Baghdad relies on profit sharing in new oil and gas contracts

Baghdad relies on profit sharing in new oil and gas contracts

BAGHDAD, August 15 (Reuters) – Iraq is making the biggest changes in its relationship with global oil companies in decades, sources said Thursday, in a bid to attract more money to the country’s hydrocarbon sector and share in the profits from the development of vast oil reserves.

Baghdad on Wednesday signed initial contracts for 13 oil and gas exploration blocks and fields that were originally awarded in a bidding round in May. The contracts include profit-sharing agreements that carry more attractive terms than contracts for technical services.

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Profit-sharing models offer a share of revenue after royalties and cost reimbursement, an oil ministry official who attended the signing ceremony on Wednesday told Reuters.

The official, who spoke on condition of anonymity because he was not authorized to speak to the press, said Iraq had accepted profit-sharing contracts for the May round rather than structuring the deals based on previous technical service conditions to attract more investment.

Traditional technical service contracts involve paying a lump sum for each barrel of oil produced, net of costs. They are likely to be less attractive to foreign investors than production-sharing contracts.

Last year, Iraq secured a $27 billion oil deal with French company Total Energies by offering faster and less risky repayment through a higher share of the profits – a model the company said at the time could be replicated to attract more foreign firms.

Major oil companies have complained that the terms of Iraq’s traditional oil supply contracts have prevented them from profiting from rising oil prices and have left them at a disadvantage when production costs rise.

Iraq is the second largest producer in the Organization of Petroleum Exporting Countries after Saudi Arabia and currently has a production capacity of nearly five million barrels per day.

Foreign investment in the country’s energy sector has dried up since a flood of oil deals following the U.S. invasion over a decade ago, contributing to a stagnation in the country’s oil production.

Last year’s Total deal was hailed as a major breakthrough in the return of major Western companies to Baghdad.

Chinese companies dominated the bidding round in May, in which 29 oil and gas projects were offered, winning ten of the oil and gas blocks and fields auctioned.

The country’s oil ministry said on Wednesday the agreements could increase production by 750,000 barrels of crude oil and 850 million standard cubic feet of gas.

With this round of licensing – the country’s sixth – Iraq’s main goal is to increase its natural gas production to fuel power plants that rely heavily on gas imported from Iran, Iraqi oil officials said.

Oil Minister Hayan Abdel-Ghani said in a statement that increased gas production could lead to more flexible gas supplies to power plants.

(Reporting by Ahmed Rasheed; Editing by Jan Harvey)