How the Iraq oil auction works
A guide to how the bidding process for Iraq's hydrocarbons works
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The Iraq oil and gas field auction is attracting attention from all over the world. The auction, the first in the country for over 30 years, is being shown live on Iraqi television to ensure total transparency. Here is a guide to how the whole bidding process works.
The Iraq oil ministry has set a minimum plateau production target for each oil or gas field available at auction. The figure, in most cases, is around its current output. Any successful bidder will not be paid for any oil produced under the minimum target.
All bidders must submit a figure that they want to be paid for any oil produced over the target. The Iraq Oil Ministry also submit a figure of how much they want to pay.
The winning bidder also has to give Iraq a ‘soft’ loan signing bonus, that can be anything up to US$500 million. This will be paid back by Iraq after a two-year payment window and at extremely favourable terms to the country.
The winning bidder also has to guarantee a minimum expenditure for each field of anything up to $300 million.
In return successful bidders get a 20-year contract to develop the field. They will also be able to recover costs from the Iraq government for any money they spend developing the facilities at each field.
The problem so far is that the figure that Iraq is willing to pay IOCs for every extra barrel of oil is far lower than the figure the bidders have submitted. In some cases it is 10 times less.
In the case of the sole winning bid so far, the 17 billion barrel Rumaila field in southern Iraq, the BP consortium had initially asked for $3.99 a barrel for every additional barrel produced, the ExxonMobil consortium wanted $4.50, while the Iraq oil ministry wanted to pay $2. The BP consortium eventually relented and accepted the Iraq offer.
These fixed-fee contracts differ from the usual contracts IOCs sign with oil producing countries. The usual contract involves the IOC signing a production sharing agreement where it recoups costs then gets a share of the oil.
The contracts are also seen as a risk in some quarters due to the absence of an oil law in Iraq. Hypothetically, in the absence of an oil law a future Iraq government could overturn the contracts on a whim.
However, many people working in the industry believe that Iraq has the last great untapped reserves of oil left in the world, so is worth the gamble.