Carbon Web Newsletter, Issue 11.

The falling oil price has pushed the Iraqi government onto the back foot, allowing foreign oil companies to demand greater concessions. The Iraqi government has had to slash its 2009 budget from $80 bn to under $60 bn – and even this revised figure is based on an optimistic $50 a barrel.

Private companies such as BP and Shell have used Iraq’s financial weakness to boost their negotiating position in the two current bidding rounds. During consultation sessions in Istanbul on February 14, oil executives subjected Baghdad’s proposed contract terms to heavy public criticism, claiming that they would struggle to make the expected 20% return on investment. However, private comments by oil executives illustrated the power play – “With the price of oil where it is at the moment, I do not believe they [Iraqi government] can push that hard.” The same executive admitted that “There is tremendous interest in what is on offer. The quantity of reserves on offer is unheard of, its huge.”

The pressure paid off, with the Oil Ministry readjusting terms in two important ways. Oil companies will now be able to take majority control of joint ventures, with the private take increased from 49% to 75%. Although this will not significantly change the division of revenue, it risks handing control over production rates, procedures and reservoir management to IOCs.

The revised terms also allow for a 5% decline rate in output per year. This will allow for more aggressive field development – as is usually seen in the Gulf of Mexico – rather than the lower depletion rates generally seen in Middle East, where engineers say they manage their reservoirs with kidgloves. The 5% rate is likely to significantly increase theIOC’s rate of return as they recoup costs faster. Depletion rates often highlight a point of fundamental conflict between national oil companies (more longterm thinking, protecting national resource for future generations) and the private oil majors (shorter-term drive to maximise production, shareholders’ dividends).

Offering this level of control to private actors is highly controversial in a country where 95% of government revenue is generated from oil, as the current bidding rounds include access to Iraq’s super giant fields Rumaila, West Qurna and East Baghdad – some of which contain over 10% of Iraq’s proven reserves.

It seems that the Iraqi government is prepared to bend even further – at an OPEC seminar in Vienna at the end of March, Iraqi oil Minister Hussain Al-Shahristani announced that he is considering offering Production Sharing Contracts – previously accepted to be off the table – for a number of 65 new exploration blocks during its second licensing round.