September 13, 2011 / 9:11 AM / 8 years ago

Iraq reworks fees to bolster 4th energy auction

* Fee structure change to cut subcontract costs

* Auction to boost Iraq oil and gas reserves

* Companies look for foothold in Iraq despite risks

By Rania El Gamal

AMMAN, Sept 13 (Reuters) - Iraq’s fourth auction for exploration rights will offer international energy companies a revised remuneration fee formula designed to benefit bidders while encouraging them to minimise costs.

The Iraqi oil ministry held a roadshow in Amman, Jordan, on Sunday for 46 pre-qualified companies interested in bidding for 12 exploration oil and gas blocks.

Iraq expects to add 29 trillion cubic feet of gas and 10 billion barrels of oil to Iraqi reserves from the auction — part of a three-stage plan set by the Oil Ministry to boost proven reserves.

The ministry has made a few alterations in the new service agreement from contracts signed with oil companies after three bidding rounds in 2009 and 2010, said Abdul-Mahdy al-Ameedi, head of the oil ministry’s contracts and licensing directorate.

“There are not many differences from the previous contracts. But we recognised that there are some minor mistakes in the previous contracts, not substantial,” he told Reuters. “So we were able to overcome this in our current contract.”

One of the main changes was the way the remuneration fee is calculated in the new contract, Ameedi said.

“If the total production is 1 million barrels per day and the cost recovery is (the value of) 300,000 bpd, then we will deduct the 300,000 from the net production and the remainder is 700,000 bpd, so we will pay remuneration for the 700,000 only, not for the 1 million,” Ameedi said.

“The remuneration will be higher so it is in our interest and I think it is in the interest of the contractor.”

The calculation change is aimed at cutting the cost of subcontracts, which was inflated by some oil companies under the current deals signed with Iraq, Ameedi said.

“We will deduct the cost of subcontracts from the total production and the remaining production will pay remuneration for it,” he told reporters on the sidelines of the roadshow.

“If that share of production is less, remuneration of the contract will be affected negatively, and if it is high, they will get more remuneration,” he said.

“It coincides with the idea of production sharing in this sense only. That there would be ‘cost oil’ but there would not be ‘profit oil’.”

The contract length will be a maximum of 30 years including four years for exploration and 20 for development, Ameedi said.

The model contract was not final and could be changed.

Any new oil reserves discovered will be used to maintain and boost reserves, while companies who make gas discoveries will be allowed to produce it.

“We may or may not develop and produce (from) the oilfields, if any,” Ameedi said.

“Regarding the gas, we are keen to find gas accumulation to be produced in order to use the produced gas as a fuel for power generation, petrochemicals and other industries.”

The holding period will be up to seven years for oil discoveries.

OPEC member Iraq sits on the world’s fourth-largest oil reserves and flares around 700 million cubic feet of gas every day at its southern oilfields. It needs to harness gas for electricity to end chronic power blackouts that still plague the country almost eight years after the U.S.-led invasion.

The fourth bid round will help Iraq maintain and increase reserves to offset expected depletion and could strengthen its case among its OPEC peers to set an export quota for Baghdad.

Baghdad has signed a series of deals with international firms in a bid to boost production capacity to 12 million bpd.

The world’s biggest oil and gas explorers showed up in Amman, weighing the benefits of gaining access to Iraq’s vast and largely underdeveloped oil and gas fields, and shrugging off security fears and infrastructure challenges.

More than 100 executives from oil majors such as ExxonMobil , Chevron , Total , BP and Lukoil attended the show, where Iraqi officials presented the service contract and licensing process for the auction, scheduled for Jan. 25-26.

Many small and medium-sized firms that do not have a foothold in Iraq, one of the last opportunities to access cheap Middle East reserves, have also been pre-qualified to bid.

Some firms were optimistic about the opportunities while others took into account the risks due to the tough terms under Iraq’s service agreements. Many favour production-sharing deals.

“The remuneration fee is going to be much bigger, there is no question about that. But that does not necessarily automatically make it more economically interesting because the risks are high,” an oil executive attending the workshop said.

“Access to the crude is far more important than the economics for some, which could make this fourth bidding round, most probably, a success.” (Editing by Jim Loney and Jason Neely)

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