LONDON/BEIRUT (Reuters) - As OPEC gathers in Vienna next month to consider cutting its oil output, a lower profile event in Baghdad on the same day will signal Iraq’s longer term ambition to do precisely the opposite.
Nov. 30 is both the date when OPEC ministers meet in the Austrian capital and the deadline set by Iraqi oil minister Jabar Ali al-Luaibi for international firms to submit bids to help it develop 12 “small and medium-sized” oil fields.
Crude output in Iraq, OPEC’s second largest producer, is already rising dramatically despite corruption, poor infrastructure and the fight against Islamic State. This is complicating OPEC’s efforts to revive prices by making its first output cut since the 2008 global financial crisis.
Ministers from the Organization of the Petroleum Exporting Countries are supposed to decide in Vienna which member states will make the cuts under an outline agreement struck last month.
Iraq says it will not reduce output because it needs oil money to combat Islamic State, and Prime Minister Haider al-Abadi offered strictly limited support on Tuesday. “We are prepared to cooperate on the correct basis,” he said. “We want oil prices to increase.”
At around $50 a barrel, crude prices are less than half their levels in mid-2014 and OPEC is seeking a production deal that will last at least six months.
Developing the 12 Iraqi oil fields, which lie in southern and central areas away from Islamic State strongholds, will take longer than that. Nevertheless, fellow OPEC members and rivals need read no further than the terms of the new tender to understand Baghdad’s intentions.
The tender document sets quick output gains as the main requirement to win the contracts. Baghdad also wants maximum revenue, including from selling gas produced as a by-product of the crude extraction, rather than simply burning it off.
After achieving commercial production in the first phase of development, the Oil Ministry’s document says, “in the second phase, the sustainable high production level will be achieved, along with complete utilization of associated gas”.
With oil reserves of 143 billion barrels, Iraq controls almost every tenth barrel of oil in the ground in the world.
Aside from security problems, its crude is as cheap and easy to extract as in Saudi Arabia or Iran, but its energy industry suffered decades of under-investment under Saddam Hussein who was overthrown by a U.S.-led invasion in 2003.
Since then Iraq has signed deals with majors such as Exxon Mobil (XOM.N), BP (BP.L) and Royal Dutch Shell (RDSa.L) to develop its giant fields. Production has almost doubled to 4.7 million barrels per day this year from 2.4 million bpd at the start of the decade.
But the growth has lagged the initial forecasts of production at 9 million bpd by 2018, equal to Saudi Arabia‘s. Held back by red tape, infrastructure constraints and difficult contract terms, Iraq is now targeting a more modest 5.5 million to 6 million bpd by 2020.
The oil ministry is in a hurry. “Luaibi’s plan is to boost production as quickly as possible to mitigate damage from lower prices, generate more revenues and have additional crude to repay contractors. This is the best way to keep everybody happy,” a senior official with state-run South Oil Co said.
Another reason for the push to develop smaller fields is that talks with the majors on revising their contracts for operating the giant fields in southern Iraq have stalled. “We can’t just waste time and run round in circles with these tough talks,” said the official, who declined to be named.
Under service contracts awarded since 2003, the oil ministry pays the operators a fixed dollar-denominated fee for every barrel of oil produced. While the model worked well for Baghdad when prices were high, it is now paying the same fees while its revenue from oil sales is significantly lower.
An executive from a company bidding for one of the new contracts said that Luaibi wants to leave his mark “by ramping up production quickly”.
The fields might be small or midsize by Iraqi standards, but they are significant by anybody else‘s. Nine of the fields together hold 2.3 billion barrels, equal to the entire reserves of Britain, which currently produces around 1 million bpd.
The new tenders also signal a departure from existing technical service contracts (TSCs), under which some oil producers complained of late payments by Baghdad.
“Luaibi wants to tear apart old contracts and make them work better for Iraq and oil firms. He is telling oil firms: keep investing - we will find a way to pay you,” one of the executives involved in bidding said.
New deals will be awarded based on bilateral and direct negotiations between the oil ministry and oil companies, moving closer to production sharing contracts (PSCs), when companies get a percentage of the oil output instead of being paid a fee for their work.
Their structures are likely to vary, reflecting the differing geologies of the various fields and consequently differing methods of extracting the crude.
“In a country like Iraq with so much diversity in the oil fields, it’s impossible to have one contract system. This is an evolution towards a hybrid Iraqi contract model combining elements of TSC and PSC,” managing director of UAE-based Manaar Energy Group Jaafar Altaie said.
Iraq has long said it believes it was cut out of the market in the 1990s, when the government of Saddam Hussein was under international sanctions, and hence it has lost its market share to rival OPEC producer Saudi Arabia.
Officials say that as Iraq tries to retake its second city of Mosul from Islamic State, it should get the same exemptions from OPEC output restrictions as Iran, Nigeria and Libya, whose crude production has been hit by conflict and sanctions.
“We are fighting a vicious war,” Luaibi said this week.
Veteran oil watcher and founder of Petromatrix consultancy, Oliver Jakob, says a third of OPEC’s member states are now pleading special circumstances for why they should not accept output caps. As a result, Jakob has come up with a new way of spelling out the OPEC acronym: the Organisation of Producers Exempt from Cuts.
Writing by Dmitry Zhdannikov and Ahmad Ghaddar; editing by David Stamp