Iraqi oil contracts have barrels of risk

Jeff Tyler Jun 26, 2009
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Iraqi oil contracts have barrels of risk

Jeff Tyler Jun 26, 2009
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KAI RYSSDAL: Oil was down just a bit today. A hair under $70 a barrel. The big news in crude isn’t out of the trading pits in New York though. On Monday, Iraq is going to start auctioning off new contracts for its oil fields. It’ll be the first time in decades that Iraqi crude will be available to international companies. With the world’s third-largest proven reserves, Iraq stands to soak up a fortune. But there are some down sides as Marketplace’s Jeff Tyler explains.


Jeff Tyler: Security is one risk, violence is still a fact of life in Iraq and the terms of the deal aren’t great. Foreign oil companies would be given 20-year service contracts. That would mean a set amount of money for specific work, rather than a percentage of the oil produced.

Many observers say oil companies may sacrifice short-term profits for the chance to get a foot in the door — hoping to negotiate a better deal down the road. For access to its oil, Iraq also wants firms to pay more than $2 billion upfront as a kind of loan.

Allen Good is an oil analyst with Morningstar.

Allen Good: It will take a lot of money to develop these fields and get them up to production. So it’s really looking for these Western oil companies to come in with their large balance sheets and start to spend some money in the country and invest. It’s certainly a way for the Iraqis to leverage the oil they have in the ground now.

There is risk for the Iraqi government. The public might view any deal as giving away
the country’s most valuable resource for too little in return.

Michael Lynch with the consulting firm Strategic Energy and Economic Research says political instability is also a danger for the companies.

Michael Lynch: You always run the risk that the opposition says, “Ah-ha! They’re doing a bad job. Look at these horrible oil contracts.” And the government gets tossed out of office and the new government refuses to re-pay the loans on the grounds that they were unfair.

If production does go smoothly, there could be an upside for consumers. More petroleum on the market could result in lower prices for a barrel of oil.

I’m Jeff Tyler for Marketplace.

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