Iraq Opens Up New Auction Round For Fields; Exxon Out On Kurdish Deal
The Iraqi central government announced a fourth round of bidding for oil and gas exploration of new blocks in the country. The new round will see the participation of 39 foreign companies including Chevron (NYSE:CVX) and BP (NYSE:BP). [1]
Oil major Exxon Mobil (NYSE:XOM) has been barred from participation in this round because it entered into a deal with the Kurdish Regional Government (KRG) to explore blocks in the semi-autonomous region. The Iraqi government disputes contracts between local governments and private players and has added a condition to the present round of bidding, threatening cancellation of contracts if successful bidders entered into contracts with regional governments without approval from Baghdad.
We have a $109 price estimate for Chevron, which is at a 10% premium to its current market price.
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Undetermined potential
The new blocks being opened up for bidding in the new round are looked at as being less attractive than those offered in the earlier rounds. The blocks being offered in the fourth round have undetermined potential for hydrocarbons. [1] In addition to this, the cost of operating facilities in the new blocks is expected to be higher than it is in other places in Iraq because of the underdeveloped infrastructure and security issues. The government has also toughened its position on companies looking to strike deals with local players to prevent other oil majors from following Exxon Mobil to begin exploration in regions controlled by the KRG. Despite the risks, companies like Chevron and BP are expected to participate in the round as they face increasing difficulties in tapping new reserves and keeping oil production from declining in the medium to long term horizon.
Estimates say that the new blocks hold about 10 billion barrels of oil and 29 trillion cubic feet of natural gas. [1] The present round of bidding also signifies a growing interest within the Iraqi government to increase the country’s natural gas output. The Iraqi government is continuing its policy of offering service fee based contracts that offer oil companies a flat fee for their operations. The restrictive contract type offered by the Iraqi government was one of the major reasons for Exxon Mobil to pursue exploration deals with the Kurdish Regional Government (KRG), which has attracted foreign companies by offering lucrative production sharing contracts.
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