Iraq, Foreign Companies Stalled in Oil Negotiations

Ministry Backs Off Over Deals' Terms; Political Concerns

By GINA CHON
August 13, 2008

BAGHDAD - Oil negotiations between a handful of foreign companies and the government here appear stalled, setting back once again efforts to open up Iraqi oil fields to international companies.

A petroleum law that would provide a legal framework for foreign investment has long languished in Parliament. Still, momentum had built up in the spring and early summer for a series of limited so-called technical-service contracts negotiated between a group of major oil companies and the Iraqi Oil Ministry.

The deals, essentially consulting contracts, were limited in nature and small-scale by oil-industry standards. They were intended to serve as short-term deals that would halt or reverse declining production at a handful of specific fields, while tenders for longer-term technical contracts could be vetted.

Oil Ministry officials had said they hoped to sign contracts by the end of June. That deadline came and went without a deal. Now, talks with major oil companies, such as Royal Dutch Shell PLC, BP PLC and Exxon Mobil Corp., appear to have hit new snags.

"I'm not sure if they are going to go through," said Charles Ries, who heads economic affairs at the U.S. Embassy.

The Oil Ministry, which had been championing the deals for months, is now balking. Oil Minister Hussein al-Shahrastani in an interview said that is because the companies are insisting that part of the payment for the consulting work be in oil, and the foreign companies want preferential treatment for future oil-exploration deals. Political sensitivities in Baghdad also appear to be in play.

The Oil Ministry was scheduled to announce the contracts on June 30. But that day, Mr. Shahrastani said they weren't yet ready after all. Instead, he said that 35 companies had made the first round of bidding for separate, longer-term contracts that the ministry hopes to award next year. Bid terms for those contracts will be revealed next month as planned, the Oil Ministry said.

While the short-term consulting deals had been widely reported, they drew fresh scrutiny in Baghdad and Washington just before they were set to be signed. Sen. Charles Schumer, a Democrat from New York, and other U.S. politicians criticized them as lucrative, no-bid contracts. Mr. Shahrastani said they were negotiated in a transparent manner.

BP spokesman David Nicholas said the company is continuing discussions with the Iraqi authorities and said the company had no further comment. A spokesman for Exxon declined to discuss specifics of its negotiations.

"If the Iraqi government decides it wants international oil companies to partner with them in developing their resources, Exxon Mobil would be interested in participating," said spokesman Len D'Eramo.

A Shell spokesman declined to discuss specific talks but said the negotiations are continuing.

In the meantime, deals for new exploration and production won't occur until Iraq passes an oil law. That bill has been stalled for more than 18 months, mainly because of differences among Kurdish and Baghdad officials over who has control over signing contracts for development and other issues. The Kurds have signed several deals on their own with international companies for development inside their semi autonomous enclave.

For years, Iraqi officials have tried to lure international oil companies to help it develop its vast but underdeveloped fields. Saddam Hussein awarded some contracts in an apparent attempt to gain diplomatic leverage amid United Nations sanctions. But the sanctions restricted meaningful development.

After the U.S.-led invasion of Iraq in 2003, many Iraqi and U.S. officials, along with many Iraqi oilmen, pushed for opening the fields to competitive bidding. International participation, these people said, would raise production. Since the invasion, however, several attempts at inviting foreigners in have withered. After wresting control of its oil resources from Western powers decades ago, many Iraqis are still loath to see foreign companies back.

Write to Gina Chon at gina.chon@wsj.com