Up for bid at Iraq oil auction: Uncertainty

updated 6:00 p.m. ET June 25, 2009

BAGHDAD - More than three decades after they were booted from the country by Saddam Hussein, international oil companies are poised for a return to Iraq where next week they will bid for a slice of the country's vast crude reserves.

Iraq needs the expertise of internationals that can develop its dilapidated oil and gas industry. The country lacks the oil revenues needed for reconstruction following a U.S.-led war that toppled Hussein and tipped the country into chaos.

Yet a constitutional fight pitting Oil Minister Hussain al-Shahristani against the parliament and the semiautonomous Kurdish government threatens to undercut the bidding process and turn Iraq's hopes for a new beginning into a story of missed opportunities and unrealized goals.

"The upcoming bid round really does not have much political support within the country," said Raja Kiwan, a Dubai-based oil analyst with consultancy PFC Energy.

Only a small group of people surrounding al-Shahristani believes the auction will work as intended, Kiwan said.

Discord over the two days of bidding scheduled to begin Monday lies in a struggle between Iraq's various religious and ethnic factions over control of one of the world's largest proven reserves of oil — an estimated 115 billion barrels. And the debate in Baghdad is tinged with a troubled past that includes some of same international companies now back at the table.

Exxon Mobil, Royal Dutch Shell, Repsol, the China National Petroleum & Chemical Corp. and Russia's Lukoil and other approved companies, have been asked to put up a total of $2.6 billion for what the ministry calls "soft loans."

In return, they will have the right to develop Iraq's main oil fields, which could net the companies a total of $16 billion. There are none of the lucrative production sharing agreements that oil companies covet. The companies must also shoulder the costs of creating a national oil and gas joint-venture.

In return, Iraq has offered limited access, through the service contracts, to its oil fields that hold 43 billion barrels of reserves. Those fields produce about 2 million of Iraq's current 2.4 million barrels per day in output.

The upfront cash is critical for Iraq. The country, which relies on crude for 90 percent of its budget, is reeling from the collapse of oil prices over the past year.

But the contracts provide little in the way of security, physically or contractually, to big oil companies. Nothing in the contracts state explicitly that they cannot be undone by any new government.

That scenario is not so far-fetched, given that there are members of the parliament and the oil ministry who believe Iraq is opening the door for a repeat of history — providing outsiders unbridled access to its most precious resource.

Iraq offers one of the few remaining sources of cheap crude, which has tempted oil giants to look beyond the nation's perennial security woes.

It is a big gamble.

Several of the companies say they will wait until contract terms become clearer before they commit fully.

"We've signaled earlier that we're very interested in participating in the development of Iraq's oil industry, but the terms and conditions need to be right," said Kurt Glaubitz, a spokesman for Chevron Corp.

During an appearance last week in the Netherlands, Exxon Mobil Chairman and CEO Rex Tillerson said a decision has not been made on whether to bid at all.

On Wednesday, the company would only say that "Exxon Mobil will pursue profitable business opportunities that meet our investment criteria."

But just days before the auction, it's unclear of any of those standards have been met.

Al-Shahristani's troubles only add to the uncertainty.

The oil minister, a nuclear scientist by training, went before parliament on Tuesday to present his case for international bidding. Opponents say al-Shahristani has largely failed in his post and that six years after Hussein's ouster, Iraq is still producing less oil than before the U.S. invasion.

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