May 31, 2012 / 7:41 AM / 5 years ago

UPDATE 4-Tough terms dampen Iraq's energy auction

6 Min Read

* Lukoil leads group on bid for key oil block

* First, second day see few tenders

* Iraq plans fifth energy bidding round

* Few bidders push Iraq to reconsider future terms

By Ahmed Rasheed

BAGHDAD, May 31 (Reuters) - Iraq's fourth energy auction ended on Thursday with few foreign investors tendering bids after a disappointing showing that could force Baghdad to ease tough contract terms to lure more oil explorers into a new bidding round.

The lukewarm response to Iraq's latest energy bid - only 3 of 12 blocks were awarded - is a setback for the OPEC nation's plans to expand its energy industry and compete with regional powerhouse Saudi Arabia after years of war and sanctions.

The lethargic second, and final, day of bidding followed a sluggish start on Wednesday when only one block was taken by Kuwait Energy; four other blocks got no bids and another deal failed after companies rejected the government offer.

"We have to say we didn't expect this weak turnout from the companies, but we acknowledge terms for the contracts were tough," Sabah Abdul-Kadhim, head of the legal section of Iraq's oil ministry contracts and licensing directorate, told Reuters.

"If the terms were the main reason why we had few bidders for gas, then we should consider that in future auctions and have more attractive terms," he said.

A group led by Russian oil firm LUKOIL won a bid for a key oil block on Thursday, the only high profile foreign company to make a play for fields Iraq had hoped would attract more oil majors.

Baghdad's less attractive service contracts combined with a recent boom in natural gas supplies and gas finds elsewhere in the world may have further quashed investor interest in a tricky gas prospect like Iraq.

LUKOIL and partner Inpex Corp of Japan won the deal for the 5,500-square-km Block 10 in Muthanna and Dhi Qar provinces in the south, one of the few fields in the auction executives had expected would attract investors.

A bid from Pakistan Petroleum also won gas Block 8 in Diyala and Wasit provinces in eastern Iraq. Four other blocks, and two from the first day that were re-offered, received no bids.

Iraq had hoped the auction would further spur the expansion of its energy sector as violence from its long war ebbs and investment picks up, nine years after the U.S.-led invasion that ousted Saddam Hussein.

But three previous upstream licensing rounds have already left Baghdad with more than it can handle -- in terms of oil and gas development and infrastructure challenges.

Big Oil's absence from the exploration round came as no surprise. Companies such as BP, Exxon Mobil, ENI and Royal Dutch Shell may be looking to explore for oil below and beside their existing oil field projects in southern Iraq.

Still, the government said it would shortly open a fifth round with more new oil and gas blocks up for auction.

Oil explorers who won blocks will immediately be able to extract gas discovered at their sites, but the Iraqi government has retained the option to pay compensation to companies to keep crude in the ground to help boost its reserves.

"We will start preparations in the next few months to start a 5th exploration bidding round. The round will include 10 to 15 new blocks," Oil Minister Abdul Kareem Luaibi told reporters.

"It will also focus on gas, while the oil will be used to boost out reserves."

Less Attractive Terms

Oil giants such as Exxon Mobil and BP have already signed major deals to develop oilfields in Iraq, which has the world's fourth-largest oil reserves and the tenth largest gas reserves.

But Iraq has offered foreign companies less attractive service agreements - where they are paid a fee - rather than production-sharing deals that allow them to profit jointly from the output.

"Limitations are there, constraints are there. You really try to understand the dynamics and the constraints to work with the authorities and solve those issues," Abdul Wahid, senior manager at Pakistan Petroleum told Reuters.

A boom in unconventional gas production in North America has boosted world supplies, while a surge in Australian exports, gas finds in east Africa, and China's own gas potential also combine to make more complex prospects such as Iraq less attractive.

Violence in Iraq has eased since the height of the war, though security remains a concern, especially in more remote areas where some of the auctioned gas blocks are located.

Companies entering new deals also weighed risks from Iraq's continued political instability against the potential gas and crude developments on offer in the bidding, which are mostly in western and central Iraq.

Another complication overshadowing Iraq's oil sector is the ongoing feud between the central government in Baghdad and the autonomous Kurdistan region in the north over control of disputed territories and oil rights.

Baghdad has rejected oil deals signed by Kurdistan as illegal. The Kurdish region has its own government and armed forces, but relies on the central government for budget and for export of its oil production.

Exxon was banned by Baghdad from competing in the 4th bidding round because it had signed deals with Kurdistan to explore in their region, a move Baghdad rejected. U.S. company Hess Corp. was also excluded for its Kurdish deals.

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