BAGHDAD: Energy companies face tough terms, shaky security and local opposition when they fly to Baghdad this week to take part in a gas bidding round.
Iraq’s plan to auction three gas fields on Wednesday has generated little interest from international energy firms eager to tap the country’s vast reserves, compared with Iraq’s two oil bidding rounds held last year, analysts said.
Winning bidders will have to brave the risks of operating in violent areas where provincial opposition against the auction is ramping up and convince the Oil Ministry to allow them to export the gas as a way to compensate them for low remuneration fees.
"I think the concessions Iraq has made on the gas contracts … with interested companies indicates that they are in a relatively weaker bargaining position for this third round," said Kyle McEneaney, who heads the Middle East practice at Ergo, an emerging markets consultancy.
"This gas is a good potential source of both export revenue and feedstock for domestic electricity production, and Iraq may need to be even more flexible with the contract terms to get companies to participate."
The three fields up for grabs are Akkas field in the western desert, Iraq’s Sunni heartland and once an al Qaeda stronghold, Mansuriyah near the Iranian border in volatile Diyala province, and Siba in the relatively peaceful southern oil hub of Basra.
In total, the three fields have estimated reserves of 11.23 trillion cubic feet of gas, out of Iraq’s total 112 trillion cubic feet of proven natural gas reserves, the world’s 10th largest.
Thirteen companies registered for the auction including Italy’s ENI, Edison, France’s Total, Norway’s Statoil, South Korea’s KOGAS, and Russia’s TNK-BP.
Baghdad had said priority for the gas on offer was for domestic consumption, an unattractive term for firms who will have to build an almost non-existing gas infrastructure and pipeline network from scratch.
"There are a lot of outstanding issues, gas is a little bit different from oil because oil is much easier to commoditize. Gas needs long-term stability, it needs pipeline systems, and it needs bilateral agreements to export," said Samuel Ciszuk, Middle East energy analyst at consultants IHS Energy.
Iraq, starved of power after years of war, economic sanctions, neglect and sabotage, hopes opening its gas sector to foreign investment will boost its power capacity. The country’s national grid only supplies a few hours of electricity each day.
But Iraq still does not have a clear vision for its future power and domestic gas demand, industry sources say. It is already in talks with Royal Dutch Shell and Japan’s Mitsubishi over a $12 billion joint venture to capture associated gas flared at the southern oilfields.
"Iraq doesn’t have a clear plan about the domestic demand for this gas.
There is no certainty who will take all this gas," said an oil executive, who asked not to be named.
"Even if you said you will export the surplus, gas export doesn’t work like that, it is all about very long-term commitments."
Industry insiders said the southern field of Siba, the smallest of the three with reserves of 1.13 trillion cubic feet, is likely to attract the most bidders due to the relative stability of the area and its proximity to Kuwait, a possible though politically complicated export route.
Gas from Akkas — which has 5.6 trillion cubic feet in reserves —could be exported to Syria, a better economic solution for the gas than building a pipeline network to the rest of Iraq if used for the domestic market.
But to muddy matters, the provincial government in Anbar is opposed to exporting surplus gas from Akkas.
Meanwhile, Mansuriyah, which is near the Iranian border, is likely a no-go for Western companies who could be hobbled by sanctions if they exported gas through Iran.
Gas produced from the field will likely feed domestic power stations, meaning that building pipelines across the country would make development costs higher than the other two fields.
"The question will be, what will the internal gas market price be in Iraq? What they (Iraqi government) actually pay for the gas will be crucial and in the end that might be too little for the companies given the risk," said Ciszuk.
Challenges Ahead
Not all companies registered will actually bid on Wednesday. Some may pull out of the race due to poor economics and lack of clarity on export possibilities, industry observers said.
The Oil Ministry has tried to sweeten the deals by dropping signature bonuses, which were at least $100 million in the two earlier bidding rounds for oilfields, and said it will also revise its maximum remuneration fee.
In Iraq’s oil round last year, Edison was the sole bidder for Akkas with a proposed fee of $38 for each additional barrel of oil equivalent, while Baghdad offered $8.50 a barrel.
To sweeten the contract terms even more this time, companies will be paid even if Iraq fails to set up a national gas pipeline network in time to receive gas from the fields.
But this might not be enough to entice bidders.
Iraq may have to offer companies a share of equity, giving them the right to book reserves, said David Horgan, managing director of Irish explorer Petrel Resources.
"It’s going to be a major problem to make it work unless you get a share of the equity," he said. "The terms look quite harsh. I would be surprised … if it’s a success."
Additional reporting by Barbara Lewis and Ahmed Rasheed
