U.S. Companies Shut Out as Iraq Auctions Its Oil Fields

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Essam Al-Sudani / AFP / Getty

Iraqi workers walk through part of the Halfaya oil field near the southern city of Amara on December 12, 2009.

Those who claim that the U.S. invaded Iraq in 2003 to get control of the country's giant oil reserves will be left scratching their heads by the results of last weekend's auction of Iraqi oil contracts: Not a single U.S. company secured a deal in the auction of contracts that will shape the Iraqi oil industry for the next couple of decades. Two of the most lucrative of the multi-billion-dollar oil contracts went to two countries which bitterly opposed the U.S. invasion — Russia and China — while even Total Oil of France, which led the charge to deny international approval for the war at the U.N. Security Council in 2003, won a bigger stake than the Americans in the most recent auction. "[The distribution of oil contracts] certainly answers the theory that the war was for the benefit of big U.S. oil interests," says Alex Munton, Middle East oil analyst for the energy consultancy Wood Mackenzie, whose clients include major U.S. companies. "That has not been demonstrated by what has happened this week."

In one of the biggest auctions held anywhere in the 150-year history of the oil industry, executives from across the world flew into Baghdad on Dec. 11 for a two-day, red-carpet ceremony at the Oil Ministry, broadcast live in Iraq. With U.S. military helicopters hovering overhead to help ward off a possible insurgent attack, Oil Minister Hussein Al-Shahrastani unsealed envelopes from each company, stating how much oil it would produce, and what it was willing to accept in payment from Iraq's government. Rather than giving foreign oil companies control over Iraqi reserves, as the U.S. had hoped to do with the Oil Law it failed to get the Iraqi parliament to pass, the oil companies were awarded service contracts lasting 20 years for seven of the 10 oil fields on offer — the oil will remain the property of the Iraqi state, and the foreign companies will pump it for a fixed price per barrel.

Far from behaving like the war-ravaged, bankrupt country that it is, Iraq heavily weighted the contracts in its own favor, demanding a low per-barrel price and signing bonuses of up to $150 million. Only one U.S. company, Occidental Petroleum Corp., joined the bidding last weekend, and lost. (ExxonMobil had hoped to land the lucrative Rumaila field, but lost out to an alliance between the Chinese National Petroleum Company and BP because it declined the Iraqi government's $2-a-barrel fee.)

Russia's Lukoil, CNPC, and RoyalDutchShell accepted fees of between $1.15 and $1.40 for every barrel they produce — that's about 2% of Friday's oil futures price of $73 a barrel. "No one thinks it will be easy to make money on these contracts," says Samuel Ciszuk, Middle East energy analyst at IHS Global Insight, an economic forecasting company in London. "Companies have been willing to come in very, very low just to get their foot in the door in Iraq."

The lure is obvious: Iraq's 115 billion barrels of known oil reserves are outmatched only by Saudi Arabia, Canada and Iran, and geologists believe vast amounts more lie unexplored in the Western Desert. With 2.4 million barrels a day in production, the country was until this week up for grabs for foreign oil companies, in contrast to other big oil nations, where Big Oil is shut out: Iran is off limits because of sanctions, and Saudi Arabia's government controls its oil fields, as does Kuwait.

Still, there are daunting challenges: Iraq's lethal risks will require companies to spend millions on security. Political uncertainty continues, with the oil law governing the sharing of revenues remaining stalled and disputes over oil contracts raising the tension between Baghdad and the autonomous Kurdish enclave in the north. An election scheduled for next March could see a change of government in Iraq, and on Friday Iranian troops reportedly seized control of an oil field along a disputed section of border. Some analysts believe that Iran is deliberately attempting to shake the oil industry's confidence in Iraq, by reminding investors that several oil fields traverse disputed border areas with Iran. Iran — like other big oil producers — might also fear that a dramatic increase in Iraqi output could send world oil prices plummeting.

Clearly, there's no shortage of uncertainties facing investors in Iraqi oil. And then there are the problems of decrepit wells, aging pipelines, storage facilities, and export ports incapable of handling large volumes. Still, says Ciszuk: "Most oil people think it is better to be part of those challenges than not being part of it."

The auction represents an astonishing transformation for Iraq. In just a few months, it has become a major oil power with the potential to overtake the world's biggest producer, Saudi Arabia. In a previous bid round last June, Iraq handed control to the giant Rumaila field near Basra to Britain's BP, while ExxonMobil later took an 80% stake in another huge field, West Qurna Phase 1, and plan to eventually pump 2.5 million barrels a day. Now, Baghdad officials say they aim to harness the know-how and technology of their foreign partners to pump about 12 million barrels a day by 2017. "It is difficult for any major oil company not to be in Iraq," Total's global exploration and production chief Yves-Louis Darricarrére told TIME last month. Despite intense negotiations, the French company was outbid by an alliance of Shell and Malaysia's Petronas for Iraq's giant Majnoon field. Total CEO Christophe de Margerie told TIME last Sunday that he had put in a "fair bid," and that he doubted his competitors would make solid profits in Iraq, given the stiff terms.

That might have been the thinking of U.S. oil giants, which largely stayed away from last week's bidding, and which have failed to negotiate oil deals with Iraq's government outside of the public auction process. Iraqi officials say they are not awarding contracts based on political considerations, but simply a straight comparison of prices and production targets. "The bidding was extremely tough," said one official in Baghdad, in an email. "My guess is that [the U.S. companies] could not match the offers from others." In Iraq, at least, the victor has no special claim on the spoils of war.