From the Los Angeles Times

Iraq's attempt to bring foreign investors into oil industry comes up dry

Development deals were being sought for eight oil and gas fields. But at a widely anticipated (and televised) auction, international firms and the government are far apart on the price.

By Liz Sly

12:48 PM PDT, June 30, 2009

Reporting from Baghdad — A much-ballyhooed effort by Iraq to lure foreign investment into its battered oil industry fizzled today after it became clear that the government is not prepared to pay the prices being asked by international oil companies for their services.

Iraq was seeking bids from firms to develop eight of its existing oil and gas fields, but only one contract was awarded to develop one oil field after a public auction that was televised live from Baghdad's Rashid Hotel inside the heavily fortified Green Zone. The disappointing outcome to the widely anticipated event, which was planned a year ago, suggested international oil firms aren't as eager to invest in Iraq as the Iraqi government had been hoping -- and that there will be no quick fix for the country's looming financial problems.

"It's pretty much a total disaster," said Peter Kemp of the New York-based Energy Intelligence publishing group. "It seems the Iraqis totally miscalculated the commercial realities of this process."

The sole contract was awarded to a consortium led by Britain's BP and including China's CNPC International Ltd., marking the first time any foreign companies have been permitted to invest in Iraqi oil since 1972, when the oil industry was nationalized. Oil Minister Hussein Shahristani called it a "historic day" that coincided with the withdrawal of U.S. troops from Iraq's cities.

The bidding process was being closely watched for signs as to how the new Iraq is likely to go about developing its vast oil reserves, the world's third-largest after Saudi Arabia and Iran. But as the bids by representatives of the world's top oil companies were unsealed, it quickly emerged that there was a wide gulf between the maximum price the Iraqi government was prepared to pay investors to develop the oil fields, and the minimum price oil companies were prepared to accept.

A consortium led by U.S. oil giant ConocoPhillips sought five times more in remuneration than the Iraqi government offered to develop the Bai Hassan field in northern Iraq. Other bids were almost as far from the prices set by the Iraqi government.

Under the contracts being sought by Iraq, oil companies would be paid a fixed fee per unit of oil or gas produced, above a certain threshold, in return for much-needed technical expertise and investment to increase production at the fields.

Four of the eight fields on offer received only one bid each, and one gas field, in troubled Diyala province, received no bids at all, indicating that oil companies are less keen to enter the potential quagmire of Iraq than had been anticipated, despite recent security improvements.

Shahristani acknowledged that oil companies investing in Iraq will still need to pay hefty fees to security companies to ensure their safety, which may explain why their prices were so high.

"Some of the oil companies are not very comfortable with the security situation and this is why they didn't offer acceptable bids," he said.