Iraq and China to seal deal

Iraq prepares to sign a US$1.2 billion (Dh4.4bn) deal with a Chinese state oil company following months of contract delays.

Standing guard: two Iraqi police officers protect oil installations crippled by fighting.

Iraq is preparing to sign a US$1.2 billion (Dh4.4bn) deal with a Chinese state oil company following months of delays in negotiating contracts with western firms. The proposed deal with a division of China National Petroleum Corporation (CNPC), which could be signed in the next few days, replaces a cancelled agreement between the company and the government of ousted Iraqi leader Saddam Hussein. Its terms, however, would be very different from those of the earlier deal, which would have given CNPC a long-term stake in future profits from Iraq's Ahdab oil field, southeast of Baghdad.

"We have held talks with [the Chinese] for a year, and the terms of the deal were changed to a service contract. The Chinese have agreed on that," Hussain al Shahristani. Iraq's oil minister, told the country's Al Noor newspaper. The proposed agreement would be the first major oil deal to be signed by Iraq since the fall of Mr Hussein's regime in 2003. Mr Shahristani is scheduled to fly to China to meet CNPC officials following his trip to Poland, an Iraqi oil ministry official said.

Western oil companies have also been lining up to participate in rebuilding Iraq's crippled energy sector, but have so far balked at signing short-term service deals instead of more lucrative production-sharing contracts. Earlier this month, Baghdad terminated negotiations with an international consortium led by Anadarko Petroleum, a US oil producer, for a $500 million technical service contract to develop the Luhais oil field in southern Iraq. The oil ministry continues discussions over similar contracts, aimed at obtaining technical help to boost output from some of Iraq's biggest oil fields, with major international oil companies including BP, Royal Dutch Shell and Exxon Mobil, but those negotiations are now two years old.

The western companies are not keen on fee-for-service agreements, which do not allow them to book oil and gas reserves. Analysts have criticised such deals on the grounds that they do not provide performance-based incentives. Still, the oil companies hope that such service contracts would improve their chances of winning exploration rights in Iraq, which holds the world's third largest conventional oil reserves after Saudi Arabia and Iran. The companies also hope to participate in coveted production-sharing deals to develop Iraq's untapped reserves.

But for that to happen, Iraq's government would need to pass a new federal oil law allowing such contracts. The proposed law is controversial, with government factions split between those who believe production-sharing contracts are essential to attract foreign investment and technical support, and proponents of strict government ownership of resources. As a result, its passage has been long delayed.

Iraq's current federal oil law, dating from the Saddam era, does not allow foreign ownership of oil production, but permits foreign participation in the country's oil sector under service contracts. It is likely that the national oil companies of energy consuming countries such as China, even more than independent western enterprises, are also primarily interested in production-sharing deals, as their government masters want long-term access to international oil supplies. But because they are government backed, such state-owned entities can afford to settle for deals with tougher terms than their investor-owned rivals while they continue the long process of building relationships in the host country.

Iraq's government is preparing for its first exploration licensing round and now attributes this for its failure to sign service contracts with western companies. "The technical service agreements have been delayed because the oil ministry is concentrating on the oil bid round," Thamir Ghadhban, the chairman of the advisory commission to Iraq's prime minister, told Bloomberg yesterday. Iraq's oil ministry has pre-qualified over 40 foreign companies to bid on long-term exploration and production-sharing deals that the government said it hopes to offer next year. While CNPC would initially focus its efforts on a relatively small field producing just 90,000 barrels of oil per day, the Russian private oil company Lukoil, which also had an oil deal in place in Iraq under Mr Hussein's regime, has its sights set on the giant West Qurna oil field, one or Iraq's largest.

Mr Shahristani has repudiated Lukoil's former deal as "political" and "unfair". He has also said that Lukoil will not be given an advantage over rival firms in bidding on a contract to develop the lucrative field. After years of sanctions and war, Iraq still produces significantly less oil than its peak output of 3.5 million barrels per day (mbd) in 2000. Last month, it produced about 2.45 mbd.
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