Dr.

Michelle Michot Foss, CEE-UT

Reasons for Service Contracts

Bureau of Economic Geology, The University of Texas at Austin

• Government convinced that Iraq alone cannot

provide a substantial and sustainable buildup
of production capacity
• Increase oil production levels from proved
reserves from about 2.5 MM BPD currently to
7 MM BPD by 2017
• Add 52 MM BOE to proved reserves by 2017
through exploration (official targets, 40 BBO
Iraq Oil Industry Service and 70 TCF natural gas)
Contracts: Rounds 1 & 2 ©CEE-UT, 2

Dr. Michelle Michot Foss, CEE-UT Dr. Michelle Michot Foss, CEE-UT

Round 1: Technical Service

Service Contracts Rounds 1 & 2
Contracts (June, 2009)
• Targets production growth from over 85 • Addresses ramp up of output from producing fields
billion barrels of proved producing and proved • 20 year term
undeveloped reserves with $2-$6/bbl • Non-recoverable signature bonuses of $100-$150
million; other costs recoverable over 5 years
development costs beginning in year 3
• These fields are “exceptional in every aspect” • Contractor must achieve a production plateau target
and as such these contracts may not be (PPT) within 7 years and maintain it for 7 years
applicable in other parts of the world • Remuneration Fee per Barrel (RFB) and cost
recovery from 50% of gross revenues with cost
recovery taking precedence
• Bid parameter PPT more important than RFB

©CEE-UT, 3 ©CEE-UT, 4
Dr. Michelle Michot Foss, CEE-UT Dr. Michelle Michot Foss, CEE-UT

Round 1: Technical Service Round 1: Technical Service

Contracts (June, 2009) Contracts (June, 2009)
• Average RFB $2.05/bbl of incremental production • Adjusted average RFB
reduced by sliding scale “R factor” as costs are
recovered $2.05/bbl. – Contract RFB
• RFB payable in cash or in kind (export oil)
• RFB adjusted by “P factor”: (actual production/bid
Less: (.51) – 25% to state entity
plateau production) unless government orders less $1.54
production or infrastructure is unavailable
• State entity carried for 25% project participation and Less: (.54) – 35% income tax
receives 25% of RFB
• 35% tax rate on RFB after deduction of 25% state
$1.00 – Received RFB
carried interest

©CEE-UT, 5 ©CEE-UT, 6

Dr. Michelle Michot Foss, CEE-UT Dr. Michelle Michot Foss, CEE-UT

Rumaila: Cost Recovery and Remuneration

Round 1 TSC Awards Contract Incentives:
•Rapid initial production growth
•Achievement of PPT
•Sustaining PPT for 7 years

Source: David Evans, BP Exploration Operating Company,

Source: Gaffney, Cline & Associates, April 2010 ©CEE-UT, 7 ©CEE-UT, 8
AIPN Spring Conference, April, 2010
Dr. Michelle Michot Foss, CEE-UT Dr. Michelle Michot Foss, CEE-UT

Cash Flow Analysis Round 2: Development and Production

West Qurna 1 TSC Service Contracts (December, 2009)
(Nominal $) BID ESTIMATE
Oil Price $60/bbl $60/bbl • Addresses 15 proved but undeveloped fields
Capex
Opex
$25 billion
$25 billion
$25 billion
$25 billion
with more than 40 billion barrels of oil
Contractor ROR 33% 15% reserves
Capex
Contractor ROR
$12.5 billion
33%
• Most contract terms similar to Round 1
• Bid parameter “RFB” outweighs “plateau
production target”
“Management of capital
expenditures relative to • Signature bonuses, $100-400 million,
production buildup and ability to
achieve bid production plateau key
recoverable (subject to change)
to contractor profitability” • 7-13 plateau production duration
Source: “Iraq’s Technical Service Contracts-A Good Deal for Iraq?” by
Peter Wells, Middle East Economic Survey, Vol. LII, No. 47, 11/23/09
©CEE-UT, 9 ©CEE-UT, 10

Dr. Michelle Michot Foss, CEE-UT Dr. Michelle Michot Foss, CEE-UT

Round 2: DPSC Awards Iraq Service Contracts Risks

• “Below ground” (geological) risks are minimal
• “Above ground” risks substantial
• Iraqi government responsible for:
– Safety and security of contract areas
– Access to and use of water, including water for
injection within or outside the contract areas
– Timely provision of transportation and export
infrastructure
– Government ordered production decreases do not result in
RFB penalties
• Failure of government to perform could open door to
contract renegotiations

Source: Gaffney, Cline & Associates, April 2010 ©CEE-UT, 11 ©CEE-UT, 12

Dr. Michelle Michot Foss, CEE-UT

So, Why the Rush for Iraqi Oil?

• Exceptional proved reserves: more than 70% of
Iraq’s proven reserves, including two “super giant”
fields
• “Easy oil”- Sophisticated technology not required;
increases competition
• “Cheap oil”- $2-$6/barrel development costs
(especially for south fields)
• Even with low RFBs, 15-20% RORs possible with
carefully phased in capital expenditures to obtain
maximum BPD production per $ invested
• Iraq’s assumption of above ground security and
infrastructure risks which could delay production (and
possibly lead to contract renegotiation)

©CEE-UT, 13
 Iraq Mexico
More than 85 bn barrels of proved  About 10 bn barrels proved reserves; high 
(economically recoverable) oil reserves,  cost (tight onshore reservoirs, Chicontopec;  
i.e., no exploration cost deep water approx. $65/bbl)
Easy and cheap oil , ($2‐$6/bbl  Hard and expensive oil (especially deep water 
development cost) dry hole risk and development)
Medium‐sour oil Mostly heavy; potentially lighter in deep water
Low well productivity  in some locations 
High well productivity (Chicontopec), potentially higher rates 
offshore
High field recovery rates Low field recovery rates
Payment in the form of export oil is 
Only cash payment is allowed
allowed
Fields awarded as single blocks Multiple blocks to be tendered

Security risk is an issue which may enable  Security risk in not an issue, no contract 
IOC contract renegotiations renegotiation
Major IOCs active participation Major IOCs participation is unlikely