Iraq's oil ministry awarded only one exploration block on the opening day of what turned out to be a dismal start to a two-day auction of oil and gas acreage as international oil companies failed to submit bids or, in one case, rejected an Iraqi counter-offer to accept a lower remuneration fee.
Kuwait Energy as operator, bidding alongside Turkey's TPAO and the UAE's Dragon Oil, submitted the sole, and so far, only winning bid for Block 9, believed to hold potential oil reserves.
Kuwait Energy has a 40% operating stake in the consortium with the other two partners holding 30% each.
The group is seeking a remuneration fee of $6.24 per barrel of oil, below the maximum set by the oil ministry, which did not reveal its figure.
The remuneration fee was the only bidding parameter adopted for the current bidding round for 12 oil and gas exploration blocks being auctioned over two days with 39 of 47 qualified companies taking part.
Under the terms of the tender documents for long-term service contracts, the winning remuneration has to be below that set by the oil ministry for each block and would be declared only if bids come in higher.
The only other bidder of the day was the UK's Premier Oil, which submitted a bid for another potential oil block at a rate far higher than that set by the oil ministry, resulting in rejection of its offer at the public auction.
Premier Oil, which teamed up with PetroVietnam and Russia's Bashneft, submitted a sole bid for Block 12, also in southern Iraq, for a remuneration fee of $9.85/barrel against a maximum of $5 set by the ministry. The consortium rejected the ministry's offer to reconsider its bid and walked away, leaving Kuwait Energy as the only winning bidder of the day.
Block 12, in Iraq's Muthana province in southern Iraq near the Saudi Arabian border, carries a minimum expenditure requirement of $120 million and a $15 million non-refundable signature bonus. One well has been drilled so far in the area.
Kuwait Energy and its partners submitted a bid on the basis of a remuneration fee of $6.24/barrel, which Iraqi oil ministry official Abdul Mahdi al-Ameedi said was below the ministry's number.
Block 9, near the border with Iran, covers an area of 900 sq km and carries a non-refundable signature bonus of $25 million. The minimum expenditure requirement was set by the ministry at $90 million.
Ameedi, who led the auction in his capacity as head of the ministry's Petroleum Contracts and Licensing Directorate, said earlier that no exploration wells have been drilled in the block.
The latest licensing round, the fourth since the US-led invasion of Iraq, covers roughly one fifth of the country's territory and has been delayed repeatedly since last November as qualified companies pored over final tender protocols and model contracts. Despite some minor amendments to the contract, some major oil companies like France's Total said the terms were not attractive enough to entice them.
Of the four other blocks -- all with gas potential -- offered up on Wednesday, none secured bids from the foreign oil executives attending the auction in Baghdad. Blocks 2 and 6 are to be re-offered on Thursday, when the remaining six blocks will be up for grabs, oil ministry officials said.
The location of Block 2 in provinces known to have been hotbeds of Sunni Muslim militant activity may have dampened interest by the oil companies present in Baghdad, which is still grappling with security issues in the wake of the US troop withdrawal late last year.
The oil ministry's insistence on retaining an option to put a seven-year hold on development of any oil discoveries was believed to be among the less popular clauses in the exploration contracts, a provision that does not apply to gas discoveries.
Baghdad, which relies almost exclusively on oil revenues for its income, had hoped to take a total $235 million in signature bonuses for all 12 blocks, which were selected with a focus on its vast unexploited free gas reserves.
The oil ministry had estimated that the oil and gas exploration drive would add 10 billion barrels of crude oil and 30 Tcf of natural gas to the country's already huge reserves should all blocks be taken up. The ministry in 2010 revised both its oil and gas reserves, raising crude oil reserve estimates by 25% to 143 billion barrels and gas reserves to 130 Tcf.
Although Iraq has no immediate plans to export gas, it has envisaged building a gas pipeline through Syria, currently in the grips of a violent anti-government rebellion. Analysts say the lack of existing gas infrastructure -- much of Iraq's associated gas is flared -- and price system, as well as the Syrian export plans, may have deterred potential bidders.
The stay on further oil development was inserted in the exploration contracts because existing plans for the development and further development of Iraqi oil fields, mainly in the south, are set to more than quadruple the OPEC state's oil production to over 13 million b/d by 2017.
Foreign oil companies awarded 20-year service contracts for upstream developments at two licensing rounds in 2009 are ramping up production from Iraq's major oil fields in the south with current output now at its highest in over two decades.
Iraqi Oil Minister Abdul Karim al-Luaibi told reporters on the sidelines of the ceremony that oil production so far this month had risen to 3 million b/d. He put exports at 2.445 million b/d as of Wednesday.
Dhia Jaffar, director general of the South Oil Company, said output from southern oil fields averaged 2.35 million b/d. He put southern exports at 2.13 million b/d.
Official oil ministry data obtained by Platts last week showed that production for the whole month of April averaged 2.942 million b/d, the highest level since early 1990, just before Iraq's invasion of Kuwait. Iraqi output briefly hit 3 million b/d just before March 2003 but was not sustained at that level. Exports in April were just above 2.5 million b/d.
