington-based Middle East Institute and Iraq's environment minister from 2004 to 2005. Ideally, the legislation will outline investing in new oil fields, establishing a council to manage petroleum issues and offering a mechanism allocating oil revenues, she added.