Big Oil Ready for Big Gamble in Iraq

BAGHDAD -- Next week, Iraqi officials plan a welcome-back party for Big Oil.

The government intends to auction off oil contracts to foreign companies for the first time since Iraq nationalized its oil industry more than three decades ago. If all goes according to plan in the first round, foreign oil companies will move in to help Iraq revive production at six developed fields that have suffered from years of war and neglect.

But Iraq's fractious politics have complicated the process. Some lawmakers and oil officials have called for a delay of the auction. The man behind the plan, Oil Minister Hussain al-Shahristani, appeared before parliament on Tuesday, where some lawmakers questioned the legality of the proposed contracts and what they called favorable terms for the foreign companies. But the auction appears to have sufficient political support to go ahead on schedule, and Mr. Shahristani and other government officials vowed to plow ahead.

Mr. Shahristani's oil deals are crucial to this war-torn country's economy. Iraq is thought to have one of the world's largest supplies of crude oil, with 115 billion barrels in proven reserves. But foreign know-how is key to its plans to boost oil output to four million barrels a day within four to five years, from 2.4 million barrels currently.

Despite security risks, Western oil companies are clamoring to get in. Iraq is still relatively unexplored, offering big companies a potentially easy-to-tap source of growth. Some are touting Iraq as the most important opening of petroleum fields since the discovery in 2000 of the giant Kashagan field in the Caspian Sea.

Some 120 companies expressed interest in bidding for the contracts at the June 29 and 30 auction, according to the oil ministry. Thirty-five companies qualified to bid, including Exxon Mobil Corp., Royal Dutch Shell PLC, Italy's Eni SpA, Russia's Lukoil and China Petroleum & Chemical Corp., or Sinopec. The six oil fields at stake are believed to hold reserves of more than 43 billion barrels. Foreigners won't get the most prized piece of the action -- ownership stakes in the reserves -- but will be paid fees for ramping up output.

Just over 20 of Iraq's roughly 80 known oil fields have been fully or partially developed, and most of its production comes from just three giants, North and South Rumaila and Kirkuk. Because lots of the black gold is considered relatively easy to extract, oil experts estimate that exploration and development in Iraq costs $1.50 to $2.25 a barrel, compared with about $5 in Malaysia or $20 in Canada.

"We're talking about a huge volume of crude flowing through their system for the companies who win the bids," says Samuel Ciszuk, IHS Global Insight's Middle East Energy analyst. "On the other side, Iraq desperately needs technology, and these companies can bring it."

But Mr. Shahristani, architect of the plan, is under attack from many quarters. Falling oil prices have triggered a budget crisis, and he is being blamed for not boosting production enough to make up the difference. Lawmakers and some oil officials, meanwhile, say the auction will give foreigners too much access to Iraq's resources. Mr. Shahristani also has been called to appear before parliament for questioning about alleged corruption and mismanagement at the ministry.

"He should not continue," says Jabber Khalifa al-Jabber, secretary of the parliament's powerful Oil and Gas Committee. "Let someone who is qualified do the job....I can't name one accomplishment."

Prime Minister Nouri al-Maliki's spokesman, appearing earlier this month with the oil minister, voiced confidence in him and reaffirmed that the auction would take place as scheduled.

In a recent interview, Mr. Shahristani, 66 years old, says he has done nothing wrong, and that lawmakers critical of him have a political agenda. He says he looks forward to answering questions from parliament about corruption and mismanagement.

"I'm not a political animal, and I don't enjoy politics," he says. "The only reason I've accepted and continue with my responsibility is to protect the Iraqi wealth from unclean hands."

Deals in Iraq often are reached over cups of tea late at night, but Mr. Shahristani doesn't like schmoozing. In a capital built on patronage, he has denied plum jobs to longtime friends. He's earned a reputation as a stickler for rules, including cumbersome purchasing regulations that other oil officials blame for slowing down Iraqi oil development. He has refused even small gifts, such as neckties, from visiting oil executives, he says.

In his three years as oil minister, Mr. Shahristani has emerged as a key lieutenant to Mr. Maliki. After violence started to ebb in Iraq in 2008, Messrs. Maliki and Shahristani and a handful of other former Iraqi exiles have pushed an ambitious set of economic reforms.

Western oil companies were kicked out of Iraq in 1972, part of a wave of Mideast petroleum nationalization. Oil production hit at least three million barrels a day before Iraq invaded Kuwait in 1990, then fell sharply to 300,000 barrels after economic sanctions and trade embargoes were imposed. Production rebounded to about 2.5 million barrels before the U.S. invasion in 2003.

Iraqi lawmakers have squabbled for years over a draft petroleum law that would set a legal framework for foreign companies to start drilling again. Tired of waiting, Mr. Shahristani in 2008 unilaterally invited oil companies to bid on contracts. Because global companies are reluctant to explore undeveloped fields in Iraq without an oil law, Mr. Shahristani has focused on getting foreign help pumping from existing fields. "We have done what we can with our national resources, and now we need outside help," he says.

He says the contracts don't need approval from parliament, though he insisted they fit the conditions outlined in the draft oil law, which is now being redrafted in the cabinet. Some of the terms, he says, are particularly beneficial to Iraq: Winners of the auction must fork over hundreds of millions of dollars of cash in upfront loans to the government.

Mr. Shahristani, who grew up in Karbala in a prominent, religious family, is a nuclear scientist by training. After studying in Moscow and spending time in London, he earned masters and doctorate degrees in nuclear chemistry at the University of Toronto. In 1978, he became chief adviser to the Iraqi Atomic Energy Commission.

Saddam Hussein had consolidated power and become president. According to Mr. Shahristani and others, he wanted a nuclear weapon. In a face-to-face meeting with Mr. Hussein, Mr. Shahristani reminded him that Iraq had signed a nonproliferation treaty and was bound by it. Mr. Hussein told him to concentrate on science and leave politics to him, according to Mr. Shahristani and two other scientists at the meeting.

A few days later, in December 1979, security officials took him to Iraq's Internal Security facilities, where he was tortured for three weeks, he says. Mr. Shahristani says his torturers offered him palaces and riches if he would reconsider his refusal to work on nuclear weapons. He declined and was put into solitary confinement, where he remained for 10 years, he says. "But I never lost my will, I never lost my faith," he says.

In 1990, he was released from solitary confinement. A year later, the U.S. bombardment of Baghdad during the first Gulf War sowed chaos at the prison. Another inmate stole some intelligence-corps uniforms and arranged for a getaway car.

One evening, Mr. Shahristani and two others managed to evade guards, duck into a storage room and put on the stolen uniforms. After hiding for several hours, they snuck past some visiting intelligence officers playing cards and hustled out the prison gate.

They met up with their families and snuck across the border into Iran. For the next few years, Mr. Shahristani helped Iraqi dissidents and refugees. In 1995, he and his wife, a Canadian, set up the Iraqi Refugee Aid Council. He became an outspoken critic of Mr. Hussein's regime and of nuclear proliferation.

After U.S. troops poured into Baghdad in April 2003, he returned. He was identified by American officials as a top contender for the prime minister's job. He declined the position because it wasn't an elected one, he says, instead becoming deputy speaker of Iraq's parliament.

Around that time, Mohammed Baqir, a family friend who had helped Mr. Shahristani escape from prison, asked for his help in finding government jobs for relatives. Mr. Shahristani refused. "Shahristani's problem is he is too straight and clean," Mr. Baqir says. "As a politician, you need to be flexible."

After a new government led by Mr. Maliki was formed in 2006, the prime minister named him oil minister. His new ministry, like other government agencies at the time, was overrun by militia members, and corruption was rampant, according to Mr. Shahristani and other current and former oil officials.

Over the next two years, hundreds of ministry employees were murdered or kidnapped. By the end of 2007, many top technocrats had fled the country, and various political parties had filled the ministry with patronage employees, according to Mr. Shahristani and the other officials.

Mr. Shahristani fired 250 members of the ministry's security staff thought to be militia members, and replaced top security officials with people he trusted. He turned over evidence of wrongdoing to the ministry's inspector general, and fired or transferred those suspected of malfeasance.

"Before, there was lots of interference in the ministry from political blocs, but he got rid of all that," says Abdul Mahdy al-Ameedi, head of the ministry's contracts department.

The purge stirred resentment. Some employees claimed they were wrongly targeted. Others accused Mr. Shahristani of being too by-the-book. He cracked down on absenteeism and introduced a card-scan check-in system. He scaled back bonuses.

But boosting oil production significantly proved difficult. Insurgents were attacking pipelines and refineries. Without a legal framework in place, foreign companies were reluctant to come to Iraq. The oil law stalled in parliament.

An impatient government in the semiautonomous Kurdish north decided to move without Baghdad. In September 2007, Kurdish officials signed a deal with Texas-based Hunt Oil Co.

Mr. Shahristani criticized the deal, saying it had no legal standing. The Kurdish government accused him of moving too slowly, and pressed ahead with its deal.

A Western official in Baghdad who has dealt with Mr. Shahristani says he and others advising the government agreed that Mr. Shahristani was moving too slowly. Oil prices were sky-high, and foreign oil executives were eager to get into Iraq. The country needed a "wheeler-dealer type," this official says.

Recently, he dropped his longtime opposition and allowed the Kurdish government to begin exporting oil. He yielded after the Kurds agreed to have Baghdad's central government receive payments for the exports.

In this month's auction, Western firms also are competing to develop two natural-gas fields. All these deals are so-called technical-service contracts. Essentially, Iraq will pay companies a fee for boosting output. The contracts will last 20 years. Oil executives would prefer "production sharing" agreements, which give companies a share of profits, and typically allow them to book new reserves. They are nonetheless eager to get their feet in the door. Mr. Shahristani says companies that offer the lowest costs and most profit for Iraq will win. If the auction succeeds, the winners are expected to begin work in November.

The Oil Ministry is planning a second round of bidding, to cover oil fields that have been explored but not fully developed. Nine of the 38 companies that applied to participate have been chosen as bidders. Those contracts will be awarded at the end of this year.

Mr. Shahristani's term ends when a new government is formed after elections early next year. He plans to return to the Iraqi National Academy of Science, which he established in 2003. "I am not a politician," he says.

—Munaf Mustafa and Jabbar al-Obedi in Baghdad contributed to this article.

By GINA CHON