Oil companies bid for Iraq’s oil fields (ExxonMobile loses to BP)

BP and CNPC have won the right to help Iraq develop the Rumaila field. The UK and Chinese companies beat ExxonMobil, the US oil company, which had partnered with Petronas, the Malaysian oil company. BP clinched the contract when it agreed to reduce its fee per barrel from $3.99 to $2.

But the rest of the auction has not gone as smoothly. In fact, so far, the smaller five of the eight oil and gas fields being auctioned off have failed to find a company willing to accept the narrow terms and the relatively low price Iraq is willing to pay for their services. And the future of West Qurna, the biggest of the fields, is looking in doubt after ExxonMobil and CNPC both rejected Iraq’s tougher terms. Royal Dutch Shell has bid for Kirkuk, bit no winner has been announced for that field.

Today had marked the beginning of a long-awaited journey. Braving sand storms and the continued violence on Iraq’s streets, oil executives had come to Baghdad to make their bids. It was the first time since nationalisation more than 30 years ago that international oil companies would be allowed back into the country.

After much debate, Iraq had decided to allow foreign oil companies to help repair its oil developments, which have been plagued by years of war, sanctions and violence. The companies will be paid a fee for their service, but they hope their willingness to accept such narrow terms eventually could lead to more lucrative exploration and development deals.

But, but... I thought we went to war for the oil companies! This can't be right! ExxonMobil should demand all their money back from Bush and Cheney! /sarc

On a more serious note, there must have been a hell of a bidding war if BP reduced their fee by almost 50%! This should be interesting both for people watching Iraq and for people interested in the energy industry.

Just think how bad the business climate in the US must be if these companies will brave all the hardship of drilling in a war zone for $2 a barrel rather than try to drill here.

And just remember this the next time someone goes on about “Big Oil”. The “really big oil” companies are the ones who hire BP and Exxon and pay them two or three bucks a barrel. Make them put up all the investment money and then pay them a couple bucks a barrell for their trouble.

The “really big oil” companies are governments. What we usually call “big oil” are the very few and rare private oil companies who are mostly just contractors to the “really big” government oil companies.

Yeah, I’m trying to figure out exactly what the nature of these contracts are. On one hand, the fact that they’re getting a flat fee rather than any direct exploitation or profit-sharing rights suggests that it’s an oil services contract, which would be more in line with Halliburton’s business than ExxonMobil’s, and Halliburton doesn’t appear to have been involved in the bidding. On the other hand, the fact that the fee is per barrel suggests that the contractor is actually operating the oil field, which seems like much more than simple “development” as the article characterized the contracts.

I think I have some more brushing up to do on the oil business.

What I have seen is this:

An oil company bids, competitively, for an oil concession that gives them the right to develop a field and operate it over, say, a twenty year period.

The host government gets some payment up front, the oil company puts up the whole investment cost. The oil company is allowed to recoup their costs, and then receive x dollars per barrel. The host government in turn gets y dollars per barrel, as agreed in the competitive bid. In some cases it may be a percentage split rather than a fixed price per barrel. But the winner of the concession is the company that is willing to give the largest fee to the host government and the smallest fee for itself.

In tough cases, where the development has big challenges, obviously the numbers will tip toward the oil company because the risk is greater. They will have to invent some new technology in order to make it pay, or simply the risk of failure is greater, or the risk of political trouble is greater. So they’ll need a bigger cut in order to take the risk.

They always run a risk that, once their field has been developed, the new technology invented, millions in infrastructure built and in operation, the host government may just come back and unilaterally change the contract. It happens, and there is little the oil companies can do about it. Its a risky business. Their only protection is the fact that the host government will need them tomorrow and so will hopefully be fair today. But unilateral rewriting of the contracts happens all the time. So its not a game for the weak-kneed.

Oh, and at the end of the twenty year concession, the field and all its infrastructure revert to the host government, who then either operates it itself through its own government oil company, or puts it up for bid again.

So, essentially, the host government puts up nothing and receives everything.
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