Why Big Oil Declined Iraq's Riches


"[The Iraqis] approached this auction with a bit of arrogance."

In a day-long auction of eight huge oil fields, virtually all 41 foreign companies invited to bid by the Iraqi government balked at the Baghdad terms.

The only contract signed was a 20-year deal for a consortium led by BP and China's National Petroleum Corporation to develop Rumaila field in southern Iraq. "Frankly I did not think it would be such a fiasco and embarrassment for the government," says Rochdi Younsi, Director of Middle East and Africa for the Eurasia Group in Washington. "It shows the level of disconnect between the Ministry of Oil and the oil companies."

Iraq plans to retain ownership of its oil, but make long-term agreements with foreign companies to run operations. But Oil Minister Hussein Shahristani demanded that oil companies lower their profit expectations, offering to pay $2/barrel rather than the $4/barrel rate sought by oil executives. Chevron, which had negotiated for a year to develop Iraq's second-biggest field, West Qurna, pulled out of the deal on Tuesday, saying it had not met the company's "standard investment criteria." France's Total and Spain's Repsol also withdrew after failing to secure better deals, leaving Baghdad high and dry. "[The Iraqis] approached this auction with a bit of arrogance," Younsi says. "They thought oil companies would do absolutely anything to get into Iraq."

Iraq remains enormously tantalizing for Big Oil, whose prospects for tapping huge new fields around the world are shrinking. The country's 115 billion barrels in proven reserves, most of it untapped, make it perhaps the last major oil territory yet to be spoken for.

"Where else would any company go today to have access to a field that produces two million barrels per day?" asked Tariq Shafiq, director of the London oil consultancy PetroLog & Associates, and a previous executive director of Iraq's National Oil Company. "There is none."

Until now, major oil companies have not invested in the Kurdish zone, fearing that investing there might prompt Baghdad to blacklist them from bidding for the larger fields down South. Those fears have diminished as the stalemate in parliament over oil has dragged on.

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