Despite the rich deposits on offer, energy companies were put off by the prices demanded by the Iraqi government, and continuing concerns over the security situation in the country. And their caution has dealt a blow to Baghdad's efforts to raise billions of dollars desperately needed to rebuild.
Even before the auction, analysts warned that Iraq's plans for attracting the investment necessary to crank up its output were overly optimistic. Iraq plans to retain ownership of its oil, but make long-term agreements with foreign companies to run the operations. But Oil Minister Hussein Shahristani demanded that oil companies lower their profit expectations, offering to pay them $2 for every barrel pumped in Iraq rather than the $4-a-barrel rate sought by oil executives. Chevron, which had negotiated for a year to develop Iraq's second-biggest field, West Qurna, pulled out of the deal on Tuesday, saying it had not met the company's "standard investment criteria." French giant Total and Spain's Repsol also withdrew after failing to secure a better deal from the Iraqis, leaving Baghdad high and dry. "[The Iraqis] approached this auction with a bit of arrogance," Younsi says. "They thought oil companies would do absolutely anything to get into Iraq."
Iraq remains enormously tantalizing for Big Oil, whose prospects for tapping huge new fields around the world are shrinking. The country's 115 billion barrels in proven reserves, most of it untapped, make it perhaps the last major oil territory yet to be spoken for. Engineers recently estimated that there may even be a further 150 billion barrels underground that have not yet been surveyed, much of it in the vast Western Desert. If true, Iraq could one day potentially match Saudi Arabia, whose output of 9.6 million barrels a day makes it the world's largest producer. Iraq currently pumps just 2.4 million barrels a day, because its oil facilities need huge capital upgrades. "Even if this process had gone as planned it's still not sure that the targets would be reached," says Leila Benali of the Cambridge Energy Research Associates. Still, Iraqi officials are confident that with enough international expertise and investment, their country could produce 6 million barrels a day within a decade.
Iraq's industry has gone to seed in the decades of war and sanctions, as well as the expulsion of foreign oil companies by Saddam Hussein in 1972. But its potential remains massive, especially when compared with the dwindling reserves of the North Sea, the fact that most Middle Eastern fields are already being pumped, and that new deposits elsewhere offshore and in the Arctic are remote and expensive to develop.
"It is too tempting for companies to miss having a foothold in Iraq," says Tariq Shafiq, director of the London oil consultancy PetroLog & Associates, and a previous executive director of Iraq's National Oil Company who helped to draft Iraq's new national oil law after the US invasion in 2003. "Where else would any company go today to have access to a field that produces two million barrels per day? There is none."
Presented with an opportunity this week to claim that foothold, however, most major oil companies were unwilling to commit. The need for military style security and expansive insurance in light of ongoing terror attacks would require foreign investors to add millions to the cost of operating in Iraq. Massive capital investment is required to develop the industry's capacity in Iraq, and militant trade unions that have flexed their muscles through strikes in recent years and which bitterly oppose foreign oil companies taking charge of developing Iraq's fields add to the headache facing potential investors.
Nor is the political climate necessarily conducive to Big Oil setting up shop in Iraq. The country's parliament has thus far refused to ratify the government's national oil law drafted under the strong influence of U.S. officials which would allow international oil companies to acquire an ownership stake in the mammoth reserves.
Iraq's Arab-Kurd political conflict also directly affects oil investment in the three semi-autonomous Kurdish provinces in the North. Since 2006 the Kurdistan Regional Government has signed about 20 deals with small oil companies, and have begun exporting oil during the past year the only new oil fields developed in Iraq in decades . That violated the Iraqi government's decrees that such contracts, which bypassed Baghdad, are illegal.
As the energy consultancy Wood Mackenzie noted on Wednesday, for oil companies, Iraq has "more risk on the downside than opportunity for the upside."
Until now, major oil companies such as Chevron and ExxonMobil have stayed out of investing in the Kurdish zone for fear that investing there might prompt Baghdad to blacklist them from bidding for the far larger fields down South. But those fears have diminished as the stalemate in parliament over oil has dragged on. Big Oil might also be emboldened to make deals on oil fields in the Kurdish areas since last week, when the Chinese oil giant Sinopec announced that it was acquiring the Swiss oil company Addax Petroleum, which operates in Iraqi Kurdistan. "It will be much more difficult to blacklist Sinopec," says Yousni. "This is China, a permanent member of the U.N. Security Council, not some small oil company," he says. Having dared to take on Baghdad, China has increased the Kurds' ability to become an autonomous economic power, and perhaps allowed other companies to follow suit. "The Chevrons and Exxons of this world can now do the same, and go into Kurdish fields." For now, some may see that as a safer bet than the riches on offer, at a steeper price and risk, further south.