After a fallow period that saw an effective moratorium on Iraq’s oil and gas upstream licensing process, May 2024 saw awards covering the two most recent bid rounds, Licensing Round 5+ (LR5+) and Licensing Round 6 (LR6). These have introduced a clutch of new entrants to Iraq’s energy sector, with just one of the 29 blocks on offer going to a Western major.
The two rounds followed an 11-block fifth licensing round, launched in April 2018, which saw contract awards in February 2023. Crescent Petroleum was awarded contracts to develop three blocks: the Gilabat-Qumar and Khashim Ahmer-Injana blocks, both in Diyala governorate, and the Khidher al-Mai field, in Basrah province.
Altogether, Crescent has committed to developing the Khashim Ahmer-Injana block to initially supply 120mcf/d of feedstock gas to Mansuriyah power plant, reaching up to 520mcf/d feeding into both Mansuriyah’s power plants and other nearby power stations. The Basrah province block will also contribute to the local natural gas feedstock mix in due time.
“The fifth and sixth bidding round awarded fields containing large amounts of associated and non-associated natural gas, especially in Diyala region,” said Abdulla al-Qadi, Crescent Petroleum’s Iraq country chairman.
“These projects aim to secure Iraq’s energy independence and ultimately improve electricity services and related aspects. The result will be considerable savings for the national budget that could be invested in other sectors of the economy.”
Since June 2017, Iraq has been importing natural gas from Iran—currently at a volume of around 1bcf/d—said Qadi. The price of Iranian gas is estimated at $9/m Btu based on the government’s public pronouncements, amounting to more than $3.2b/yr. Iraq is also burning crude oil for power generation at a rate of 194,000b/d in 2018, according to available government figures.
“Gas supplied from the Khashim Ahmer-Injana block will significantly reduce these costs while providing more reliable supply,” said Qadi.
It also represents Crescent’s first formal entry into federal Iraqi territory; up until now, its operations had been focused on the Kurdistan Region of Iraq. With Kurdistan’s KAR Group also securing the Daimah licence in Maysan province, Baghdad has signalled it is prepared to adopt a more open attitude to bringing in experienced developers to its upstream, putting aside past grievances related to Kurdistan’s pursuit of an independent oil and gas strategy.
The sixth bid round, launched in 2023, revealed new thinking in Baghdad, being explicitly designed to help Iraq meets its domestic gas needs, with a priority placed on power generation and supplying feed gas to the country’s industrial, petrochemical and fertiliser sectors. The 11 blocks on offer were mainly located in the country's western governorate of Anbar—which holds substantial non-associated gas reserves—and the northern governorate of Nineveh. Expected gas production from the round was 800mcf/d.
Government officials expect the various projects in the licensing round will hike oil production capacity to 6m b/d by 2030 from around 5m b/d now. Iraq anticipates deriving more than 3.46bcf/d of gas from the licensing rounds.
Not all areas attracted bids. Those that didn’t were the Anbar, Okashat, Anah and al Anz blocks in Anbar province; the Pulkhana field in Salahuddin province; Tel Al Hajar block in Nineveh province; Block 11 in Muthana province; and Qalaat Salih block in Maysan province. On the other hand, with the 22 oil company bids attracted for the 29 blocks on offer, including majors Shell and BP, it is evident there is still ample heavyweight interest in Iraq’s upstream.
Improving contracts
What is equally significant is that Iraq has overseen a major shift in its contracting process. Contract terms have been re-evaluated over the years. “After 2003, we saw majors rushing into Iraq to plant a flag in the ground. The fee-based service contracts attracted the majors because they were hoping that, over the passage of time, they would get access to larger resources,” said Qadi. “That model did not work for them, and it did not work for the government either, as the fee-based system meant there was no incentive to complete the projects on time and at cost.”
According to analysis from consultancy Wood Mackenzie, Iraqi upstream licences had features of both service contracts and production-sharing contracts, creating a form of hybrid service contract that comprised a royalty, cost fee, remuneration fee and income tax. Of these, only the remuneration fee was a biddable parameter and was a percentage of net revenue share.
The first hybrid service contract was awarded in April 2018. Since then, Iraq has revised fiscal terms for oil and gas projects. The new terms address several structural shortcomings with the technical service contract. For example, the per barrel remuneration fee has been replaced with a biddable profit share. However, terms remain tough, with a typical government share of more than 95%.
Most acreage now being offered is under long-term profit sharing-based exploration, development and production contracts or development and production contracts. The current contract utilised the experiences and lessons learned from the previous technical service contract and aims to improve on those contracts, said Qadi.
Another major divergence from previous contracts is that the remuneration fee has been replaced by the net revenue share. This means the contractor will get a share of the net revenue with the government. “Sharing the net revenue with the government will guarantee government share while generating attractive returns for the contractor,” said Qadi.
Other modifications include new clauses giving priority to Iraqi service providers and subcontractors, and only qualifying foreign subcontractors that specifically employ Iraqis. There are also new amendments to ensure a certain percentage of local content in the operations and within a specified timeframe, thereby increasing development and employment of the Iraqi workforce. Crescent, fresh from its success in the fifth bid round, is now set to bring its Kurdistan region experience to bear in Diyala, not far from its Kurdish production area.
“The recent bid rounds were all about smaller fields—by Iraqi standards—compared to the supergiant fields awarded earlier,” said Majid Jafar, CEO of Crescent Petroleum. “In my view it would be good to take this new contract model and apply it to the older bid rounds. It is not straightforward, and there would have to be negotiation, but investors would welcome it. And it would achieve more investment, at less cost and with higher growth for Iraq's production.” Perspective is needed when judging licensing rounds. In Jafar’s view, what has been achieved in a relatively short space of time, through six bid rounds, is still substantial.
Despite criticism of terms, the country’s oil and gas sector has succeeded in adding more than 2m b/d to domestic crude production, pushing it above 4m b/d. Without Iraq’s OPEC quota constraints, it would be capable of more still.
“We have gone from majors to NOCs to Chinese companies to private sector independents such as ourselves. And only now are we starting to bring forward the true potential in Iraq,” said Jafar,
This article forms part of our recent Energising Iraq report, produced in conjunction with Crescent Petroleum. Click here to download your free copy.
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