The foreign army moves out; foreign oil men move in. Iraqis may fear their energy is being sold off on the cheap, but they need not worry. Terms for operating rights offered at auction yesterday for eight oil and gas fields were so harsh that two failed to find bidders. The auction of the giant Rumaila field almost collapsed – until BP stepped in and accepted a flat $2 fee for each barrel of oil produced beyond about 1.2m a day, half what it asked for.
In this case, Iraq has certainly got a good deal. If BP boosts Rumaila's production to 1.7m b/d, it would take $365m in fees a year, about a thousandth of annual revenues. Apply company margins obtained elsewhere, and pre-tax profits might reach $40m – although that is before factoring in higher Iraqi costs, especially security. Even if BP more than doubles Rumaila's production to its own heady target of 2.85m b/d, it would still only earn $120m a year, about 0.6 per cent of forecast group profits. In return, Iraq would have increased oil production by 75 per cent, without risking any capital.
For foreign oil majors, or state-owned companies such as China's CNOOC, that is a price worth paying. Total Iraqi reserves are often cited at 115bn barrels, the world's third biggest. But this is based on seismic data three decades old. There could easily be 100bn barrels more – lifting reserves to Saudi Arabian levels. Unusually, the interests of Iraqis and the world's consuming nations are also aligned. Both want more production, with Baghdad aiming to more than double output to 6m b/d by 2015. For Opec that could spell problems. Iraq, although a founding member, has not had a binding quota since 1998.