Fri Feb 26, 2010
Inked deals lull oil firms, but Iraq risks remain
DUBAI/BAGHDAD (AFP) - The speed at which Baghdad signed oil deals awarded last year has lulled big oil firms into lowering their perception of the risks posed by Iraqi elections to their freshly inked contracts.
But political pitfalls remain around the vote, and along with big challenges to infrastructure, should not be underestimated, analysts say.
After representatives of international oil giants filed through Baghdad in January to sign deals that could take Iraq's oil output capacity to Saudi levels of 12 million barrels per day, they saw less threat from the March 7 parliamentary poll.
Just a few months ago, firms fretted the final signing of the deals could be held up as Baghdad prepared for the vote.
"The speed of the process has given the impression that Iraq will deliver what it promises," said one executive at an oil company with a contract in Iraq, asking not to be named. "So the elections are no longer the big risk in the process."
Yet many potential hurdles remain for the firms.
"I think it is foolish to take a benign view of Iraqi politics when looking at the risk to these contracts," said Raad Alkadiri, head of global risk at Washington-based consultancy PFC Energy. "The risk is not so much that the deals will be ripped up, it is that there is a revision or review."
The terms of the contracts make them sensitive to delay. A period of post-electoral wrangling over the formation of a new government could provide just that.
The return of foreign firms to Iraq's oil sector seven years after the U.S. invasion is an easy target for nationalist populism, and an emotive issue in a country that kicked out the majors just over three decades ago.
The risk of review is made worse by the lack of modern oil laws, leaving contracts vulnerable to modification and future governments under no legal obligation to respect them.
"When oil companies go to a country and sign oil deals without a hydrocarbon law securing their interests, they should know they are walking on a tightrope," said Mahmoud al-Jubouri, an oil consultant working with Iraq's state-run South Oil Co.
DICTATORSHIP ERA
Iraq's oil laws date back to Saddam Hussein's dictatorship, and are untested in democracy. New oil laws to establish a legal framework for foreign investment have been on hold for years due to disputes between Kurds and the Arab-led Baghdad government.
Iraqis have yet to reach political consensus on the control of oil and distribution of the revenues. Until these fundamental questions are resolved, deals remain vulnerable.
The risk is not all on the side of the oil firms. Tampering with the contracts could backfire on a future administration, as the deals are already on tough terms for oil firms.
The government's share of revenues generated by the contracts was around 97-98 percent, said one of the oil company executives. Any change that made Big Oil rethink what it already sees as deals with little upside could hurt Iraq, which has failed to boost output on its own since the 2003 war.
"It's difficult to criticise the fiscal terms that Iraq has secured for these projects," said Colin Lothian, of Edinburgh-based consultancy Wood Mackenzie.
For oil firms, security, as well as a lack of infrastructure, are the biggest risks to deals.
Even if oil firms could get people and equipment in to undertake an unprecedented development of Iraq's oil capacity, it is questionable whether the government can coordinate the development of infrastructure and services to go with it.
Oil firms must have millions of barrels per day of water in a country suffering from drought. The water is injected into oilfields to maintain underground pressure and boost oil output.
Iraq needs hundreds of kilometres of pipelines to get the crude to export facilities, which it also needs to build.
It needs infrastructure to get huge volumes of gas, produced as a by-product of increased oil output, to homes and industry, or to expensive new gas export terminals. It also needs shops, houses, sewage plants, roads and airstrips.
"They need everything, absolutely everything, they're starting almost from nothing," said one oil executive. "Winning a contract has taken us to the bottom of a mountain. But we still have to climb it."
AFP Global
Inked deals lull oil firms, but Iraq risks remain
DUBAI/BAGHDAD (AFP) - The speed at which Baghdad signed oil deals awarded last year has lulled big oil firms into lowering their perception of the risks posed by Iraqi elections to their freshly inked contracts.
But political pitfalls remain around the vote, and along with big challenges to infrastructure, should not be underestimated, analysts say.
After representatives of international oil giants filed through Baghdad in January to sign deals that could take Iraq's oil output capacity to Saudi levels of 12 million barrels per day, they saw less threat from the March 7 parliamentary poll.
Just a few months ago, firms fretted the final signing of the deals could be held up as Baghdad prepared for the vote.
"The speed of the process has given the impression that Iraq will deliver what it promises," said one executive at an oil company with a contract in Iraq, asking not to be named. "So the elections are no longer the big risk in the process."
Yet many potential hurdles remain for the firms.
"I think it is foolish to take a benign view of Iraqi politics when looking at the risk to these contracts," said Raad Alkadiri, head of global risk at Washington-based consultancy PFC Energy. "The risk is not so much that the deals will be ripped up, it is that there is a revision or review."
The terms of the contracts make them sensitive to delay. A period of post-electoral wrangling over the formation of a new government could provide just that.
The return of foreign firms to Iraq's oil sector seven years after the U.S. invasion is an easy target for nationalist populism, and an emotive issue in a country that kicked out the majors just over three decades ago.
The risk of review is made worse by the lack of modern oil laws, leaving contracts vulnerable to modification and future governments under no legal obligation to respect them.
"When oil companies go to a country and sign oil deals without a hydrocarbon law securing their interests, they should know they are walking on a tightrope," said Mahmoud al-Jubouri, an oil consultant working with Iraq's state-run South Oil Co.
DICTATORSHIP ERA
Iraq's oil laws date back to Saddam Hussein's dictatorship, and are untested in democracy. New oil laws to establish a legal framework for foreign investment have been on hold for years due to disputes between Kurds and the Arab-led Baghdad government.
Iraqis have yet to reach political consensus on the control of oil and distribution of the revenues. Until these fundamental questions are resolved, deals remain vulnerable.
The risk is not all on the side of the oil firms. Tampering with the contracts could backfire on a future administration, as the deals are already on tough terms for oil firms.
The government's share of revenues generated by the contracts was around 97-98 percent, said one of the oil company executives. Any change that made Big Oil rethink what it already sees as deals with little upside could hurt Iraq, which has failed to boost output on its own since the 2003 war.
"It's difficult to criticise the fiscal terms that Iraq has secured for these projects," said Colin Lothian, of Edinburgh-based consultancy Wood Mackenzie.
For oil firms, security, as well as a lack of infrastructure, are the biggest risks to deals.
Even if oil firms could get people and equipment in to undertake an unprecedented development of Iraq's oil capacity, it is questionable whether the government can coordinate the development of infrastructure and services to go with it.
Oil firms must have millions of barrels per day of water in a country suffering from drought. The water is injected into oilfields to maintain underground pressure and boost oil output.
Iraq needs hundreds of kilometres of pipelines to get the crude to export facilities, which it also needs to build.
It needs infrastructure to get huge volumes of gas, produced as a by-product of increased oil output, to homes and industry, or to expensive new gas export terminals. It also needs shops, houses, sewage plants, roads and airstrips.
"They need everything, absolutely everything, they're starting almost from nothing," said one oil executive. "Winning a contract has taken us to the bottom of a mountain. But we still have to climb it."
AFP Global
