Iraq Gas Auction Draws Few Takers

October 19, 2010 - 6:02 AM

Baghdad (AP) - Iraq is set to open three major natural gas fields to international companies on Wednesday, but lackluster turnout by potential bidders could stymie the country's hopes of exploiting a commodity it sorely needs to rebuild.

Unlike two oil licensing auctions last year that opened up Iraq's vast oil reserves and drew strong interest by foreign firms, only 13 out of 45 companies pre-qualified for this week's event paid participation fees. The meager showing highlights not only prevailing concerns about Iraq's security situation, but also the challenges of attracting interest in a commodity in which the world is currently awash.

"Gas is a bit different than oil," said Samuel Ciszuk, a London-based Mideast energy analyst with IHS Global Insight. "It's tougher to commoditize, ... hence companies are bit more uncertain about whether the Iraqi terms are good enough, and whether the long-term stability required is really there."

Iraqis already are disappointed.

The number of companies competing for the fields "is not at the level that we aspired for," Senior Deputy Oil Minister Abdul-Karim Elaibi told The Associated Press.

For Iraq, the stakes are clear. The nation, home to the world's third largest proven reserves of conventional crude oil, needs to attract international interest -- and capital -- to develop a resource on which its reconstruction depends after decades of sanction, neglect and war.

The three gas fields on offer have a combined reserve base of 11.2 trillion cubic feet, or about 10 percent of the country's total gas reserves. The biggest among them is the 5.6 trillion cubic foot Akkas near the border with Syria, followed by the 4.5 trillion cubic foot Mansouriya in Diyala province. The third is the 1.1 trillion cubic foot Siba near Kuwait and Iran. Akkas and Mansouriya were offered during the earlier auctions but were not awarded.

When Iraq offered its oil fields last year, interest was stronger, in part because its oil reserves are among the cheapest to exploit and there was the expectation that crude demand would continue to climb. But even then, it met with mixed results as only 13 of the 21 oil fields offered were awarded.

The same factors that raised concern among the companies during those auctions remain true today.

Security is uncertain -- perhaps more so since the withdrawal of U.S. combat forces in August. The political process remains fragmented, with no government yet in place months after the March elections. A national oil law in the works for over three years has yet to be approved.

But when it comes to gas, other worries also factor in.

"I think the main reason behind the reluctance of companies is that most of them have had enough deals in Iraq now and want to see how they are going to go forward with their development plans and how they are going to deal with the exist challenges.," said Kamel A. al-Harami, an independent oil analyst based in Kuwait and former president of Q8, the retail arm of the Kuwait Petroleum Co.

Also, "there are abundant gas resources, especially after recent huge gas discoveries in the region and the United States which forced gas prices to go down," he said.

Iraq faces competition from others in the region, including Iran and Qatar, as well as non-Mideast heavyweights such as Russia that are all eager to develop their own ample reserves.

While the focus on boosting oil production is to increase exports and revenues, much of Iraq's near-term plans for gas, however, are domestic. Put simply, it needs the gas to fuel power plants at a time when electricity demand far exceeds output, leaving Iraqis with just five to seven hours of power per day.

According to Oil Ministry figures, power stations and industrial enterprises need 1.05 billion standard cubit feet per day for their operations, but receive only 670 million cubic feet per day. Meanwhile, overall gas demand in Iraq is expected to climb to 2.46 billion standard cubic feet per day by 2014 and 5 billion standard cubic feet per day by 2018.

Those figures are troubling for a nation that sits on an estimated 112 trillion cubic feet of natural gas, but where frequent power outages have sparked protests and are seen as among the worst and most enduring legacies of the post-2003 U.S. led invasion to topple Saddam Hussein.

Even as it looks to boost gas output, Iraq is struggling to harness the full potential of its current production.

Of the roughly 950 million standard cubic feet it produces daily, about 40 percent is burned off at the well because of inadequate gas capture and sequestration facilities that would allow it to make use of the gas in industry or utilities. A joint venture deal with Royal Dutch Shell PLC and Japan's Mitsubishi Corp. to capture gas in four southern oil fields is still pending because of legal issues.

Like other two bidding rounds, the companies will be vying for the 20-year service contracts in which they will be paid a flat fee for their services versus the more lucrative production-sharing contracts. The contracts can be extended for five more years.

Aside from the disappointing turnout by the companies, the latest auction was off to a rocky start even before it began.

It was first scheduled for Sept. 1, but was twice postponed to alter the terms to drum up more interest.

The main change were dropping a condition that winning companies should find an export client for 50 percent of the output. Other changes including dropping signature bonuses and reducing the annual training commitment to $1 million from $5 million.

Elaibi, the deputy oil minister, said Iraq will be responsible for building a national gas pipeline network for the new output. Initially, the gas will be used for power generation while exports are not slated to begin for at least four years.

The companies that paid the participation fees are France's Total SA, Italy's Eni SpA and Edison SpA, Norway's Statoil ASA, Kazakhstan's KazMunaiGas EP JSC, Turkish Petroleum International Co., or TPAO, Japan's Oil, Gas and Metals National Corp., or JOGMEC, Itochu Corp., Mitsubishi, Kuwait Energy, India's Oil and Natural Gas Corporation Ltd., or ONGC, Korea Gas Corp., or KOGAS and TNK-BP, BP PLC's Russian joint venture.