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The Scramble For Iraqi Oil.

So great is the world's demand for oil today - and so great the concern over rising prices, with paper WTI likely to hit $170/b later this summer - that it would be tempting to embrace plans by IOCs to return to Iraq. The evolving deals could well rekindle suspicions in the Arab world about oil being America's real reason for invading Iraq and fan even more distrust among Iraq's competing factions. BP, ExxonMobil, Shell and Total - the original partners in the BP-led IPC - are in the final stages of discussions which will let them formally re-enter Iraq's oil sector. They had been expelled from Iraq in 1972 with the nationalisation of IPC's assets. The technical support agreements (TSAs) being negotiated include Chevron.

The Oil Ministry has accepted six state-owned oil firms (NOCs) to compete for oil and gas contracts, bringing the number of companies eligible to 41. The six are: Algeria's Sonatrach, PetroVietnam, Turkey's TPAO, Angola's Sonangol, Pakistan Petroleum Ltd, and the NOC of Thailand. These NOCs applied to the ministry earlier this year and they were qualified to take part in tenders to develop the country's vast oilfields.

The ministry is in the final stage of awarding two-year TSAs for West Qurna-1, Zubair, Msysan, Rumaila and Luhais in southern Iraq and Kirkuk in the north. The IOCs lined up for these are BP, Shell, ExxonMobil, Total, Chevron, Anadarko Petroleum and BHP Billiton of Australia.

Iraq badly needs the modern technology and skills these giants offer. Long years of UN sanctions and war have badly eroded the industry. Government officials say they aim to increase production from 2.6m b/d to 3m b/d by end-2008 and to more than 4.5m b/d a few years later, with a 6m b/d target to be reached in 2010s. That is a minor increase in global terms, but with paper WTI likely to hit $170/b before the summer ends, it is good news for Iraqis, who need the money to rebuild their war-torn country.

Baghdad wants to get on with the TSAs especially as the Kurdistan Regional Government (KRG) in the north is rapidly signing exploration and production sharing agreements (EPSAs) to develop oilfields in its own autonomous region. Still, the negotiating process pursued by Baghdad is flawed and troubling. The TSAs are being let without competitive bidding to IOCs which since the US invasion have been quietly advising the Oil Ministry how to increase production - with their services provided free of charge.

While the TSAs are limited to refurbishing equipment and technical support and last only two years, they would give these companies an inside track on vastly more lucrative long-term deals. Given that corruption is an acknowledged problem in Iraq's government, the TSAs would have more legitimacy if the bidding were open to all and the process was more transparent. Iraqis must apply that standard when they let contracts for long-term oilfield development.

The TSA was devised even though Iraq's parliament has failed to adopt petroleum and revenue sharing laws - critical benchmarks set by the Bush administration. That is evidence of continued deep divisions in Iraq over whether oil should be controlled by central or regional government, whether IOCs should be involved in development and how the profits should be distributed.

Experts say the US and the IOCs must encourage Iraqi officials to make the political compromises needed to establish in law the rules for managing Iraq's abundant natural resources with as much transparency as possible. Otherwise, oil will just become one more centripetal force pulling the country apart.

Relationships would be established at a time when IOCs are finding it harder and more expensive to gain access to new petroleum resources. State-run NOCs, like those in Iran, Saudi Arabia and Venezuela, control almost 90% of global oil reserves and, given today's historic prices, are keeping a tight grip on their assets.

No doubt the IOCs are eyeing possible EPSAs with Baghdad as the country's petroleum business evolves. These giants are in it for the money, not to make friends. In areas which do not require sophisticated E&P methods, there would be no incentive for Baghdad to sign EPSAs.
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Publication:APS Diplomat Operations in Oil Diplomacy
Geographic Code:7IRAQ
Date:Jun 30, 2008
Words:694
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