Iraq's Oil Bounty Ripe for Chinese Investment

Source:

"China was actually the first country to sign an energy deal with Iraq in the post-Saddam era."

British oil giant BP PLC (NYSE ADR: BP) and China National Petroleum Corp. (CNPC) Tuesday won the first contract in more than 30 years to develop a major Iraqi oil field—an indication that Chinese companies plan to play an integral role in the development of Iraq's energy resources.

A total of 32 energy companies from the United States, Europe, and Asia are bidding for the rights to tap Iraq's massive oil reserves, but so far only one deal has been struck. BP and CNPC have secured the contract for the Rumaila oil field.

Rumaila is the largest of Iraq's six oil fields on offer to foreign and state-owned companies with 17.7 billion barrels of proven reserves. Under terms of the 20-year contract, BP and CNPC have six years to boost the field's production to 2.85 billion barrels per day (bpd).

"The companies accepted to be paid two dollars per barrel," said Oil Minister Hussein al-Shahristani.

A handful of other companies had the opportunity to sign production deals but rejected the terms offered by the Iraqi government. While any foreign firm that is awarded a contract will have to fully finance the development of the oil field in question, it will also have to partner with a government-owned Iraqi energy company and share management.

"This raises the question of the profitability of the contract," said a source involved in the bidding, who spoke on condition of anonymity, told Melbourne-based newspaper The Age. "The companies are the ones investing, but have a big problem with the fact that management will be shared."

Also, foreign oil majors will be paid a fixed fee per barrel of oil produced, as opposed to sharing in the profits of the oil's sale. And that fee will only be paid when the operated field reaches a production quota set by the government.

China was actually the first country to sign an energy deal with Iraq in the post-Saddam era. CNPC last year agreed to a $3 billion deal to develop the Ahdab oil field, 100 miles southeast of Baghdad.

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