INTERVIEW-BP hopes to sign Iraq service contract midyear

DOHA, April 7 Mon Apr 7, 2008 8:42pm BST

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DOHA, April 7 (Reuters) - BP Plc (BP.L) hopes to sign within a few months a service contract designed to boost output in Iraq by 100,000 barrels per day (bpd), a senior BP executive told Reuters on Monday.

The deal is one of five that Iraq is negotiating with oil majors to boost output by 500,000 bpd, or nearly a quarter, from its largest oil fields. Iraqi officials had hoped to sign the deals by early April.

"I'd say we might sign around the middle of the year," said Steve Peacock, president of BP's Middle East and South Asia exploration and production unit. "These are active discussions with serious intent, there is no sense that they've stalled or reconsidered, it's just taking longer than anticipated."

Payment terms for the service contracts were yet to be concluded, Peacock said. Iraq has said each contract could be worth up to $500 million.

Iraq wants to sign two-year technical service contracts with oil majors as part of stopgap measures to boost oil production in the absence of a vital oil law. Legislation to set the terms and extent of foreign investment in the country has been stalled in parliament for more than a year.

"In this politically sensitive and difficult situation service contacts are a pragmatic step forward for Iraq," Peacock said.

Majors would prefer contracts that offer long-term involvement in Iraq and were looking for a link in the service contracts to future development of Iraq's giant oil fields.

"Whether it gets linked into the contract or not -- it's a natural question that's on the table. These contracts are valid for a couple of years; how does that link with what comes afterwards?" Peacock said.

The longer-term link would help ensure that work undertaken under the two-year service contracts would be in line with future field development plans, he added.

Peacock said he was confident that the majors and Iraqi negotiators would come up with a contract that gave an incentive for firms to use all their skills and expertise, while at the same time respecting political opposition in Iraq to deals that gave companies a share in production.

The terms of the contracts could set the pace of oil field development for years to come, he said.

"I think it's important acknowledging the political sensitivity of using barrels as a form of reward," Peacock said.

"That shouldn't be confused with giving up national sovereignty over the ownership -- that's never in question. The question is, do you want to use barrels or cash as a form of reward? Whichever it is, I think, is going to be key for the long term. It will determine how fast production can be realised and how fast new developments can be brought on stream."

The service contract Iraq is negotiating with is for the giant Rumaila oil field in the country's south. The target to boost output by 100,000 bpd from the field was possible, although to do so in two years would require an aggressive development plan, Peacock said.

The contracts call for larger project management roles in the fields than the majors previously had. Aside from boosting production and long-term planning, the oil firms would be required to bring in supplies to Iraq. Majors will supervise the work from outside of the country as security concerns will prevent them from sending in ground staff, at least initially.

The companies have studied the same fields and for years provided training and technical assistance as they look to position themselves for any future contracts.

"We've studied the whole of the rest of the country, so we're waiting for what comes next after the service agreements. And we have an opinion on which bits we'd be more interested in," Peacock said.

KUWAIT, OMAN

BP was in similar discussions in Kuwait for a service contract there, Peacock said.

Kuwait aims to include a performance-related clause in its service contracts that would increase the attraction for signing up for international oil companies.

Discussions currently revolved around the details of that clause, Peacock said.

"If Kuwait were to pay more for that expertise, how could that be justified? One way to justify it is to link it for achievement of output. The devil is in the details -- how aggressive are the targets and how much do you get paid if targets are met?" Peacock said.

The contracts would likely be concluded over a period of months rather than years, he added.

In Oman, drilling would start on BP's project to develop tight gas reserves by the end of the fourth quarter, Peacock said.

The company is evaluating different ways of commercialising gas output from early appraisal wells, he added.

BP won a contract to develop tight gas reserves in Oman in early 2007. The reserves are in complex formations from which it is difficult to extract the gas. (Reporting by Simon Webb, editing by Matthew Lewis)