RECONSIDERING IRAQ'S FIRST OIL BID ROUND AND

C O N F I D E N T I A L SECTION 01 OF 03 BAGHDAD 002661 SIPDIS E.O. 12958: DECL: 10/03/2019 TAGS: EPET ENRG ECON EINV EAID PREL IZ SUBJECT: RECONSIDERING IRAQ'S FIRST OIL BID ROUND AND LOOKING AHEAD TO THE DECEMBER BID ROUND REF: (A) BAGHDAD 1764 (B) BAGHDAD 1805 (C) BAGHDAD 2389 (D) BAGHDAD 2632 (E) BASRAH 54 Classified By: Economic Minister Counselor John Desrocher for reasons 1 .4 (b) & (d) ¶1. (C) Summary: While the results of Iraq's June 30 oil and gas bid round may at first seem disappointing, the bid round could be considered a modest success. Although only one oil field was awarded, the planned expansion of that field should increase Iraq's oil production over the next six years by 1.8 million barrels per day -- a nearly 75% increase over today's production. Awarding all eight offered fields, which produce nearly 90% of Iraq's oil and hold 40% of Iraq's oil reserves, would have been extraordinary. If all or most of the offered fields had been awarded, the resulting political backlash and administrative turmoil could have led to paralysis. Looking ahead, what expectations are reasonable for the second bid round in December? The next round is in some ways as ambitious as the first, and the Government of Iraq (GOI) could be trying to achieve too much, too soon. In preparing for the results of the December round, we should consider that another modest success might be both the most likely and the best result for Iraq. End Summary. The GOI's Learning Curve -------------- ¶2. (SBU) Iraq's first oil and gas bid round on June 30 indicated both the progress Iraq has made since 2003 and how much work remains to be done to modernize Iraq's oil and gas sector. The highly transparent and organized bid round demonstrated the GOI's willingness to engage, for the first time in decades, in competitive and market-oriented oil sector development. At the same time, the GOI offered too little compensation to the bidders for the political, contractual, and security risks they face and underestimated the oil production increases they can deliver. As a result, the GOI did not award seven of the eight offered oil and gas fields. A major international oil company estimated that the expansion of just one of the fields not awarded could have generated up to $50 billion in new investment in Iraq, up to $500 billion in additional revenues to the GOI, and up to 200,000 new direct and indirect jobs. The Modest Success Will Significantly Boost GOI Revenues -------------- -------------- ¶3. (SBU) Before the June 30 bid round, there was widespread Iraqi concern that the bid round would be a wholesale selloff of Iraq's oil patrimony. After the bid round, other Iraqis declared it a failure, largely because most of the offered fields were not awarded. However, the one awarded field, the North and South Rumaila oil-field group, could increase Iraq's oil production by 75% (from 2.4 million barrels per day to 4.2 million barrels per day) and could increase Iraq's oil exports by over 90% within the next six years. This production increase alone could boost Iraq from the world's twelfth largest oil producer to the world's fourth or fifth largest oil producer. Such a production increase for one year at today's export price of $68 per barrel would increase GOI revenues by $45 billion, which would double estimated GOI revenues for 2009, enabling badly needed investment in clean water, electricity, healthcare, and education. Oil Ministry Learning While It Negotiates the One Awarded Bid -------------- -------------- Q -------------- -------------- ¶4. (C) The contract negotiation for Rumaila has led the GOI to make improvements in the model contract that will be used in the next oil and gas bid round in December. For example, the improved model contract will give each winning bidder more operational and financial control via a joint venture, with the Ministry of Oil's (MOO's) South Oil Company, to administer the awarded field and give the winning bidder veto power over capital expenditures. These contract improvements could lead to more aggressive bidding in the December bid round and allow winning bidders to reach agreement on contracts with MOO more quickly. But the Oil Ministry Can Handle Only a Few Awarded Bids -------------- -------------- ¶5. (C) The contract negotiation for Rumaila has absorbed most of MOO's capacity and severely taxed MOO's capabilities. BAGHDAD 00002661 002 OF 003 Even though Rumaila was awarded on June 30, MOO is still negotiating the contract almost 3 months later, with the contract needing significant revisions. MOO's antiquated or nonexistent business systems and practices have made the collection of data needed to finalize the contract and the services MOO must provide under the contract extremely difficult. For example, MOO reportedly does not know its operating costs for the Rumaila oil fields and cannot generate an accurate invoice for reimbursement of services rendered. MOO has had similar difficulty negotiating a major contract with Royal Dutch Shell for the capture, processing, and marketing of flared gas from Basra province -- a contract vital to the delivery of fuel for Iraq's underdeveloped electricity sector (reftel E). Too Many Bid Awards Could Fuel Concern Over Patrimony Selloff -------------- -------------- ¶6. (C) About 70% of Iraq's oil production comes from southern Iraq, and most of that production, over 90% of it, comes from the southern province of Basra alone. Rumaila, in Basra province, supplies about 40% of Iraq's oil production and is Iraq's largest oil field by production. (Rumaila is one of only five oil fields in the world that produce more than 1 million barrels per day.) Also included in the first bid round with Rumaila, but not awarded, the northern Kirkuk field is Iraq's second largest oil field by production and supplies about 17% of Iraq's oil production. In total, in the first bid round, the GOI offered nine oil fields in six oil-field groups (along with two gas fields) that hold a total of 46 billion barrels of oil reserves -- 40% of Iraq's oil reserves and almost 4% of the world's oil reserves. If too many big oil fields had been awarded in the first bid round, especially both the Kirkuk and Rumaila fields, it could have inflamed fears and accusations that the GOI was selling-off Iraq's oil patrimony. Comment: What Would a Successful Second Bid Round Look Like? -------------- -------------- ¶7. (C) Paradoxically, the first oil and gas bid round on June 30 could have led to failure if too many fields had been awarded. MOO could not have handled such a frantic pace of development, and the winning bids would have been mired in lengthy negotiations, souring both investor and GOI enthusiasm. Awarding too many fields too quickly could also have provided fodder for nationalists ready to accuse the GOI of selling off Iraq's oil resources too cheaply. ¶8. (C) During the next bid round in December, the GOI will offer ten oil-field groups holding 40 billion barrels of oil reserves. Although these total 35% of Iraq's reserves (nearly as large as the reserves offered in the first bid round),most are not producing, and the groups combined are responsible for less than 3% of Iraq's current production. The much lower profile of these fields might avoid political backlash if only several fields are awarded. However, we should be aware that awarding "too many" fields could re-ignite concerns that the GOI is selling-off Iraq's oil patrimony. Successful second round bidders could also suffer from negotiating delays, as we expect few improvements in MOO's capacity and capabilities in the coming weeks. In short, awarding too many fields could choke the system and Qshort, awarding too many fields could choke the system and actually impede development in Iraq. In preparing for the results of the December bid round, we should consider that another modest success might be both the most likely and the best result for Iraq. The award of one more big field in the South, such as Majnoon or West Qurna Phase 2, and one smaller field in the North, either Qaiyarah or Najmah, could provide that modest success, not overtax the MOO's negotiating capabilities, and could provide a sense of continued, albeit slow, progress. Additionally, the award of Qaiyarah or Najmah could support the on-going political and security efforts in the northern provinces. End Comment. Additional Statistical Background -------------- ¶9. (SBU) Iraq, with 115 billion barrels of oil reserves, has about 9% of the world's oil reserves (the world's third largest). According to the International Energy Agency (IEA),the world's oil fields can be classified by proven reserves as super giant fields (5 billion barrels or more), giant fields (500 million barrels to 5 billion barrels), large fields (100 million barrels to 500 million barrels), BAGHDAD 00002661 003 OF 003 and other fields (less than 100 million barrels). Most of the world's oil fields, over 70,000 of them, fall into the other-fields category. Iraq, disproportionately, has seven (13%) of the world's 54 super giant fields, 21 (6.5%) of the world's 320 giant fields, and 19 of the world's 570 large fields. Almost 70% of Iraq's proven oil fields are at least large fields, while less than 2% of the world's proven oil fields are at least large fields. During the June 30 bid round, the nine oil fields offered by the GOI included four super giant fields (more than half of Iraq's super giant fields) and four giant fields. Two of these super giant fields alone, the geologically related North Rumaila and South Rumaila fields (often considered a single combined field) together have over 15% of Iraq's oil reserves. A large number of the world's oil fields produce less than 1,000 barrels per day and only a handful (about 110, less than 0.2%) produce more than 100,000 barrels per day. Iraq's median oil field produces about 25,000 barrels per day and at least six (over 25%) of its fields produce more than 100,000 barrels per day. All six of these fields were offered during the June 30 oil and gas bid round. In the upcoming second bid round, the Majnoon and West Qurna Phase II fields are super giants, whereas Qaiyarah and Najmah are giants. HILL