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Dec 14, 2009, 05.21 PM IST
Oil majors Royal Dutch Shell Plc and Total are not expected to generate big profits from the deals they signed with Iraq on Friday, and their suppliers could instead be the real beneficiaries.
Shares in Shell, Europe's largest oil company by market value, lagged rivals slightly after Iraq awarded it and Malaysia's Petronas a contract to develop the 13-billion-barrel Majnoon field, which should generate over USD 900 million a year.
Investors in France's Total were also unimpressed when the China National Petroleum Corp-led consortium it was a member of won the contract for the 4.1 billion barrel Halfaya field contract.
"The reserves potential from those fields is exciting but the terms are not generous," said Richard Champion, fund manager at Principal Investment Management, which owns Shell stock.
In contrast, when Europe's second-largest oil company, BP, announced in September that it had discovered an oil field in the Gulf of Mexico, with recoverable reserves of around 700 million barrels, its shares jumped 4 percent.
The reason for investors' scepticism over Iraq is that though the volumes are high and the costs of extraction low, the companies will receive a low, flat fee and will not benefit when oil prices rise.
"The fee of USD 1.39 per barrel doesn't exactly strike me as being huge given the returns you can get on a conventional oil development in Brazil or the Gulf of Mexico," Peter Hitchens, analyst at Panmure Gordon said of Shell's contract.
Shell has said it achieves a margin of USD 2-4 a barrel in the Niger Delta, USD 20 in the Gulf of Mexico and USD 10-12 in the UK North Sea.
"History tells us that when the oil is easy to find and extract, the financial terms offered to foreign oil companies are very poor," analysts at Bernstein said in a note on Iraq last month.
Foot in the door
Oil companies justify their interest in Iraq by saying it will give them a presence from which they will be able to build a profitable business in the future.
"Their view was not so much about the returns on the project but in getting their foot in the door," said Hitchens.
Restricted by local laws or international sanctions from investing in big fields in energy-rich countries such as Russia, Saudi Arabia and Iran, the oil majors are struggling to add reserves and Iraq represents a rare opportunity to book billions of barrels on their balance sheets.
However, not everyone is convinced of the long-term opportunity.
"All the talk of the importance of gaining a foothold in the country for future opportunities is likely to be wishful thinking," Bernstein added.
Shell shares traded down 0.4% at 1,815 pence at 1626 GMT, against a 0.33% rise in the DJ STOXX European oil and gas sector index. Total shares traded up 0.28%.
Services compnaies to gain
The outlook is seen as better for the companies which will supply the winners of the contracts with rigs, pipes and pump stations.
Iraq said the contracts will help it lift output to 10 million barrels/day in 6 or 7 years -- comparable with Russia's current output and levels Saudi Arabia achieved before the Oranisation of Petroleum Exporting Countries (OPEC) cuts in the past year.
This will require tens of billions of dollars of investment in facilities, leading analysts at Morgan Stanley to predict a "boom" for oil services companies.
Companies including Schlumberger, Halliburton and Baker Hughes have said they are in talks or are looking to enter the Iraqi market.
Analysts do not expect the contracts the oil services firms will sign to face the same political scrutiny that the oil field contracts faced, because the sensitive issue of control of oil reserves is not at stake.
Consequently, the government is unlikely to be so focused on driving a hard bargain.
Also, able to operate in countries from which the oil majors are barred, the oil services companies are not under the same pressure to sacrifice margins for business in Iraq.
"I don't expect the same degree of bidding frenzy from the service companies as we saw from the oil companies," said Keith Morris, oil analyst at Evolution Securities.
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