OIL STAMPEDE: IRAQ,S 2ND BID ROUND RESULTS

UNCLAS SECTION 01 OF 05 BAGHDAD 003196 SIPDIS E.O. 12958: N/A TAGS: EPET ENRG ECON EINV EAID PREL IZ SUBJECT: OIL STAMPEDE: IRAQ,S 2ND BID ROUND RESULTS REF: A. BAGHDAD 1764 ¶B. BAGHDAD 1805 BAGHDAD 00003196 001.2 OF 005 ¶1. (U) Summary: In a landmark event for Iraq and the global oil industry, Iraq's 2nd oil bid (licensing) round on December 11-12 showcased the potential of Iraq's oil sector. Overall, the event proceeded with remarkable organization, precision, and transparency. The bidding started as a rush and quickly became a stampede as a broad range of international oil companies bid unheard of low prices for seven of the ten oil fields (or oil field groups) being offered. Based solely on the magnitude of the awarded bids, Iraq's total oil production could conceivably rise to 12 million barrels per day (bpd) within seven to ten years. In the less than six months since the first bid round on June 30, Iraq has positioned itself to jump from the 11th largest oil producer to potentially the world's largest oil producer, and from the 10th largest oil exporter to potentially the world's largest oil exporter. This cable reports the results of the weekend's bid round; septel will analyze the political and economic implications of these results. End Summary. The Event: Impressive Organization -------------- ¶2. (U) Iraq held its 2nd oil bid (licensing) round on December 11-12 at the Ministry of Oil (MOO),outside the International ("Green") Zone. With intense security precautions and numerous attendees from international oil companies (IOCs),the press, and the Government of Iraq (GOI) -- all with large security details -- the event began with some disorder and confusion, but quickly proceeded with efficiency and transparency. The event began with speeches by Prime Minister Nuri al-Maliki and Oil Minister Hussain al-Shahristani, and the first two hours of the event, including the bidding for the first three fields, were televised. Bidding Process: Highly Methodical and Transparent -------------- -------------- ¶3. (U) The MOO appeared to take every precaution to demonstrate that its bidding process was fair and above reproach. A committee of senior MOO officials, chaired by Minister Shahristani, presided over the meeting on an elevated stage at the front of the auditorium. During each of the bid round's two days, five oil fields (or oil field groups) were offered sequentially, and the bidding on each field was completed before the next field was offered for bid. The two components of each bid were the Remuneration Fee Bid (RFB) and the Plateau Production Target (PPT). The RFB is the gross profit per barrel of oil (in dollars) that the bidder desires. The PPT is the production rate (in barrels of oil per day) that the bidder commits to achieve within the timeframe specified and to maintain for a specified timeframe for each oil field being offered. ¶4. (U) The bidders, a mix of individual companies and consortia of companies, had roughly 20 minutes to announce their intention to bid for the field being offered. A bid could be submitted only on an official form sealed in an official envelope, both of which were unique to the field being offered. On the front of the bid envelope, in addition to other information, the bidder listed the company or companies in consortium who were bidding and, for companies bidding in consortia, the percentage interest of each company and the operator for the consortium. A registration committee seated next to the stage then confirmed whether the Qcommittee seated next to the stage then confirmed whether the bidding information conformed with the bidding requirements. ¶5. (U) When the time closed for declaring an intention to bid, a sealed envelope containing MOO's maximum acceptable remuneration fee was placed in a glass box on the stage next to the MOO committee. Each bidder then placed its sealed bid envelope in the glass box. After all bids were submitted, the envelopes were removed one at a time, the front of the envelope was projected on a screen for all attendees to see, the envelope was then opened, and the enclosed bid form was projected on the screen. After all bids had been announced in this fashion, each bid was scored according to a previously published formula. A summary listing all bids for the field being offered, along with each bid's score, was then projected on the screen for all attendees to see. ¶6. (U) The winning score and bidder was identified on this summary listing, and the field was immediately awarded to the BAGHDAD 00003196 002.2 OF 005 highest scoring bidder -- unless the Remuneration Fee Bid (RFB -- gross profit per barrel) of the winning company/consortia was higher than MOO's maximum remuneration fee. If the winning RFB was higher than MOO's maximum remuneration fee, the sealed envelope with MOO's maximum fee was removed from the glass box, opened as the audience watched, and the enclosed form was then projected on the screen. The winning bidder was given reasonable time to decide whether to accept MOO's maximum fee. Bidding Results: Momentum and Surprises -------------- ¶7. (U) On the first day of the bid round, the initial oil fields offered (the super-giant Majnoon field and the giant Halfaya field) were two of the three largest and most attractive offerings. They were awarded to surprisingly aggressive bids, at remuneration fees well below the lowest ($1.90) remuneration fee accepted in the 1st bid round contracts. The other three field groups offered the first day were not awarded, though one (Qaiyarah) received a bid by Sonangol that was not accepted by the MOO. The second (and last) day began with Sonangol announcing that it would accept MOO's much lower maximum remuneration fee ($5.00 versus $12.50) for Qaiyarah. This announcement set the tone for the day as the action and surprises accelerated. The first two fields offered (the super-giant West Qurna Phase 2 field and the undeveloped Gharraf field) received four bids each at stunningly low prices. In another surprise, even Badra field, a minor and remote cross-border field with Iran, was awarded. At the end of the day, four more of the ten oil fields (or oil field groups) were awarded, bringing the total for both days to seven fields awarded (a remarkable change from the 1st bid round on June 30 in which only one of eight fields was awarded that day). The general mood of MOO officials present was restrained but jubilant. The general mood of the international oil companies varied and seemed to range from pleased to surprised to stunned. Bidding Results: Broad International Participation -------------- -------------- ¶8. (U) Forty-four international oil companies, from twenty-three countries, were prequalified to bid. Twenty-one companies from seventeen countries submitted bids. Petronas, the Malaysian national oil company, submitted the most bids (five, all as part of bid consortia) and participated in the most winning bids (four). A number of other companies participated in three bids submissions. An analysis of the awarded bids and the percentage interest of each company shows that the Russian company Lukoil was awarded the most reserves (11 billion barrels of oil) and bid the most increase in production (1.5 million bpd),followed closely by the Anglo-Dutch company Royal Dutch Shell (with 7.6 billion barrels of reserves and 1 million bpd of production) and Petronas (with 6.6 billion barrels of reserves and 1 million bpd of production). Only three of the seven prequalified U.S. companies attended the bid round, and only one (Occidental Petroleum) submitted a bid. No U.S. companies were awarded contracts. (Comment: However, from the 1st bid round contracts, ExxonMobil and Occidental Petroleum will participate in developing nearly 3 million bpd of future Iraqi production -- or nearly a third of the potential total increase in Iraqi production from both bid rounds. Despite Qincrease in Iraqi production from both bid rounds. Despite winning no new fields in this bid round, U.S. firms remain poised to do well in the Iraqi oil sector. End Comment.) Bidding Results: Landmark Event for Iraq and Oil Industry -------------- -------------- ¶9. (U) Iraq's current oil production is 2.4 million bpd. If the production targets in the contracts for the three fields awarded as a result of the 1st bid round on June 30 are achieved, Iraq's production would increase by 4.9 million bpd to 7.3 million bpd. If the winning bidders in the 2nd bid round achieve their production targets, the seven awarded fields would increase Iraq's production by an additional 4.7 million bpd and raise Iraq's total production to 12 million bpd within seven to ten years. In short, in less than six months from the 1st bid round on June 30, Iraq has positioned itself to jump from the 11th largest oil producer to potentially the world's largest oil producer, and from the 10th largest oil exporter to potentially the world's largest oil exporter (overtaking even Saudi Arabia). (Comment: Iraq faces tremendous challenges in realizing this potential, including the construction of export infrastructure, which BAGHDAD 00003196 003.2 OF 005 will be reported septel. End comment.) Bidding Results: Resources of Global Oil Industry Available -------------- -------------- ¶10. (U) As a result of the 2nd bid round, Iraq has the opportunity to partner with more key international oil companies: one more of the six major oil companies (the French company Total),two more of the top ten oil companies as measured by production (Total and Lukoil),two respected national oil companies (Malaysia's Petronas and Norway's StatoilHydro),and eight new (to Iraq) international oil companies from seven countries. In addition, of the 15 winning bidders (either bidding alone or in consortia),six are parastatal companies that could bring the full diplomatic and economic resources of their countries to Iraq's oil sector. ¶11. (U) Summing up the results of both bid rounds (June 30 and December 11-12),Iraq can now partner with four of the six major oil companies, six of the top ten (and ten of the top twenty) oil companies (as measured by production),two respected national oil companies, and an additional 15 international oil companies from 13 countries. All five of the permanent members of the United Nations Security Council will now have companies involved in Iraq's oil sector. Bidding Results: The Bids and the Winners -------------- ¶12. (U) Some 32 billion barrels (28% of Iraq's total reserves) were awarded during the 2nd bid round, including two of Iraq's (and the world's) largest oil fields: part of West Qurna, which holds in its entirety 21.5 billion barrels of oil, almost 19% of Iraq's reserves, and is Iraq's largest field (the first part of West Qurna was awarded as a result of the 1st bid round); and Majnoon, Iraq's third largest field with 12.6 billion barrels of oil and 11% of Iraq's reserves). The awarded fields are in five of Iraq's eighteen provinces: four are in southern provinces (Basra, Maysan, Dhi Qar, and Wasit),and one is in a northern province (Ninawa). ¶13. (U) The bids and bid winners are follows: Day 1: Majnoon Oil Field: **Winner** Consortium of (a) Royal Dutch Shell (Anglo-Dutch company, one of the six Majors, top 10 company as measured by production) as the operator with a 60% interest in the consortium (b) Petronas (Malaysian national oil company, top 20 company by production) with a 40% interest in the consortium Remuneration Fee Bid (RFB): $1.39 Plateau Production Target (PPT): 1,800,000 bpd (the current production is 55,000 bpd and the minimum required PPT was 700,000) Consortium of (a) Total (French company, one of the six Majors, top 10 company by production) as the operator with 57% interest (b) CNPC, i.e., China National Petroleum Corporation or Petrochina (top 10 company by production, participant in the Rumaila contract from the 1st bid round) with 43% interest RFB: $1.75 PPT: 1,400,00 bpd Halfaya Oil Field: **Winner** Consortium of (a) CNPC (one of the Chinese national oil companies, top 10 company by production, participant in the Rumaila contract from the 1st bid round) as the operator with 50% interest (b) Petronas (Malaysian national oil company, top 20 company by production) with 25% interest (c) Total (French company, one of the six Majors, top 10 company by production) with 25% interest RFB: $1.40 PPT: 535,000 bpd (the current production is 3,000 bpd and the minimum required PPT was 300,000) Qminimum required PPT was 300,000) BAGHDAD 00003196 004.2 OF 005 Consortium of (a) StatoilHydro (Norwegian national oil company, top 20 company by production) as the operator with 50% interest (b) Lukoil (Russian company, top 10 company by production) with 50% interest RFB: $1.53 PPT: 600,000 bpd Consortium of (a) ONGC Videsh Limited, i.e., OVL (one of the Indian national oil companies, top 20 company by production) as the operator with 50% interest (b) TPAO (Turkish national oil company) with 30% interest (c) OIL, i.e., Oil India Limited (one of the Indian national oil companies) with 20% interest RFB: $1.76 PPT: 550,000 bpd Consortium of (a) Eni (Italian national oil company, top 20 company by production, participant in the Zubair contract from the 1st bid round) as the operator with 30% interest (b) Occidental Petroleum, i.e., Oxy (U.S. company, top 25 company by production, 4th largest U.S. company by production, participant in the Zubair contract from the 1st bid round) with 20% interest (c) Kogas, i.e., Korea Gas Corporation (Korean national oil company, participant in the Zubair contract from the 1st bid round) with 20% interest (d) Sonangol (Angolan national oil company) with 15% interest (e) CNOOC, i.e., China National Offshore Oil Corporation (one of the Chinese national oil companies) with 15% interest RFB: $12.90 PPT: 400,000 bpd East Baghdad Oil Field: No bids Eastern Oil Field Group (Gilabat, Khashim Al-Ahmar, Nau Doman, Qumar): No bids Qaiyarah Oil Field: **Winner: Awarded on Day 2** Sonangol (Angolan national oil company) as the operator with 100% interest RFB: $5.00 (Sonangol's bid was $12.50, but it accepted MOO's maximum remuneration fee of $5.00) PPT: 120,000 bpd (the current production is 2,000 bpd and the minimum required PPT was 120,000) Day 2: Phase 2 of the West Qurna Oil Field: **Winner** Consortium of (a) Lukoil (Russian company, top 10 company by production) as the operator with 85% interest (b) StatoilHyrdo (Norwegian national oil company, top 20 company by production) with 15% interest RFB: $1.15 PPT: 1,800,000 bpd (the minimum required PPT was 750,000; no current production) Consortium of (a) Petronas (Malaysian national oil company, top 20 company by production) as the operator with 60% interest (b) Pertamina (Indonesian national oil company) with 20% interest (c) PetroVietnam, i.e., Vietnam Oil and Gas Group (Vietnamese national oil company) with 20% interest RFB: $1.25 PPT: 1,200,000 bpd Total (French company, one of the six Majors, top 10 company by production) as the operator with 100% interest RFB: $1.72 PPT: 1,430,000 bpd BAGHDAD 00003196 005 OF 005 Consortium of (a) BP, i.e., British Petroleum (British company with a significant U.S. presence, one of the six Majors, top 10 company by production, participant in the Rumaila contract from the 1st bid round) as the operator with 51% interest (b) CNPC (one of the Chinese national oil companies, top 10 company by production, participant in the Rumaila contract from the 1st bid round) with 49% interest RFB: $1.65 PPT: 888,000 bpd Gharraf Oil Field: **Winner** Consortium of (a) Petronas (Malaysian national oil company, top 20 company by production) as the operator with 60% interest (b) JAPEX, i.e., Japan Petroleum Exploration Company with 40% interest RFB: $1.49 PPT: 230,000 bpd (the minimum required PPT was 150,000; no current production) Consortium of (a) KazMunayGas (Kazakhstan national oil company) as the operator with 45% interest (b) Kogas, i.e., Korea Gas Corporation (one of the Korean national oil companies, participant in the Zubair contract from the 1st bid round) with 45% interest (c) Edison (Italian company) with 10% interest RFB: $2.55 PPT: 185,000 bpd Consortium of (a) TPAO (Turkish national oil company) as the operator with 60% interest (b) ONGC Videsh Limited, i.e., OVL (one of the Indian national oil companies, top 20 company by production) with 40% interest RFB: $2.76 PPT: 200,000 bpd Pertamina (Indonesian national oil company) as the operator with 100% interest RFB: $7.50 PPT: 150,000 bpd Badra Oil Field: **Winner** Consortium of (a) JSC Gazprom Neft (Russian company, top 20 company by production) as the operator with 40% interest (b) Kogas, i.e., Korea Gas Corporation (one of the Korean national oil companies, participant in the Zubair contract from the 1st bid round) with 30% interest (c) Petronas (Malaysian national oil company, top 20 company by production) with 20% interest (d) TPAO (Turkish national oil company) with 10% interest RFB: $5.50 (the consortium's bid was $6.00, but it accepted MOO's maximum remuneration fee of $5.50) PPT: 170,000 (the minimum required PPT was 80,000; no current production) Middle Furat Oil Field Group (Kifl, West Kifl, Merjan): No bids Najmah Oil Field: **Winner** Sonangol (Angolan national oil company) as the operator with 100% interest RFB: $6.00 (Sonangol's bid was $8.50, but it accepted MOO's maximum remuneration fee of $6.00) PPT: 110,000 (the minimum required PPT was 110,000; no current production) HILL