Iraq Oil Auction: China's Public Display of Aggression, BP-led Bid Scores Deal

Iraq’s oil auction — viewed as an opportunity for foreign firms to access the country’s rich resources for the first time in nearly 40 years — didn’t quite meet the lofty expectations swirling around it in recent weeks.

The auction, which offered up six oil and two gas fields, promised to inject some much-needed cash into Iraq’s coffers, resurrect damaged oil fields, give international oil companies access to a long-restricted country and maybe even preserve Oil Minister Hussain al-Shahristani’s career.

In the end and out of the 22 companies that placed bids in the auction, one contract was secured by BP and its consortium partner China National Petroleum Co., to develop the Rumaila field in southern Iraq. The auction also provided insight into just how serious China is about Iraq’s oil and gas resources. If Chinese firm Sinopec’s takeover of Addax Petroleum for $7.2 billion didn’t signal China’s interest in Iraq, this week’s auction certainly did.

Iraq’s cabinet approved Wednesday the fee-based contract with BP and its minority partner CNPC. The cabinet rejected bids resubmitted for six other fields. No companies bid on the Mansuriya gas field.

BP was the only firm willing to lower its per barrel fee to $2, the maximum amount Iraq’s oil ministry said it would pay. The remaining 20 companies including ExxonMobil, Royal Dutch Shell and ConocoPhillips failed to reach an agreement with the government, with many complaining terms of the contracts were too narrow. The government rejected new offers Wednesday because the firms did not agree to the per-barrel fees Iraq would have paid to develop the oil and gas fields.

I was struck by how aggressive China was in the auction. Four Chinese firms participated in the bidding including CNPC, China National Offshore Oil Corp. or CNOOC, Sinopec and Sinochem.

CNPC bid on five of the eight fields in Iraq. The Chinese company secured the Rumaila contract with its majority partner BP. Rumaila, with 17.7 billion in known oil reserves, was the largest oil field offered in the auction. CNPC and BP bid together — this time with CNPC as the majority partner — for the Zubair field. Ruba Husari, editor of the Iraq Oil Forum provides information on the entire process of the auction including the final bids.

In some cases, the Chinese firms would partner up, such as CNOOC and Sinochem’s bid on the Missan field. Other times, they placed competing bids for access to the same field.

Let’s not forget, China is already operating in Iraq. CNPC signed a 23-year service agreement last yearto develop the Al-Ahdaboil field south of Baghdad. The deal is worth $3 billion.

For BP, securing the contract allows access to vast amounts of easy-to-reach oil. But this access doesn’t come without plenty of risks. The $2 per-barrel fee is hardly ideal. And once BP pays the 25 percent in taxes and 25 percent of after-tax income to their associated Iraqi company, it will walk with 95 cents per barrel.  

Plus, the company will have to invest considerable money into the infrastructure if it hopes to boost output from 985,000 barrels to 2.85 million barrels a day.

The country still does not have a hydrocarbon law on the books, perhaps one of the bigger uncertainties facing BP and any other foreign oil company that manages to gain access in the future.  If more companies had secured contracts, the Iraq government may have been a bit more demanding. But with only BP on board, I expect they’ll be more accommodating.

Other BNET coverage of China and its recent acquisitions:

• China Targets Addax, Kosmos in Overseas Asset Grab