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Big energy companies snub Iraq oil auction -

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Big energy companies snub Iraq oil auction

Ashley Hall reported this story on Wednesday, July 1, 2009 12:34:00

PETER CAVE: When US troops invaded Iraq six years ago, critics of the move argued the Americans
were motivated by oil.

After all, Iraq has the world's second biggest oil reserves, and the US is the biggest oil
consumer.

But now that Iraq has offered foreign energy companies a chance to exploit those reserves, there
has been very little interest from the American giants at the price Iraq is asking.

It's dealt a sharp blow for Iraq's hopes for an oil-fuelled post war recovery.

Ashley Hall reports.

(Sound from auction)

ASHLEY HALL: It was Iraq's first oil auction since Saddam Hussein nationalised the industry 30
years ago.

And it took the form of a bizarre reality TV show, with international oil company executives
sliding their offers into wooden bidding boxes.

It was one way to guarantee there'd be no concerns about the legitimacy of the negotiations.

Iraq's Oil Minister Hussain al-Shahristani offered eight deals in total, six for oil fields and two
for gas.

It's part of his plan to almost double Iraq's oil production, and boost Government revenue along
the way.

But only one deal was done, with a consortium led by the British company, BP.

PETER KEMP: Iraq has set the parameters for bidding so tightly that while the oil companies offered
to increase production by far greater volumes than the Iraqis expected, they asked for a fee which
is much, much higher than the Iraqis are prepared to pay.

ASHLEY HALL: Peter Kemp is an oil industry analyst with the Energy Intelligence Group. He says the
gap between the negotiators' bargaining positions was simply too wide to overcome.

In short, the Government is offering to pay the companies a bonus if they lift oil production over
a certain level. But the companies say the bonus isn't big enough.

Dr Fadhil Chalabi is a former Iraqi oil minister who now works for the Institute of Energy Studies.

He's told the BBC that the country needs the foreign oil companies to rejuvenate its economy.

FADHIL CHALABI: Iraq needs the technology, the finance and the managerial skills to develop its own
oil sources; especially that great number of experts left the country.

So in principle, I believe Iraq needs the foreign companies.

ASHLEY HALL: The auction was expected to deliver Iraq's Government about $3-billion in sign-on fees
alone. But it'll be lucky to see $500-million from the one deal it signed.

The director of studies at the Lowy Institute Andrew Shearer says that won't be enough to get the
nation's struggling budget out of trouble.

ANDREW SHEARER: The Iraqi budget is already suffering from the fact that oil prices are down at the
moment because of the global economic down turn.

That's meaning that the Iraqi Government can't provide as many services as it needs to provide, and
it's not able to put as much money into building up the security forces as it would like to.

ASHLEY HALL: Some analysts fear that Iraq's budget troubles could lead to a surge in sectarian
violence.

Andrew Shearer argues the nation's financial problems won't last long, once the oil companies
return to the negotiating table.

ANDREW SHEARER: I think the oil companies are concerned about the commercial environment in the
sense that Iraq's yet to finalise its petroleum resources law. I think the other part of it
undoubtedly is that there's still a reasonable political risk in Iraq.

Iraq's making progress, but people are still watching and waiting to see if whether the Maliki
Government steps up now.

ASHLEY HALL: And while most attention is now on Iraq's future, Andrew Shearer couldn't resist a
look back.

He says what was possibly the most noticeable element of the oil auction process was the minimal
interest from big American oil companies.

ANDREW SHEARER: One of the things that demonstrates is that Iraq was never about oil, the war was
about the threat that Saddam posed to the rest of the region, he'd already invaded Kuwait once,
he'd launched missiles at some of Iraq's other neighbours and the guy was a menace.

And the military operation that overthrew his regime was about the threat that he posed, never
about oil.

PETER CAVE: Andrew Shearer the director of studies at the Lowy Institute ending Ashley Hall's
report.