Iraq auction terms deter oil firms, BP wins prize

Workers adjust the valves of an oil pipe in Tawke oil field near Dahuk, 400 km (249 miles) north of Baghdad, June 27, 2009.

BAGHDAD (Reuters) - A BP-led group won a deal to develop Iraq's biggest oilfield but had to slash its fee as Baghdad's tough terms put off other investors in the country's first major energy auction since the U.S.-led invasion in 2003.

Other companies, including firms from resource-hungry China and India that are eager to get a share of the world's third largest oil reserves, balked at the fees and Iraq failed to strike deals on most of the eight oil and gas fields on offer.

The controversial auction of Iraq's prized assets took place on the same day that the U.S. troops who toppled Saddam Hussein quit Iraq's cities and left security chiefly to the country's own forces. The sale aims to raise funds for reconstruction as Iraq also takes greater charge of its economy.

"Today we have seen that the Iraqi Oil Ministry and international oil companies are living on different planets," oil analyst Ruba Husari said.

The results of the auction were not a disappointment, said Oil Ministry spokesman Asim Jihad.

"The participation of these well-known, major companies is a good sign and it reflects the desire of these firms to invest in the Iraqi oil sector," Jihad said.

A BP-led consortium including the Chinese National Petroleum Corp NPC, was the only foreign firm to strike a deal -- for the 17-billion barrel Rumaila oilfield, Iraq's biggest, in the Shi'ite south.

The deal only went down after an Exxon Mobil-led group rejected the government's proposed fee.

The Oil Ministry failed to find takers for another huge field, Kirkuk, and for the smaller Bai Hassan, Maysan and Zubair fields, after Chinese, Italian, British and U.S.-led consortia rejected its terms. The companies also wanted a much higher fee for each extra barrel produced than it was willing to pay.

No bids were received for Iraq's Mansuriyah gas field and no deal was agreed on the Akkas gas field.

Iraqi Oil Minister Hussain al-Shahristani gave the bidding companies a little extra time -- until 1500 GMT on Tuesday -- to rethink their offers.

The sale was billed as the first chance since Iraq nationalized its oil in 1972 for major foreign companies to get a run at the country's hydrocarbon reserves, much of which are untapped. But many Iraqi critics said it was a bad bargain.

Foreign companies servicing the fields will be paid per barrel of oil produced above a certain amount.

The BP/CNPC alliance had to accept a fee of $2 for every barrel of additional oil produced, compared with a fee of $3.99 in their initial offer.

The only group to bid for the Kirkuk oilfield, which lies in a northern region contested by minority Kurds and the Arab-led government in Baghdad, was led by Royal Dutch Shell. Shell wanted to be paid $7.89 per extra barrel of oil while the Iraqi government offered $2 again.

"The expectations of the Iraqi government and the oil companies are mismatched," one oil executive, who asked not to be named, told Reuters.

VAST RESERVES

Foreign companies working in Iraq will have to contend not only with security risks from a still stubborn insurgency, but also discontent within ruling circles.

Some Iraqi lawmakers condemn the deals as illegal and even officials in the state-run oil industry have criticized the government for selling Iraq's vast oil wealth short, especially as the country has already invested heavily in the fields.

Years after Saddam's removal was supposed to unleash Iraq's oil potential, the auction marked the first big moment for the Oil Ministry, which is under growing pressure to boost disappointing output of around 2.4 million barrels a day.

Iraq has proven oil reserves of 115 billion barrels, but the true amount of hydrocarbons sitting beneath its desolate deserts could be far greater.

The auction, delayed by a day by a sandstorm, was broadcast live from a hotel in Baghdad's fortified Green Zone in a process Iraqi oil officials insisted would be fully transparent.

Later this year, Iraq is due to offer another set of fields that are even more appealing since they are undeveloped.