Replies to post #152 on The Rising Influence of Rising Affluence

[DewDiligence]

…Production Service (or Sharing) Contracts (PSCs) are used in Nigeria where the country receives royalties and taxes on a percentage basis, e.g., 5% royalty and 50% tax.

From a practical standpoint, does it matter to an E&P company what portion of the total 55% (in your example) is called a royalty and what portion is called a tax? I presume that both amounts are fully deductible to the company under GAAP. T.i.a.

[DewDiligence]

Iraq Hails Oil Auction as Success

[Well, maybe. With the puny terms agreed to by the winning bidders in the recent auctions, Iraq seems unlikely to be a material driver of earnings growth for any of the publicly traded energy companies.]

http://online.wsj.com/article/SB10001424052748704121504574593422979148980.html

›Shell, Lukoil, Other Companies Pledge to Vastly Increase Nation's Output Despite Hurdles

DECEMBER 14, 2009, 4:57 A.M. ET
By HASSAN HAFIDH And CHIP CUMMINS

BAGHDAD—Iraq awarded some of its most promising fields to a variety of foreign bidders in an auction Friday and Saturday that Iraqi officials presented as an endorsement of the nation's revitalization.

Companies that won fields over the weekend—including Royal Dutch Shell PLC and Russia's OAO Lukoil—and those winning deals earlier this year have pledged to more than quadruple the country's oil output.

Iraqi officials hailed the weekend auction as the clearest sign yet that Baghdad is on its way to rebuilding its vast but hobbled oil industry, and more broadly, reasserting its regional economic power. The auctions lend "more credence that Iraq is coming back, and Iraq is strong" again, Hoshyar Zebari, Iraq's foreign minister, said in an interview.

Big challenges still loom for Iraq and the companies, however, including winning final government approval for the deals. Iraq has scheduled parliamentary elections for March, and some Iraqi officials and oil executives worry that a new government could reconsider the deals.

But the current government of Prime Minister Nouri al-Maliki has strongly backed the country's two auctions so far. Iraq in June held its first oil auction, offering foreign companies the chance to boost production at already-pumping fields. This weekend's auction was the first time foreign firms could bid on more-attractive untapped fields. Of the 10 groups of fields available, seven were awarded.

If the companies that won fields over the weekend live up to their production pledges, they would increase the country's oil production to 4.765 million barrels a day, Oil Minister Hussain al-Shahristani said. Current production is around 2.5 million barrels a day.

"It is a very successful bid round," Mr. Shahristani said. Including pledges from companies who won field-development contracts in previous months for already producing fields, international consortia have committed to boosting Iraqi production capacity to 12 million barrels a day, Mr. Shahristani said. That would rival the output of Saudi Arabia, the world's largest oil exporter.

Reflecting Iraq's optimism, Mr. Shahristani said Saturday that Iraq eventually would accept a production quota from the Organization of Petroleum Exporting Countries.

By many estimates, Iraq, which is an OPEC member, sits on the world's third-largest reserves of oil, behind Saudi Arabia and Iran. But Iraq's oil industry has struggled for years because of United Nations sanctions, war and underinvestment. As a result, Iraq long has been exempt from the output quota that other OPEC members adhere to in an effort to manage global prices.

Production growth in Iraq won't be easy.

Legal hurdles remain. The oil ministry and Mr. Maliki's government designed the current contracts—essentially service contracts that pay a per-barrel fee to oil companies in exchange for production increases—without parliamentary approval.

A petroleum law setting out the legal framework for foreign oil development has been marooned in Parliament, and a new government next year could object to the current contracts.

Technical worries also persist. Fields, especially untapped ones, often prove more technically challenging than expected or result in fewer reserves than anticipated.

For currently producing fields, decades of overproduction under Saddam Hussein may have caused irreparable reservoir damage, oil analysts warn. Contrary to expectations, U.S. firms bowed out of the most recent bidding.

Still, interest from foreign firms was high. Executives from more than 30 international oil companies came to Baghdad to bid for the oil fields despite the nation's volatility. A series of coordinated bombings in Baghdad last Tuesday killed more than 100 people.

A consortium led by Shell and Malaysia's Petroliam Nasional Bhd. on Friday won the giant Majnoon field, which could hold about 12 billion barrels of reserves. The consortium proposed receiving $1.39 a barrel and pledged to increase output to 1.8 million barrels a day.

Lukoil along with Statoil ASA secured a deal Saturday to develop another big field, West Qurna Phase 2. They proposed a fee of $1.15 a barrel and a production plateau of 1.8 million barrels a day.

Initial agreements are to be worked out in two weeks and then sent to the cabinet for approval. Mr. Shahristani said he expects the contracts to be signed early next year.‹