Iraq and China agree to $3 billion oil service deal

BEIJING Wed Aug 27, 2008 11:56am EDT

A view of Baiji oil refinery in Baiji, 180 km (112 miles) north of Baghdad, June 30, 2008. REUTERS/Sabah al-Bazee

A view of Baiji oil refinery in Baiji, 180 km (112 miles) north of Baghdad, June 30, 2008.

Credit: Reuters/Sabah al-Bazee

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BEIJING (Reuters) - Iraq and China have agreed the terms of a $3 billion oil service contract, Iraq's oil minister said on Wednesday, announcing the first major oil contract with a foreign firm since the fall of Saddam Hussein.

Energy-hungry China has beaten international oil majors to take the first opening since the U.S.-led invasion for work on the world's third-largest reserves.

Iraqi Oil Minister Hussain al-Shahristani warned that time was running out for big Western oil firms, which have jostled for years for Iraqi contracts, to seal even the short-term deals that were expected to mark their return to the country.

Iraq and China's state-oil firm CNPC have agreed the renegotiated terms of an old deal signed in 1997 to pump oil from the Adhab oilfield, Shahristani told Reuters in an interview. CNPC is Asia's biggest oil and gas company.

"Finally we have reached an agreement," Shahristani said after clinching the deal. "The total investment of the project is expected to be about $3 billion."

Iraq has toughened the terms, changing the contract to a set-fee service deal from the oil production sharing agreement signed under Saddam.

Iraq needs billions of dollars of investment in its energy sector after years of war and sanctions. But with high oil prices and strong competition for access to some of the world's cheapest oil to produce, Iraq has been negotiating from a position of strength.

Under the revised contract, Adhab will produce 110,000 barrels per day (bpd), up from the previous target of 90,000 bpd, Shahristani said.

First output would come in three years, and the field should pump for 20 years, he said.

CNPC would own 75 percent of a joint venture to be set up for the contract, while Iraq's Northern Oil Company would own 25 percent, he added. The value of the contract would be reviewed every quarter, he said.

The deal was pending the final seal from both countries' governments.

TECHNICAL SERVICE CONTRACTS

The probability of a series of short-term service contracts with oil majors going ahead was falling after delays in signing, although negotiations were ongoing, Shahristani said.

Iraq had wanted six contracts to boost oil output by 100,000 bpd each to be signed in June and implemented within a year. Baghdad does not want to extend the end-date for the contracts as it plans to sign long-term deals for the same fields by mid-2009.

"We only have about 10 months left," he said. "It seems more and more unlikely that these technical service contracts can be implemented now in such a short remaining time."

The firms that have been negotiating deals are Royal Dutch Shell; Shell in partnership with BHP Billiton; Exxon Mobil; Chevron with Total.

A smaller consortium of Anadarko, Vitol and Dome had negotiated for another deal but Anadarko walked away this month.

Iraq still aimed to boost output by 500,000 bpd by the mid-2009, Shahristani said.

"We are working at increasing our production, hopefully by another 500,000 bpd, by the middle of next year," he said.

Iraq pumped around 2.4 million bpd in July, according to a Reuters survey.

A long-delayed draft oil law to set the framework for foreign investment was unlikely to be approved in parliament in the near-future, Shahristani said.

"Different parliamentary blocs still have serious differences about the law," he said. "I have not heard anything new from the parliament to make me expect that the law will be passed any time soon."

But Iraq was going ahead with new deals anyway under existing legislation, he said.

Disputes with the regional government in Kurdistan have hobbled the progress of the law.

There had been no progress in resolving differences between Baghdad and the Kurdish regional government, Shahristani said.

(Reporting by Emma Graham-Harrison and Jim Bai; writing by Simon Webb; editing by James jukwey)

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