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Iraqi workers walk in South Rumaila oil field, in southern Iraq, December 2, 2009. (ATEF HASSAN)
Iraqi workers walk in South Rumaila oil field, in southern Iraq, December 2, 2009. (ATEF HASSAN)

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Kurdistan: A lot of oil, a lot of risk Add to ...

While the northern regions of Kirkuk and Kurdistan figure prominently in Baghdad's plan to boost its oil production over the longer term, it's the vast array of giant, proven fields in southern Iraq that are expected in the short term to catapult the country into oil's big leagues.

Those fields were the subject of Iraq's first auction. Bidding got off to a shaky start in June but has since resulted in a series of agreements.

In the south, international oil companies such as BP PLC, Exxon, Royal Dutch Shell PLC, China National Petroleum Corp. and Italy's Eni SpA have either signed contracts or reached a memorandum of understanding to dramatically boost production from operating oil fields.

Oil companies are coming into the country agreeing to work under service contracts that pay a fixed amount for every barrel of oil produced. With access to producing fields containing more than 30 billion barrels of reserves, they still stand to make a great deal of money.

The bidding process began inauspiciously, with only BP and its partner, China's CNPC, participating in the round, winning the right to develop the Rumaila field, which is located near the Kuwait border in an area populated almost exclusively by Shia tribes.

Eager for more development, Mr. al-Shahristani went back to the international companies and offered sweeteners that neither the companies nor the government will reveal.

Recently, Exxon and Shell agreed to a deal to develop the giant West Qurna 1 field, with its estimated 8.6 billion barrels of reserves, while Eni is leading a group that will boost production in the Zubair field that has reserves of 4.1 billion barrels.

Those three fields lie in areas of the country that have been relatively peaceful of late. But challenges remain, including the potential for renewed violence.

Of immediate concern, however, is the fact that Iraq has not updated its laws covering the oil industry since the era of Saddam Hussein. Companies must count on the commitments of Prime Minister Nouri al-Maliki's government, which faces a difficult re-election bid slated for January but likely to be postponed for a few months, adding further uncertainty.

Political opponents have criticized the government for allowing foreign companies to develop Iraq's resources.

The al-Maliki government had hoped to showcase the country's new-found security as part of its election platform. However, the massive double bombings in Baghdad in August and again in October, have made that a shaky proposition.

This has meant that item two in the platform - the promise of economic development driven by oil - has taken on even greater importance.

Mr. al-Shahristani was determined to "front load the bid round to get the companies committed" prior to the election set for January, says Greg Priddy, an analyst with Washington-based political risk consultants, Eurasia Group. That's why the best, proven fields were offered at auction first.

To reduce public opposition, the Iraqi government offered only service contracts that confer no ownership of the resource, rather than "production-sharing agreements" that provide companies more revenue if prices rise and allow them to include the reserves on their books - a major selling point with investors in publicly traded oil companies.

With service contracts, the minister has concrete answers for political critics who complain the government is "giving away the oil to foreigners," Mr. Priddy says. "They say they are hiring service providers only."

Analysts note that the Oil Ministry has been reluctant to divulge some of the details of those arrangements, but the companies are not required to start spending serious money for several months after signing the contracts.

As a result, they aren't putting serious investment at risk until after the election, at which time they can assess whether Mr. al-Maliki or his successors remain committed to the deals.

Meanwhile, Iraq's current oil-producing infrastructure is decrepit, and it's debatable whether the country has the labour force, the transportation network or the power grid that would be required for the massive investment boom.

Iraq does, however, plan new infrastructure aimed at helping the country achieve its oil ambitions. Four new floating oil terminals and three new undersea oil pipelines are planned for completion in 2011, an oil official said last week.

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