Iraq shifts to profit sharing with new oil and gas deals

Iraq is making the biggest change in decades to the way it works with global oil firms in a bid to lure more money into its hydrocarbon sector, with Baghdad shifting to share profits from its massive reserve development, sources said on Thursday.

Baghdad, on Wednesday, signed initial deals for 13 oil and gas exploration blocks and fields, originally awarded in a May bid round, giving companies profit-sharing contracts that include more attractive terms than technical-service ones.

Profit-sharing models offer a share of revenue after deducting royalty and cost recovery expenses, an oil ministry official who attended the Wednesday signing ceremony told Reuters.

Speaking on condition of anonymity because he was not authorised to speak to the press, the official said Iraq had adopted profit-sharing contracts for the May round rather than modelling the deals on previous technical service terms to try to attract more investment.

Traditional technical service contracts pay a flat rate for every barrel of oil produced after reimbursing costs, and are likely to be less lucrative for foreign investors than production-sharing terms.

Last year, Iraq secured a $27bn oil deal with France’s Total Energies by offering quicker, less risky payback through greater revenue-sharing, a model it said at the time could be replicated to lure more foreign firms.

Oil majors have complained that the terms of Iraq’s traditional oil service contracts meant they could not benefit from rising oil prices and lost out when production costs rose.

Iraq’s oil production

Iraq, the second biggest producer in the Organization of the Petroleum Exporting Countries (OPEC) behind Saudi Arabia, currently has the capacity to produce almost 5 million barrels per day.

Foreign investment in its energy sector has fizzled out since a flurry of post US-invasion deals more than a decade ago, contributing to a stagnation in the country’s oil production.

Last year’s Total deal was heralded as a major breakthrough in attracting Western majors back to Baghdad.

Chinese companies dominated the May bidding round which offered 29 oil and gas projects, winning 10 out of the auctioned oil and gas blocks and fields.

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

Iraq wanted this licensing round – the country’s sixth – in particular to increase output of natural gas, which it wants to use to fire power plants that rely heavily on gas imported from Iran, Iraqi oil officials said.

Its Oil Minister Hayan Abdel-Ghani said in a statement the increased gas production could allow more flexibility to supply electric power plants with gas.

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