Iraq Launches Historic Oil And Gas Auction

Iraq will auction off eight giant oil and gas fields on Tuesday in its first major tender since 2003, giving oil firms a foothold in a country that may hold some of the world's largest untapped energy reserves.

Private jets flew representatives from leading global firms like Exxon Mobil <XOM.N> and Total <TOTF.PA> into Baghdad, a city still ringed by blast walls and gripped by violence, to place their bids for the 20-year development contracts.

The companies are wading into a morass of controversy surrounding the deals, which some Iraqi lawmakers condemn as illegal and which even some within the state-run oil industry have criticised for selling Iraq's vast oil wealth short.

Over six years after Saddam Hussein's ouster was supposed to unleash Iraq's oil potential, the auction marks the first real centre-stage moment for the Oil Ministry, under growing pressure to boost disappointing output around 2.4 million barrels a day.

Iraq has proven oil reserves of 115 billion barrels, the world's third largest, but the true amount of black gold sitting beneath Iraq's desolate deserts could be far greater.

The auction, delayed by a day by a sandstorm, will be broadcast live from a hotel in Baghdad's fortified Green Zone in a process Iraqi oil officials insist will be fully transparent.

Firms from the countries that launched the 2003 invasion, which triggered years of chaos and bloodshed, will be neither favoured nor disadvantaged, they say.

Six of Iraq's largest oilfields, which are already producing, and two natural gas fields, which have barely been tapped, will be auctioned off one at a time over the course of the day, and the auction may stretch into Wednesday if necessary.

For oil firms, the allure may be more about getting a foothold in Iraq's oil sector than about the amount of money they expect to make in these deals, which are fixed-fee service contracts rather than the production-sharing deals they prefer.

Winning firms must pay Iraq $2.6 billion in signature bonuses and cover Iraq's 25-percent share of development costs, which it will pay back in oil.

It will take a great deal of money to reverse the decades of war, sanctions and neglect that have left Iraq's oil sector rusting, out-of-date, and unable to leverage enviable resources.

Oil Minister Hussain al-Shahristani, a nuclear scientist, says the deals will bring Iraq $1.7 trillion over 20 years. He defended the contracts when he was summoned to parliament last week by sceptical lawmakers who insist the deals will be illegitimate unless they are sent to parliament for approval.

The contracts also came in for condemnation from minority Kurds, who have signed their own deals with foreign firms and who are warning they could make it difficult for companies to work around the disputed, oil-producing city of Kirkuk.

Parliament's failure to pass new energy legislation due to disagreement between Kurds and Arabs, raises more questions for firms coming into Iraq, as do national elections scheduled for January that could bring upheaval to a fledgling democracy.

But oil majors appear willing to confront the risks, and ongoing violence, for a chance to work in a place with such large untapped reserves.

Later this year, Iraq is due to offer another set of fields that are even more appealing since they are undeveloped.