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The New York Times

Oil Companies Look to the Future in Iraq

Timothy Williams

Iraqis working at a refinery near Basra. Deals on three top oil fields show that Iraq may be on a path to joining the world's major oil-producing nations, analysts say. (Image: Nabil al-Jourani/Associated Press )

BAGHDAD - More than six and a half years after the United States-led invasion here that many believed was about oil, the major oil companies are finally gaining access to Iraq's petroleum reserves. But they are doing so at far less advantageous terms than they once envisioned.

The companies seem to have calculated that it is worth their while
to accept deals with limited profit opportunities now, in order to cash
in on more lucrative development deals in the future, oil industry
analysts say.

"The attraction of these fields to oil companies is not the
per-barrel profit, which is very low, but their value as an entrance
ticket to the oil sector of southern Iraq," said Reidar Visser, a
research fellow at the Norwegian Institute of International Affairs who operates an Iraq Web site, Historiae.
"In terms of size and potential, the Basra region remains one of the
most attractive areas of future growth for the international oil

Iraq's first stab at opening its oil industry to foreign investment ended in disappointment at an auction in June in which most companies declined to bid. But last month many of those same companies - including Exxon Mobil and Occidental Petroleum,
the first American companies to reach production agreements with
Baghdad since the 2003 invasion - signed deals at much the same terms
they rejected over the summer.

Analysts say the deals on three of the country's top fields show
that Iraq, after an embarrassing start, may be on a path to joining the
world's major oil-producing nations, which could in turn upset the
equilibrium in OPEC
and increase tensions with the neighboring oil giants Iran and Saudi
Arabia. Adding to those strains, development rights to 10 other Iraqi
oil fields will be offered to foreign companies at a public auction in
Baghdad on Dec. 11.

However, the auction and the contracts come at an awkward time: just
months before national elections that could provoke renewed violence or
sweep in a new government that could disown the deals.

In the recent deals, the major oil companies have agreed to accept
service contracts, in which they earn a fee for each barrel of oil
produced. Yet they vastly prefer production-sharing agreements, in
which they gain an equity stake in the oil itself. Such deals are far
more lucrative to oil companies, but for Iraqis they are reminiscent of
the colonial era, when foreign companies controlled the country's oil
wealth. "We have shown that we can attract international companies to
invest in Iraq and boost production through service contracts," Hussain
al-Shahristani, Iraq's oil minister, said recently. "They will not have
a share of Iraqi oil, and our country will have total control over

But Iraq has also been forced to acknowledge that it cannot hope to
revive its decrepit oil industry without the money and the technical
expertise of the major companies. Despite strong anti-American
sentiments among the Iraqi public, few officials want to refuse
American cash.

"We do not have any preferences," said Abdul Hadi al-Hassani, deputy
chairman of Parliament's Oil and Gas Committee. "We are interested only
in the financial health of the company and in their technical know-how.
American companies are well known in the oil sector."

After months of secret negotiations between the Oil Ministry and the
companies, two new deals and the completion of a third were announced
in recent weeks. A consortium of Eni, an Italian oil company,
Occidental and Korea Gas signed a preliminary agreement to develop the
Zubayr field, which has an estimated 4.1 billion barrels of oil.

Shortly thereafter came the formal ratification of the only deal reached during the June auction, a partnership between British Petroleum
and the China National Petroleum Company for Iraq's Rumaila oil field,
one of the largest in the world, with an estimated 17.8 billion barrels
of oil.

Within days of that deal's ratification, Exxon Mobil and Royal Dutch Shell
signed an initial contract to develop West Qurna, Iraq's most
sought-after field in part because it is believed to have at least 8.6
billion barrels of oil.

The government said it expected production from the three fields
alone to vault Iraq's output to 7 million barrels a day from 2.5
million barrels a day within six years, which would move it from the
world's 13th largest producer to the fourth, according to Department of Energy statistics.


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"Iraq is now on its way," Mr. Shahristani said after the announcements.

Oil industry analysts said that there appeared to have been little
change from the contracts offered in June. But the major oil companies
appeared to have rethought their positions and decided that despite
what they considered paltry returns, they could not afford to be left
out of Iraq's riches. A foot in the door now, they reasoned, might lead
to better contracts.

"The recent award of Zubayr and West Qurna serves to illustrate a
wider acceptance that, in order to secure these strategically important
developments, compromise is required," Colin Lothian, a research
analyst for Wood Mackenzie, an energy industry adviser, said via e-mail.

In the West Qurna field, for example, the Exxon Mobil-Shell
partnership agreed to accept $1.90 for each barrel of oil it produced
above the field's current production level, precisely what the
government demanded in June and less than half the $4 a barrel the oil
giants wanted.

"It's fair to say that there are many people negotiating now who
would not have taken $2 before," said Shell's chief financial officer,
Simon Henry, during a conference call with reporters on Oct. 29, days
before the preliminary agreement was announced.

However, while the companies have pledged to invest billions in
Iraq, few here believe much of that will actually be spent until the
country successfully concludes national elections and attains a period
of relative peace.

Iraq has the third largest proven reserves of oil in the world, with
about 115 billion barrels, but it does not rank in the top 10
producers. If and when its oil production rises toward seven million
barrels a day or more, Iraq might find itself in conflict with OPEC,
which maintains production quotas for its members. Iraq has been exempt
from the quotas since sanctions were imposed in 1990, Iraqi officials

Iraqi officials say there is no justification for imposing a quota
on their production, saying they have been underproducing for years,
allowing others to enjoy higher quotas.

"The production from these three fields will surely threaten other
oil-producing countries and will show the world that Iraq can match
Saudi Arabia's production," said Mr. Hassani. "Our share has been taken
by other countries, and we will gain our share again from the countries
that took it."

Mohammed Hussein, Sa'ad Izzi and Omar al-Jawoshy contributed reporting.


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