BAGHDAD Iraq awarded only one out of six new oil and gas blocks to foreign companies on Wednesday as the tough contract terms on offer, especially at a time when the world has plenty of gas, dampened interest in the country's fourth energy bidding round.
The auction aims to spur the rapid expansion of Iraq's energy sector after years of war and sanctions, but officials and corporate executives said the economics of the contracts, especially on gas deals, largely kept companies away on the first of two days of bidding.
"We believe the contracts.. serve the interests of the companies and Iraq. But they have a different view," Abdul-Mahdy al-Ameedi, director of the ministry's contracts and licensing directorate, said. "That is why only one block was awarded."
Iraq is offering foreign companies service agreements - where they are paid a fee - rather than production-sharing deals that allow them to profit jointly from the output.
Iraq, a member of the Organization of the Petroleum Exporting Countries (OPEC) has the world's fourth-largest oil reserves and the tenth-largest gas reserves, and it still offers potentially rich unexplored territories.
But a boom in unconventional natural gas production in North America has boosted world supplies over the last few years, while a surge in Australian exports, gas finds in east Africa, and China's own gas potential combine to make trickier prospects such as Iraq less attractive.
During the first day of the auction on Wednesday, foreign companies made no offers on four oil and gas blocks. A group led by UK-based Premier Oil (PMO.L) rejected a government offer on the fee for a fifth block, scuttling an agreement there.
Only a consortium led by Kuwait Energy and partners Turkey's TPAO and Dubai-based Dragon Oil DGO.I secured a deal to explore Block 9, an area mainly containing oil in the southern Basra province.
Bidding was decided according to the remuneration fees offered, with the lowest bids winning blocks. Industry sources had said companies would have to offer $10 to $20 a barrel for the service fee to compensate for risks involved.
Kuwait Energy offered a fee of $6.24 per barrel of oil equivalent. It was able to bid aggressively for the highly-prized Block 9 because it is already on the ground in southern Iraq at the Siba gas field project, which it won in Iraq's third licensing round in October 2010.
Block 9 is adjacent to neighboring Iran's huge Azadegan oilfield. Western geologists say there is discovered oil in the block and add it may be part of the Azadegan reservoir.
"They have already mobilized in southern Iraq, so they were able to offer a lower remuneration fee," an Iraqi oil executive said.
Industry sources expect only a few more blocks - probably oil areas - to be awarded on Thursday. At most a quarter of the 12 blocks on offer are likely to be taken up, the sources said.
Company executives involved in the bidding process said that despite the sluggish start, oil blocks 8 and 10 would probably get more bids, because of what one executive called "geological interest and promising reserves".
Another six blocks were due to go up for auction on Thursday, alongside at least two blocks rejected on Wednesday.
Iraq had eased its terms on the service contracts in an attempt to lure interest, but companies remained reluctant.
"With tough gas contract terms, and all the other risks around these blocks, we don't expect much interest from companies," said another senior company executive involved in the bidding, who asked not to be identified.
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Violence in Iraq has ebbed sharply, and major oil companies like BP (BP.L) and Exxon have already signed large deals to develop oilfields in the south, where current average exports are 2.13 million barrels per day and output 2.35 million bpd.
But companies entering new deals must weigh risks from Iraq's continued political instability against the potential gas and crude developments on offer in the bidding, which are mostly in remote parts of western and central Iraq.
Oil explorers winning 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.
Investors may also shy away from blocks in more remote areas due to concerns over security in a country where Sunni Islamists tied to al Qaeda are still active.
Another hurdle could be the failure of Iraq's parliament to pass a long-delayed national oil and gas law that would provide a stronger framework for protecting oil investments.
Baghdad's central government and the autonomous Kurdistan Regional Government in the north are also locked in a dispute for control over oil in areas which both authorities claim. Baghdad rejects deals signed by the Kurdish region as illegal.
Exxon Mobil (XOM.N) was dropped from the fourth bidding round after it announced deals to develop oilfields in Kurdistan, a move Baghdad rejected. U.S.-based Hess Corp (HES.N) was also blocked from competing after it signed for Kurdish oil deals.
(Additional reporting by Peg Mackey in London and Daniel Fineren in Dubai; writing by Patrick Markey; editing by Helen Massy-Beresford and Anthony Barker)