Iraq's Fourth Oil And Gas Licensing Round

Keywords: gas exploration sites, oil, Iraq, Reserves, Service Contracts

Since 2008, Iraq has been conducting a series of high profile oil and gas licensing rounds, with the Iraqi government's strategy being to increase its energy reserves and raise oil production from current levels of 2.5 million barrels per day (BPD) to 6.5 million BPD by 2014.

With the country having among the highest oil and gas deposits in the world (with proven reserves of 143.1 billion barrels of oil and 111.9 trillion cubic feet of gas), the previous three licensing rounds have been hugely popular, with the major international oil companies (IOCs), including BP, Shell, Total and Eni, competing hard and, in the process, accepting tough contract terms to secure a foothold in the region.

The fourth licensing round involved the auction of seven gas and five oil sites, with the focus for the first time being on the gas sites.

The results were announced on 30 May 2012 and, for the reasons considered below, display a far more muted response from the IOCs, with successful bids being received for just one of the gas exploration sites and two of the oil exploration sites.

Lack of Proven Reserves

Each of the previous three licensing rounds offered rights to immediately commence or raise output at large and medium-sized sites with proven reserves. The fourth licensing round on the other hand, only involved areas with undetermined levels of hydrocarbons on offer.

There was, therefore, little or no guaranteed return for the bidding IOCs; Abdul Al-Ameedi, the director general of Iraq's Ministry of Oil (the "Ministry"), the government body responsible for the licensing rounds, admitted as much in an interview leading up to the fourth round when he said that "there is a higher risk [in the fourth licensing round sites] since the contractor could spend millions of dollars and find dry holes and lose everything he spent."

Use of Service Contracts

Production sharing models, which typically give foreign companies the right to a portion of oil produced or profit made from sales, are used in Kurdistan and are the most commonly used model for exploration work of this type. The Iraqi government's belief is that such a model would be in contravention of Iraq's constitution (which states that the oil and gas in Iraq is the property of the Iraqi people and therefore should not be shared).

The Ministry therefore, as with the previous rounds, insisted on using a "service contract." Under the...