Iraq on Wednesday kicked off a two-day auction of a dozen energy exploration blocks, but hopes that the sale would up reserves and boost its role as a key producer were dampened when just one deal was agreed.
The bid round, the fourth such auction to be organised by Iraq since mid-2009, comes amid progress in ramping up oil exports, which account for the vast majority of government income, and as Baghdad eyes higher gas production to increase woefully inadequate power supplies.
But unlike the three previous sales, which offered contracts to foreign energy firms to raise output at existing oil and gas fields, Iraq has this time showcased areas earmarked for exploration.
Of the six blocks offered on Wednesday, however, just two received bids and only one was accepted by Baghdad.
“The main aim of this round is to increase reserves and to enter the gas industry,” Oil Minister Abdelkarim al-Luaybi said.
Of the six exploration blocks offered on Wednesday — three oil and three gas — only Block 9, an area near Iraq’s border with Iran that is thought to contain oil, was awarded.
A consortium led by Kuwait Energy that also includes Turkey’s TPAO and Dubai-based Dragon Oil won the 900-square-kilometre (347 square mile) block in the southern province of Basra, for a service fee of $6.24 per barrel of oil.
Another exploration block in south Iraq thought to contain oil received a bid from a consortium comprised of Britain’s Premier Oil, PetroVietnam and Russia’s Bashneft. But it did not meet the oil ministry’s asking price and so was not awarded.
The remaining four blocks did not receive any bids, though Abdel Mehdi al-Amidi, the director general of the oil ministry’s petroleum contracting and licensing directorate, said that two would be offered again on Thursday at the request of interested companies that could not attend the first day.
“I think it was expected, and it’s certainly a disappointment for the oil ministry, but it should give them a reason to re-think the terms that they offered, and the model,” said Ruba Husari, an analyst and editor of the www.iraqoilforum.com website.
“Exploration is too risky, and no one was going to bid big money on something that is not even guaranteed to secure the rate of return.”
Asked what caused the lack of interest from the companies, Amidi said that “our estimations do not allow us to (offer remuneration) that we believe could harm the national interest.”
“The estimations of the two sides are not in agreement, resulting in a lack of interest from the companies,” he said.
Of the 12 exploration blocks available, seven are thought to hold gas and five are believed to hold oil. In all, 47 companies have pre-qualified to bid.
The bidding had a gameshow-like quality, and was initially broadcast live on state television, with the deadline for bids and a clock with red digits showing the current time projected on massive screens at the front of an auditorium, along with information about the block up for grabs.
Bids were placed in a clear box next to top Iraqi oil officials who were seated on a stage at the front of the auditorium, then removed and publicly reviewed.
As in previous auctions, Iraq required foreign firms that agree to explore the blocks to work under fixed-price service contracts, rather than production-sharing agreements that are common elsewhere and more popular with major energy firms.
Baghdad is also now mandating that firms that win contracts agree not to sign deals with the autonomous Kurdish region, or any other sub-national authority, without the central government’s approval.
Kurdistan has signed dozens of contracts with foreign energy firms, but Baghdad regards them as illegal because they were not approved by the federal oil ministry.
Crucially, ExxonMobil, which has a contract to increase output at one of Iraq’s biggest oil fields, will not be taking part in the auction, after Baghdad barred the US energy giant for having signed a deal with the Kurdish region without the central government’s go-ahead.
Iraq is looking to ramp up its exports from its current level of around 2.5 million barrels per day.
The country has proven reserves of 143.1 billion barrels of oil and 3.2 trillion cubic metres (111.9 trillion cubic feet) of gas, both of which are among the highest such deposits in the world.