http://www.ft.com/cms/s/0/8db08786-672b-11de-925f-00144feabdc0.html
BP takes risk in Iraq while others balk
By Carola Hoyos, Chief energy correspondent
Published: July 2 2009
Tony Hayward this week made the boldest decision of his tenure so far as BP’s chief executive. His move to return to Iraq to rehabilitate the giant Rumaila oil field is at least as risky as his predecessor’s move into Russia through a joint venture with TNK. And the rewards – although not immediate and far from assured – are potentially as significant for the company.
Rumaila, Iraq’s second-biggest oil field and one that BP discovered in 1953, was the first of the country’s eight fields to be auctioned on Tuesday. It was the first time that foreigners were offered access to Iraq’s oil since nationalisation more than 30 years ago.
Bids for the contract, which involves extracting oil from the field on behalf of the Iraqi government, were handed to the minister at the start of the televised event , and the rest of the fields followed in hourly intervals. BP’s first bid demanded a service fee of $3.99 for each extra barrel of oil it produced after the field hit a predetermined production rate.
BP was up against ExxonMobil, the biggest western oil company. The US company demanded $4.80 – substantially more than BP – but nevertheless won the contest because it promised to get the field to eventually pump 3.1m barrels a day, more than the 2.85m b/d that BP said it could get out of Rumaila.
But Hussain Shahristani, Iraq’s oil minister, accepted neither bid and sent the companies back to reconsider their demands, warning them that Iraq would pay not a penny more than $2 a barrel. Oil industry executives and analysts described this as a shockingly low price, given the political and legal uncertainties of doing business in Iraq.
Exxon balked, BP didn’t. What BP could not have known was that for the rest of the day one oil company after another – almost all of its peers were gathered in the room – would refuse to accept Iraq’s demands. Several analysts and rival executives later wondered whether BP would have been so quick to fold had Rumaila not been the first field to go in an auction that later yielded no other winners.
Alex Munton, analyst at Wood Mackenzie, said Iraq got a great – if not spectacular – deal securing the services of BP, and its Chinese partner CNPC, for $2 a barrel and a $500m signing bonus. For BP, he sees little upside potential because any gain made through rising oil prices would go entirely to Iraq.
“We would say that we see it as economically viable, but the profit margins are thin,” he said.
Managing the field, which represents an important new asset for BP’s thin Middle East portfolio, won’t be easy. The contract is deliberately vague about whether ultimate control lies with BP or Iraq’s national oil company, which resents BP’s presence.
But there are positives.
Rehabilitating the dilapidated field, scarred by war and sanctions, and getting it to produce more than any other in the world except Saudi Arabia’s Ghawar will be a huge, high-profile project. If done well, it would demonstrate BP’s abilities and possibly open up new business.
But what makes Iraq’s brutal terms and all the legal, financial and human risks worthwhile for BP is having a toehold in the country with the world’s third-largest known oil reserves. Very few such places are open to foreign participation, regardless of the terms that oil companies are willing to accept.
BP takes risk in Iraq while others balk
By Carola Hoyos, Chief energy correspondent
Published: July 2 2009
Tony Hayward this week made the boldest decision of his tenure so far as BP’s chief executive. His move to return to Iraq to rehabilitate the giant Rumaila oil field is at least as risky as his predecessor’s move into Russia through a joint venture with TNK. And the rewards – although not immediate and far from assured – are potentially as significant for the company.
Rumaila, Iraq’s second-biggest oil field and one that BP discovered in 1953, was the first of the country’s eight fields to be auctioned on Tuesday. It was the first time that foreigners were offered access to Iraq’s oil since nationalisation more than 30 years ago.
Bids for the contract, which involves extracting oil from the field on behalf of the Iraqi government, were handed to the minister at the start of the televised event , and the rest of the fields followed in hourly intervals. BP’s first bid demanded a service fee of $3.99 for each extra barrel of oil it produced after the field hit a predetermined production rate.
BP was up against ExxonMobil, the biggest western oil company. The US company demanded $4.80 – substantially more than BP – but nevertheless won the contest because it promised to get the field to eventually pump 3.1m barrels a day, more than the 2.85m b/d that BP said it could get out of Rumaila.
But Hussain Shahristani, Iraq’s oil minister, accepted neither bid and sent the companies back to reconsider their demands, warning them that Iraq would pay not a penny more than $2 a barrel. Oil industry executives and analysts described this as a shockingly low price, given the political and legal uncertainties of doing business in Iraq.
Exxon balked, BP didn’t. What BP could not have known was that for the rest of the day one oil company after another – almost all of its peers were gathered in the room – would refuse to accept Iraq’s demands. Several analysts and rival executives later wondered whether BP would have been so quick to fold had Rumaila not been the first field to go in an auction that later yielded no other winners.
Alex Munton, analyst at Wood Mackenzie, said Iraq got a great – if not spectacular – deal securing the services of BP, and its Chinese partner CNPC, for $2 a barrel and a $500m signing bonus. For BP, he sees little upside potential because any gain made through rising oil prices would go entirely to Iraq.
“We would say that we see it as economically viable, but the profit margins are thin,” he said.
Managing the field, which represents an important new asset for BP’s thin Middle East portfolio, won’t be easy. The contract is deliberately vague about whether ultimate control lies with BP or Iraq’s national oil company, which resents BP’s presence.
But there are positives.
Rehabilitating the dilapidated field, scarred by war and sanctions, and getting it to produce more than any other in the world except Saudi Arabia’s Ghawar will be a huge, high-profile project. If done well, it would demonstrate BP’s abilities and possibly open up new business.
But what makes Iraq’s brutal terms and all the legal, financial and human risks worthwhile for BP is having a toehold in the country with the world’s third-largest known oil reserves. Very few such places are open to foreign participation, regardless of the terms that oil companies are willing to accept.