Saddam Hussein’s Pick, Lukoil, Wins West Qurna Oil Contract
Lukoil received a contract to develop the deposit from Saddam Hussein in 1997
Lukoil, Statoil Win West Qurna, Prize in Iraq Bidding
By Anthony DiPaola and Kadhim Ajrash
Dec. 12 (Bloomberg) — OAO Lukoil and partner Statoil ASA won rights to develop the second phase of Iraq’s “super giant” West Qurna crude deposit, the largest offered to foreign investors in today’s second round of bidding.
Lukoil, the Russian producer with the most oil assets abroad, beat out teams headed by London-based BP Plc, Paris- based Total SA and Kuala Lumpur-based Petroliam Nasional Bhd. Lukoil committed at the auction in Bagdad to increase output at West Qurna, 65 kilometers northwest of Basra, to 1.8 million barrels a day for a fee of $1.15 a barrel.
“We have been struggling for this project over these years,” Lukoil Chief Executive Officer Vagit Alekperov said in a statement today. “We intend to meet all the obligations in connection with the development of West Qurna-2 to the benefit of the Iraqi people and our shareholders.”
Russia’s OAO Gazprom, Angola’s Sonangol SA and Petroliam Nasional also won contracts awarded today in Iraq, which holds the world’s third-largest oil reserves. The government, which assigned deals this weekend and in June, aims to boost output to more than 12 million barrels a day over the next six years, Oil Minister Hussain al-Shahristani said today in Bagdad.
He called the second round a “success,” resulting in seven contracts to develop fields containing 28 percent of the country’s crude assets. Iraq awarded two service contracts yesterday to groups led by Royal Dutch Shell Plc and China National Petroleum Corp.
The winning bidders for two of Iraq’s largest fields, West Qurna and Majnoon, offered their services at one-quarter to one- third of the best bids proposed at the first auction in June, according to Oil Ministry data. BP Plc and China National Petroleum Corp. agreed in the first round to develop Rumaila, the largest Iraqi field awarded, for $2 a barrel, half their initial bid on the filed with 17 billion barrels of reserves.
“The round is a success in the sense that the prices given for the fields were right,” said Tariq Shafiq, an adviser with London-based Petrolog & Associates and a former Oil Ministry official. “There is recognition that Iraq needs international companies to help raise oil recovery rates.”
West Qurna, described as a “super giant” by Iraq’s Oil Ministry, is being developed in two licenses. The 12.9 billion barrels of oil reserves in West Qurna’s phase two make that deposit the biggest on offer in this bidding round, according to U.S. Energy Department data.
In the first round, Lukoil bid together with Houston- based producer ConocoPhillips for the first phase of West Qurna. Lukoil received a contract to develop the deposit from former Iraqi dictator Saddam Hussein in 1997. He then annulled it in 2002. Lukoil’s CEO unsuccessfully lobbied Iraqi Prime Minister Nuri al-Maliki to reinstate it this April.
The opening of Iraq’s reserves persuaded more than 35 international and state-run oil companies to set aside concerns insurgent attacks or political instability may disrupt operations. Bombings in Baghdad this week left at least 101 people dead and hundreds injured as violence escalates before elections planned in March.
“Our focus now is to establish the organization needed to develop this project in a responsible and safe manner,” Torgeir Kydland, senior vice president at Statoil, Norway’s state- controlled oil company, said in a statement.
The five projects in today’s bidding were West Qurna-2, Garraf, Badra, Middle Furat, and Najmah. Petroliam Nasional, known as Petronas, and Japan Petroleum Exploration Co., known as Japex, won Garraf. They outbid groups led by Turkish Petroleum Corp., known as TPAO, and PT Pertamina, Indonesia’s oil company.
Gazprom led the only group bidding for rights to develop Iraq’s Badra oilfield. It won the contract after lowering its cost for the work.
Sonangol, Angola’s state-run oil company, today agreed to Iraq’s terms to develop the Qaiyarah deposit after their initial bid was rejected yesterday. Sonangol also won rights to develop Iraq’s Najmah crude deposit, the last field to be auctioned. Iraq received no bids today for the Middle Furat, or Middle Euphrates, field.
Statoil bid unsuccessfully for phase one of West Qurna in June. Lukoil worked with Norsk Hydro, now part of Statoil, in exploring the Azar field in the Anaran block in Iran, close the Iraqi border, according to Statoil’s Web site.
The first phase of West Qurna was awarded last month to Exxon Mobil Corp. and Shell after an initial failure to agree on terms during the country’s earlier bidding round in June. The first phase has about 8.7 billion barrels of reserves.
Four groups involving eight companies bid for West Qurna-2. Exxon and Shell didn’t bid for the second phase.
“It’s always been seen as the main prize in the second round,” said Samuel Ciszuk, an analyst at IHS Global Insight in London.
Iraq, the third-largest producer in the Organization of Petroleum Exporting Countries, is struggling to raise output from about 2.4 million barrels a day and to boost revenue from crude sales after six years of conflict destroyed the economy and infrastructure.
“All of the low hanging fruit in the industry is gone,” Gianna Bern, president of Brookshire Advisory & Research Inc. in Flossmoor, Illinois, said in an e-mail. “The Supermajors and many national oil companies will still participate in bid rounds as the industry is forced to go wherever the reserves are located.”
25 Percent Stake
Iraq will hold a 25 percent stake in all field development licenses, with the remainder split between companies winning the bid. Bidders must accept service contracts with a flat fee for each barrel extracted, rather than production-sharing agreements in which they gain a stake in the crude produced. This means they are not positioned to benefit from a rise in oil prices.
The winning bids from yesterday’s auction show Shell and Malaysian partner Petroliam Nasional Bhd., plan to boost output at the Majnoon field to 1.8 million barrels of output a day, from about 50,000 barrels a day now, earning a fee of $1.39 a barrel. The partners beat a rival bid by Total SA and CNPC.
CNPC, Petronas and Total will boost production at Halfaya to 535,000 barrels a day, for a fee of $1.40 per barrel produced, beating groups led by Statoil, Italy’s Eni SpA and India’s Oil & Natural Gas Corp.
Majnoon holds 12.6 billion barrels of oil reserves and Halfaya holds 4.1 billion barrels, according to U.S. estimates.