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Iraq & BP Considering Kirkuk Field Deal

Source: The Wall Street Journal 1/17/2013, Location: Middle East

Iraq is considering a multibillion-dollar deal with U.K. oil major BP PLC to double the output from the Kirkuk oil field, a senior Iraqi oil official said. The field is one of the country's largest resources but lies in a disputed territory.

Abdul Mahdy al-Ameedi, head of the oil ministry's petroleum contracts and licensing directorate, told The Wall Street Journal that a request has been sent to the cabinet to approve contract negotiations with BP on developing the Kirkuk field, which is suffering from falling output because of a long period of neglect.

London-based BP is one of several international oil companies already redeveloping old oil fields in the south of Iraq, with the aim of more than doubling the country's oil production to eight million barrels a day by 2015. The award of the contract to redevelop the large Kirkuk field, in northern Iraq, has been delayed in part because it lies in an area whose control is disputed between Baghdad and the government of the semiautonomous Kurdish region.

The Kurdistan Regional Government said in a statement on its website that the proposed agreement between Baghdad and BP would be illegal and unconstitutional as long as the dispute over sovereignty of the province continued.

Production at Kirkuk, discovered in 1927, has declined to 260,000 barrels a day from 900,000 barrels a day in the early 2000s, after years of injecting water and the dumping of unwanted crude and other oil products in the field. "We want to bring output from the field to 600,000 barrels a day," said a former Iraqi oil industry official. Production from the field is declining on a daily basis, he said.

A spokesman for BP said its proposal is for short-term technical assistance to Iraq's North Oil Co., which will continue to operate the field. The proposal is still at a very early stage and neither the terms nor the duration of the assistance, which would be focused on improving output from the field, have been agreed, he said.

In addition to BP, two oil-services companies, Schlumberger Ltd. and Baker Hughes Inc., have also held talks with the oil ministry on upgrading Kirkuk, said the former oil industry official.

BP is already working in southern Iraq. It is redeveloping the 1.35 million-barrel-a-day Rumaila oil field, Iraq's largest. The company was awarded the Rumaila field during the first post-war bidding round for oil contracts in 2009.

Mr. Ameedi said that some of the terms in BP's contract in southern Iraq could also apply to the Kirkuk deal, with amendments. "Seventy percent provisions of the [possible] contract with BP to develop Kirkuk are ready," he said, without giving further details.

Kirkuk was one of the fields auctioned by Baghdad in 2009. A consortium led by Royal Dutch Shell PLC offered to boost output from the field to 825,000 barrels a day for a fee of $7.89 for each extra barrel of oil it produced, but Baghdad insisted on a payment of $2 a barrel.

Most of the international oil companies that took part in the 2009 auction didn't submit bids for the Kirkuk field because the situation in the province has been unstable since the U.S.-led war against the regime of Saddam Hussein in 2003. The government of the Kurdish region says Kirkuk is part of Kurdistan and should be annexed, while Baghdad wants Kirkuk to remain under its control.

Tensions have recently been high between Baghdad and the Kurdish capital, Erbil. In addition to the dispute over Kirkuk, the two sides are arguing over whether the Erbil government has the right to award exploration licenses on its territory, whether it can strike its own oil export deals with neighboring Turkey and over delayed payments for previous crude exports.

The two sides late last year moved additional troops into disputed areas along the border of the Kurdish region, prompting fears that fighting could break out.

Mr. Ameedi also said Thursday the Iraqi Oil Ministry has signed an agreement with Russian oil company OAO Lukoil Holdings to reduce their oil production target at the West Qurna-2 oil field by a third to 1.2 million barrels a day. This is in line with Baghdad's decision last year to reduce its oil output target to nine million barrels a day from 12 million barrels a day.

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