Iraq Sweetens New Oil Project Terms, Blames Shell for Delay

Source: Reuters 8/27/2013, Location: Middle East

Iraq has offered investors more lucrative terms to tap a large oilfield and build a refinery, while blaming Royal Dutch Shell for underproducing billions of dollars' worth of crude.

The Nasiriya oilfield holds reserves of more than 4 billion barrels and could contribute to Baghdad's plan to treble output by the end of this decade with the help of foreign companies. But Iraq's output has slowed this year and companies have complained about their slim margins on existing service contracts. Some have angered Baghdad by signing contracts with the semi-autonomous northern Kurdistan region in search of better terms.

"The oil ministry was keen to draft a contract which includes more lucrative and sweetened terms compared to the previous service contracts," an Iraqi oil industry source said.

"In this contract, operators will have no state partner and no signature bonus should be paid. That definitely will bring more profit for the project's operator."

The project involves developing the southern field and building a 300,000 barrel-per-day refinery. Previous agreements have stalled. In 2009, a Japanese consortium was selected to invest, but negotiations fell apart.

More hopeful of progress this time, Iraq in March shortlisted seven international oil companies (IOCs) to bid in an auction planned to be held in December this year, and added five more companies to the list earlier this month.

"It is going to be with completely different contract shapes that are going to be very attractive to the oil companies," Iraq's Oil Minister Abdul Kareem Luaibi said earlier this year of the investment terms for Nasiriya.

Iraq's output began to expand in 2010 after it secured service contracts with IOCs such as BP, Shell, Eni and Exxon Mobil. The revival slowed in 2013 due to infrastructure and security problems, keeping output below 3 million barrels per day (bpd) in July, athough supply is expected to start rising again later the year.

Majnoon Delays
Oil industry sources say part of the reason for the lag in production is the delayed start-up of Majnoon, an oilfield being developed by Shell and minority partner Malaysia's Petronas, which has angered the government.

A letter sent by the government last month, and seen by Reuters, blames Shell for missing start-up dates at the field, which holds 12 billion barrels, costing Iraq $4.6 billion. Delays over pipeline work started a year ago.

Shell has built up a strong position in southern Iraq as operator of Majnoon, junior partner with Exxon at West Qurna-1 and a partner in a natural gas project. The three ventures will cost around $100 billion.

The spat indicates the infrastructure challenges facing foreign oil companies working in Iraq. Industry sources say Shell is particularly wary of health and safety failings, so work may take longer.

Shell, asked to comment on the letter, said it found when it started opening existing facilities towards the end of 2012 that extra work was needed. The company said it was still targeting output of 175,000 bpd at Majnoon before the end of the year.

"The safety of our people and assets remains our top priority in Iraq, so we have been working on getting the facilities back to an acceptable condition and ensure a safe and reliable operation," a Shell spokesman said. "Drilling operations to restart new production in Majnoon have successfully concluded and we expect to open the wells in the near future."

Other oil executives downplayed the spat, seeing it as a largely routine part of sometimes rocky relations between the industry and its host governments.

"It's noise - no big deal," said one, from a rival company. "It's just the Ministry of Oil diverting attention that the delay is largely SCOP's (Iraq's State Company for Oil Projects) fault."


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