BP says oil firms submit Iraq contract changes as output slows

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ABU DHABI (Bloomberg) -- International oil companies submitted proposals to Iraq to change their production contracts in the face of constraints on growth in the country’s output next year after the oil ministry asked for spending cuts amid low crude prices, according to BP Plc.

The companies have submitted proposals to the government about how the country could change their contracts from service agreements to a model closer to production sharing agreements, Michael Townshend, the company’s regional president for the Middle East, told reporters in Abu Dhabi on Tuesday. Companies are now paid a fee, either in cash or with oil barrels, based on meeting output targets, while production sharing agreements give companies a direct stake in crude pumped.

BP operates Rumaila, Iraq’s largest deposit. Production from the southern field will average between 1.3 MMbopd and 1.35 MMbopd this year, while output next year depends on spending approved by the government, which has asked foreign companies to decrease their 2016 budgets due to the drop in crude prices, Townshend said. Total capital expenditure on the field will be about $2.5 billion this year, with BP responsible for about half of that, he said.

“It’s difficult to see a massive ramp up next year” in Iraqi crude production, Townshend said. Talks about a budget for next year at the Rumaila oil field are “a work in progress.”

The slump in global crude prices by more than 40% in the past year has cut the Iraqi government’s income as it battles Islamic extremists that have seized parts of the country. That risks sidetracking Iraq’s efforts, after decades of conflict and sanctions that choked investment, to boost production with the help of international companies.

2016 Budgets

The government sees opportunity to reach agreement with foreign oil companies on plans to decrease their 2016 budgets, Oil Minister Adel Abdul Mahdi said Oct. 28 in Amarah, Iraq.

Iraq, the second-largest producer in the Organization of Petroleum Exporting Countries after Saudi Arabia, pumped 4.3 MMbopd in October, according to data compiled by Bloomberg. The country pumped about 2.4 MMbopd by the end of 2010 and plans to boost capacity to 6 MMbopd in 2018.

BP has been taking both Iraq’s Basrah Light and Basrah Heavy crude grades produced at its southern fields, Townshend said. The heavy grade is lower quality and harder to refine.

“It’s less easy to place in the market,” Townshend said. “It tends to be in the Far East but that’s fairly saturated so it does run at quite a substantial discount.”

 

http://www.worldoil.com/news/2015/11/10/bp-says-oil-firms-submit-iraq-contract-changes-as-output-slows

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Iraq Oil Partners Seek Contract Changes to Boost Output

Anthony DiPaola | 11-11-2015, 11:15 AM | Iraq |

 

The slump in global crude prices of more than 40 per cent in the past year has cut the Iraqi government’s income 

International oil companies could boost production in Iraq beyond current targets if production contracts were changed to give more incentives for investment, according to BP and Royal Dutch Shell.

Companies working in the country have proposed that the government change contracts from the current service-fee model to be closer to production sharing agreements, Michael Townshend, BP’s regional president for the Middle East, told reporters in Abu Dhabi on Tuesday. The suggestions were made earlier this year amid talks about development budgets needed to operate Iraq’s oil fields next year, he said.

Shell would need “a different commercial balance” to achieve full potential for its development of the Majnoon oil deposit, Maarten Wetselaar, the company’s executive vice president for integrated gas, told reporters in Abu Dhabi. “It’s a bit of an affront to its potential to only produce 225,000 barrels a day from it, you could double or triple that by investing in it.”

The slump in global crude prices of more than 40 per cent in the past year has cut the Iraqi government’s income as it battles Islamic extremists that have seized parts of the country. After decades of conflict and sanctions that choked investment, Iraq is one of the nations with the greatest potential to boost production, but also faces some of the most serious challenges in mobilising the necessary investment, the International Energy Agency said Tuesday.

Companies working in Iraq are currently paid a fee, either in cash or with barrels of oil, based on meeting output targets. Production sharing agreements, used in some other OPEC members such as Angola, would give companies a direct stake in crude pumped. Reviewing existing contracts would help Iraq to better meet its obligations to pay international partners and give companies more incentive to maximise output, said Robin Mills, an analyst at Manaar Energy Consulting in Dubai.

“The government should consider revamping the oil companies’ contracts by stretching out the period over which the projects have to pay off their costs and by raising the level of remuneration for the companies over the longer term,” Mills, who consults on projects in Iraq and previously worked as a geologist for Shell, said by phone Tuesday. By cutting development spending Iraq risks output next year, he said.

BP operates Rumaila, Iraq’s largest deposit. Production from the southern field will average 1.3 million to 1.35 million barrels a day this year. Output next year depends on spending approved by the government, which has asked foreign companies to decrease their 2016 budgets due to the drop in crude prices, Townshend said. Total capital expenditure on the field will be about $2.5 billion this year, with BP responsible for about half of that, he said.

“It’s difficult to see a massive ramp up next year” in Iraqi crude production, Townshend said. Talks about a budget for next year at Rumaila are “a work in progress.”

Iraq may not be able to reach substantial agreement on new contracts given security concerns, Patrick Pouyanne, chief executive officer of Total, told reporters Tuesday.

“At $50 a barrel, Iraq needs most of the money from oil to finance its security forces and its own societal needs,” Pouyanne said. “So today in Iraq it’s not the time to discuss big contracts, but we’ll see.”

The government sees an opportunity to reach an agreement to decrease the 2016 budgets of foreign oil companies, Oil Minister Adel Abdul Mahdi said on 28 October in Amarah, Iraq.

Iraq, the second-largest producer in the Organization of Petroleum Exporting Countries after Saudi Arabia, pumped 4.3 million barrels a day in October, according to data compiled by Bloomberg. The country produced about 2.4 million barrels a day at the end of 2010 and plans to boost capacity to 6 million in 2018.

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