Oil industry eyes Iraq investment with caution

By Tom Bergin - Analysis

LONDON (Reuters) - The oil industry is cautious about Iraq's decision to offer foreign companies long-term contracts to develop its largest producing fields, with any windfalls seen as distant and likely to go to a select few firms.

Earlier this month, Iraq said it would offer development contracts aimed at boosting output at six fields by a combined 1.5 million barrels per day (bpd).

The plan is aimed at helping the country lift output to 4.5 million bpd by 2013 from about 2.3 million bpd now.

But Iraq's decision to pay companies a fee for extracting the oil, rather than sell them an interest in fields, dashed hopes of near-term windfalls and may delay big rises in crude production.

"The oil companies don't like service contracts. They prefer production sharing agreements because they are more lucrative, and also they can book the reserves," Muhammad-Ali Zainy, senior energy economist at the Centre for Global Energy Studies said.

International oil companies (IOCs) such as Exxon Mobil (XOM.N) and Royal Dutch Shell Plc (RDSa.L) usually operate by either owning a field and paying taxes on production or by having a production sharing agreement (PSA) under which they fund a project in return for a share of the oil.

Under such deals they can benefit when oil prices rise or when technology allows them to squeeze more barrels from the field or cut operating costs.

Also, these deals allow companies to add the field's reserves to their accounts, a key metric used by investors to assess the value of an oil company and its production prospects.