Iraq Signs Contracts With Foreign Oil Companies

Amid much hype and excitement, international oil companies that had been chomping at the bit for years to get into Iraq finally got their chance in 2009 when the country hosted its first post-Saddam Hussain oil field development bid rounds. After much confusion and a generally failed first bid round, the second resulted in several technical service contract agreements with major international oil companies, mid-tier operators and some National Oil Companies.

In most cases, the firms agreed to raise output at existing fields to negotiated production plateau targets for which service they would receive negotiated per barrel remuneration fees.

The award commitments in the technical service contracts included plateau production targets that would have had Iraq producing 12.44 million barrels of oil per day by 2016. That production volume, though theoretically feasible, was unlikely to be achieved in that timeframe due to technical infrastructure bottlenecks – and perhaps more importantly – global oil market considerations.

If Iraq were to flood the global market with such volumes, the subsequent price decrease would negatively impact the country’s oil revenue-dependent economy. Additionally, as active Opec members, the oil production and export figures implied by the service contract thresholds would be highly problematic, as other Opec members would need to significantly cut their own output.

Thus announcing the production target cuts during Opec’s gathering in Vienna is no coincidence, as Iraq’s oil production rapidly increased from 2.4 mmb/d in 2008 to 3.1 mmb/d in 2012. This is a far cry from 12 mmb/d, but it’s time for Opec to deal with the issue.