Iraq deal develops largest oil field

BAGHDAD | Iraq on Tuesday closed a deal with a British-Chinese consortium to develop its biggest oil field, marking a milestone moment in the OPEC nation’s effort to lure foreign investors in order to revamp its battered oil sector.

The 20-year contract, signed by Iraqi Oil Minister Hussain al-Shahristani and executives from British oil giant BP PLC and China’s CNPC, gives the two companies development rights to the 17.8 billion barrel Rumaila field in Iraq, home to the world’s third-largest proven oil reserves.

The deal marks a key step forward for Iraq, which has been struggling to attract foreign firms whose cash and expertise are greatly needed to rebuild an oil sector in which the effects of years of sanctions and neglect have only been amplified by sabotage and violence after the 2003 U.S.-led invasion to topple Saddam Hussein.

Mr. al-Shahristani said contracts, such as the one signed Tuesday and others pending, are a significant step forward for a country that had previously used its oil wealth as a way to boost its military.

“With these contracts, Iraq has begun a new period of construction,” he said. “With this great step, we will attract big companies and investors in Iraq.”

Rumaila - located in the oil-rich south - was the only one awarded in the June licensing round, in which a total of eight oil and two gas fields were on offer. The poor showing in the auction - the first such event to be held in Iraq in more than 30 years - was a blow to officials in the country where oil accounts for about 95 percent of Iraq’s revenue.

Since the 2003 invasion, Iraq has been struggling to boost output, which currently stands at about 2.4 million barrels per day.

Developing fields such as Rumaila is crucial to raising overall output for Iraq.

“The incremental this project brings to Iraq is tremendous,” said Samuel Ciszuk, an energy analyst with the London-based IHS Global Insight. While Monday’s agreement marks the largest oil deal struck in Iraq “in many, many decades,” Mr. Ciszuk said it also shows the “extraordinary opportunities there are in Iraq.”

BP and CNPC are targeting output of 2.85 million barrels per day from the field - roughly triple the current 1 million barrel per day output. For their efforts, they will be paid $2 per barrel of crude they produce during the 20-year contract, which can be extended by another five years.

Tuesday’s deal is also symbolic for BP, marking its first foray back to the country since Iraq nationalized its oil sector in the 1970s by booting the British oil giant and other Western companies out.

BP’s chief executive, Tony Hayward, hailed the contract as the start of a new era for both the company and Iraq, and described it as a “very significant undertaking for BP.”

The deal is also the second which CNPC has reached in Iraq since the invasion - an agreement reflecting energy- hungry China’s push to fuel its growing economy. CNPC last year struck a $3 billion deal to develop the al-Ahdab oil field in southern Iraq.

Under the terms of the Rumaila deal, BP will hold 38 percent stake in the venture to CNPC’s 37 percent. The rest is held by Iraq’s State Oil Marketing Organization, SOMO.

With Rumaila the only success story of the June auction, Iraqi oil officials revisited some of the bids submitted by other companies. The change of heart led to four consortiums accepting the country’s terms.

On Monday, a consortium led by Italy’s Eni SpA signed an initial agreement to develop the prized 4.1 billion barrel Zubair oil field located near Rumaila. The consortium, which includes the U.S.’s Occidental Petroleum Corp. and South Korea’s KOGAS, aims to boost output to 1.1 million barrels per day within seven years, up from the current 200,000 barrels per day.

Three other consortiums are competing to develop the 8.6 billion barrel West Qurna Stage 1 in the south.