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Chevron and Reliance close deal in Kurdistan oil fields

Chevron to acquire Rovi and Sarta in Iraqi Kurdistan

Following ExxonMobil to move first in Kurdistan in signing six oil field development licenses in November 2011, Chevron is also entering Kurdistan, in the northeastern Iraq, in dealing with Reliance Industries Limited (Reliance) from India

According to the contract signed between parties, Chevron will acquire the 80% working interest that Reliance had in the Rovi and Sarta blocks in Kurdistan.

Reliance had bought the Rovi and Sarta blocks in 2008 for $17.5 million and is reported to have sold it to Chevron on $200 million basis.

The Austrian OMV AG (OMV) holds the other 20% of Rovi and Sarta.

OMV‘s position should remain unchanged after the transaction between Chevron and Reliance.

Before this acquisition, Chevron and Reliance had already closed agreements in the past.

In 2009, Chevron sold back to Reliance its 5% stake in the Jamnagar refinery in India and in 2011, Chevron acquired Atlas Energy, the Reliance’s partner in US shale gas development.

Chevron‘s decision to invest capital expenditure directly in Kurdistan results from the previous campaigns of the Iraq Government to license its oil and gas fields.

Organized through licensing rounds, Chevron did not succeed to take any position in these oil and gas fields proposed by the Iraq Government  due too demanding conditions.

Iraq’s fourth round of bidding for oil and gas fields licenses was held in May.

Only three blocks of the twelve initially proposed were awarded in May and a fourth one in July.

Too tough contract terms deterred International Oil Companies (IOCs) to submit offers.

Under the agreement with Kurdistan Regional Government (KRG), Chevron must drill two wells by November 2013.

Production sharing contracts against Technical Services Contracts

The licensing rounds organized by the Iraq Government are to propose Technical Service Contract (TSC) to the International Oil Companies (IOCs), while the Kurdistan Regional Government (KRG) in signing classical production sharing contracts (PSCs).

Together with the concessions, the production sharing contracts are the most common form of contracts used to license oil and gas fields between the producing countries and the IOCs.

Through the production sharing contracts the licensing country and the IOCs can share the revenues, costs and risks in conditions defined case by case.

Far different from the production sharing contracts, the Technical Service Contract, or TSC, concentrates all the capital expenditure and risks to the IOCs while revenues go back to the country.

The IOCs are only compensated by a remuneration fees per barrel (RFB) produced.

The amount of this remuneration fee will condition the profitability of the license for the company.

In Iraq the Federal Government awarded these Technical Service Contracts based on reverse auctions on the remuneration fees.

As a result the first licensing rounds led to Technical Service Contracts signed with $2 or less remuneration fee per barrel for the companies.

One of the most important field awarded during these rounds was West Qurna 1, won by ExxonMobil and Shell in November 2009.

Some key figures give an idea of the challenges proposed by these Iraq Technical Service Contracts:

 – $25 billion Capital expenditure

 – $25 billion Operating costs over the TSC duration period of 20 years

 – $1.9 Remuneration Fee per Barrel

In these conditions and after experienced the return on capital employed on West Qurma 1, ExxonMobil, followed by Chevron and now Total, may see the classical production sharing contracts in Kurdistan more attractive than Iraq Technical Service Contracts, even if some additional risks must be considered, such as tensions with Iraq Federal Government.

Kurdistan Regional Government resumes oil export to open discussions with Iraq Federal Government   

Since 2003, Kurdistan managed to attract foreign oil and gas companies and to sign 50 exploration deals.

Mostly second-tier international oil companies (IOCs) or wildcat explorers, these pioneers in Kurdistan knew to have little chance of success with Baghdad licenses rounds.

Baghdad declared all these contracts as illegal and suspended payments of the corresponding exported oil.

Kurdistan‘s reaction came last April in stopping crude oil export.

Despite these disputes, both parties needs the revenues of this oil and the contribution of the oil and gas companies to their development as providing jobs and economical growth.

So the Kurdistan Regional Government (KRG) has decided to resume the export of crude oil at 100,000 b/d with the support of the producing companies not being paid in the meantime.

These deliveries should take place all along August month in expecting to resolve the payment issues to the companies with Iraq Federal Government and then to increase export in a second phase to 200,000b/d. 

Even if there are many rocks on the road ahead of the oil and gas fields development in Kurdistan, the international oil companies (IOCs) like, ExxonMobil, Chevron and Total, see in Rovi and Satra blocks a long term opportunity to take position in the northeastern of Iraq from now, in the meantime to settle an agreement with Baghdad

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