Haynes and Boone, LLP
  September 14, 2004 - Texas

Oil firms wary of Iraqi interim regime

HOUSTON (Reuters) - Fears that contracts signed with Iraq's interim government could be voided by a new elected leadership have made oil companies wary of entering into deals with the energy-rich country, experts said on Tuesday. "We're seeing some reticence from major oil companies in dealing with the interim government," Lori Feathers, a lawyer with Haynes & Boone, LLP told an energy industry gathering. The companies appeared to fear that by signing deals with the interim government headed by Prime Minister Iyad Allawi, they will be put at a disadvantage when a permanent government takes power after elections set for early 2005, she said. Rumors have surfaced that Kurdish authorities in the northern region of Iraq have already signed contracts with Turkish and Norwegian energy companies, she said, prompting Iraqi officials to warn that companies entering into such agreements with the Kurds would be precluded from participating in any future deals. That warning has been made despite the absence of a legal framework for awarding contracts to bolster Iraq's oil infrastructure. "Unfortunately today there are no rules that have been established for upstream oil investment," Feathers said. Iraqi oil minister Thamir Ghadhban told Reuters on Tuesday at an OPEC meeting in Vienna the country was aiming to raise its oil output to 3.25 million bpd by the end of 2005 using its own resources, since violence was keeping foreign investors away. U.S. oil major ChevronTexaco (CVX: Research, Estimates) and Italian ENI have signed technical support deals with the interim Iraqi government, and others, including ExxonMobil (XOM: Research, Estimates), BP, Lukoil, Royal Dutch/Shell and Total have offered technical support. Current Iraqi production is near 2.8 million bpd, close to the levels before the 1990-1991 Gulf War, he said. Ongoing violence in Iraq remained a major barrier for companies wishing to develop the oil-rich country's resources, although safety issues could be overcome, according to Emad Elrafie, consultant with Gaffney, Cline & Associates. "Security can be looked at as a cost issue," Elrafie said in a speech at the Houston energy industry gathering. Iraq has set a long-term production target of 6 million bpd, well above its 1979 peak of 3.5 million bpd, he said, and rising global demand will dictate that Iraq's oil reserves be tapped. "The demand requires it. We will need Iraqi oil," he said. In the 1990s, Total and Lukoil nearly secured oil production deals, but both deals fell apart because of United Nations sanctions imposed against Saddam Hussein's regime. It was not clear whether TotalFinaElf or Lukoil would be the favorites for those deals now, Feathers said, but the field of applicants would likely be expanded. "There is a belief some of these deals could be opened up to U.S. and British companies," she said, referring to the companies from the two states that spearheaded the war against the former Iraqi regime. Russian companies could also be in line for Iraqi work, she added, because Russian President Vladimir Putin linked his country's forgiveness of $8 billion in debts to opening Iraq up to Russian firms.