When is a Failure Not a Failure? When It’s an Iraq Oil Auction

The failed Iraq oilfield auctions this week have become a litmus test for Iraq, for oil analysts and for the ever-nervous global oil market. Iraqi officials refuse to see the disappearance of most bidders and the completion of only auction (with a single bidder) as a failure. Instead, they are hawking the crowd-pleasing idea that multinational oil companies are greedy mouth-breathers that balked at the hard bargain being driven by righteous Iraqis who control so much valuable, marginal oil supply.

For their part, of course, oil companies think that the Iraqi oil auctioneers are nuts. The proffered risk/reward premium for exploration, development and production in an unsafe country with minimal infrastructure and maximal political flux was near zero. But in their zealotry to demonstrate resource nationalism to an uneasy electorate, Iraqi officials scared off most sane bidders, making the only successful buyer in this first round a bid backstopped and subsidized by the Chinese government — and one that still required a huge price concession.

Here is a nice summary snippet from IHS on where this means the sorry process goes from here:

Without Iraq offering a better risk/reward ratio to investors it will have to undertake all investment and development itself—a process that will be slow, laborious, and under-funded, and will result in volumes nowhere near those targeted and years from their hoped-for schedule.

Iraq needs to look not only at the reward side of its offering, however; it can make significant progress on lowering the investor risks. The government needs to direct its attention to passing a national hydrocarbons law in order to lay down a clear legal framework for the deals and give them greater political legitimacy than what is just—effectively—a mere pledge of contract allegiance from the currently serving ministers. This would also lower the political risk in Iraq, as the law in itself would require some form of broader political understanding between the leading factions and thereby to some extent bind much of Iraq’s political forces into taking responsibility for long-term hydrocarbon policy.

More here and here.