UPDATE 2-BP, CNPC sign Iraq's 1st big post-invasion oil deal

By Ahmed Rasheed BAGHDAD, Nov 3 (Reuters) - British oil major BP Plc and China's CNPC on Tuesday signed Iraq's first major new oil deal since the 2003 U.S. invasion, snapping up a development contract for the Rumaila oilfield, one of the world's biggest. The 20-year contract for the southern oilfield is the first of several deals Iraq expects to sign in the coming weeks and months as it tries to catapult itself to third place from 11th in the league of oil-producing nations. The deals face huge political risk. There is no guarantee the next government following an election in January will honour them, and Iraq is still wracked by political violence and bomb attacks by Sunni Islamist insurgents, such as al Qaeda. As Iraq emerges from the sectarian carnage unleashed by the invasion, foreign capital and expertise is crucial to reviving the oil sector and raising the billions needed to rebuild. The country holds the world's third largest crude reserves but has failed to ramp up production significantly after decades of war, sanctions and underinvestment. "With these contracts Iraq has started a new phase. In the past, Iraq's oil was used to finance war, to kill Iraqis and to attack neighbouring countries," Oil Minister Hussain al-Shahristani said. "A fortune was wasted and Iraq's oil was a disgrace to the lives of Iraqis ... This fortune will now fund reconstruction and rebuilding and improve the lives of all Iraqis." Rumaila, with 17 billion barrels in estimated crude reserves, is the workhorse of Iraq's oil industry, producing almost half its total output of 2.5 million barrels per day. The field's reserves alone are bigger than Algeria's. BP and its Chinese partner expect to increase Rumaila's output to 2.85 million barrels per day. BP's chief executive, Tony Hayward, said the company would invest $15 billion. "It is a very significant undertaking, indeed." OTHER DEALS IN PIPELINE Iraqi oil experts say they do not expect BP and CNPC to pump billions into Rumaila immediately, partly because of uncertainty over the outcome of parliamentary elections in January. The contract allows them to start slow -- they must spend $300 million over the first 33 months and ramp up production by 10 percent initially. That production increase can be easily achieved by repairs to the infrastructure and by going after "low-hanging fruit," said Mahmoud al-Jubouri, an oil expert with Iraq's South Oil Company, which has run Rumaila and will be BP's partner. "They will try to reduce spending, fearing possible bad surprises in the future," he said. Rumaila was the only one out of six oilfields and two gas fields on offer that was successfully auctioned off in Iraq's first tender of development contracts at the end of June. Other oil companies balked at Iraq's stiff terms. But subsequent negotiations behind closed doors and the sweetening by Iraq of its taxation terms have since narrowed the differences between the oil ministry and the companies and several other contracts are expected to be finalised soon. Among them is the 4-billion-barrel Zubair oilfield in the south. Italy's Eni, U.S. major Occidental Petroleum Corp and South Korea's KOGAS inked an initial deal over Zubair on Monday. Another is the 9-billion-barrel West Qurna oilfield, and Iraq is also talking to Royal Dutch Shell about resubmitting a bid for the Kirkuk oilfield in the north. The Rumaila, Zubair and West Qurna deals alone are expected to add 4.5 million barrels per day to Iraq's oil output capacity, roughly equal to 5 percent of global oil supply. A second auction of 10 largely undeveloped oilfields will be held on Dec 11-12. In addition, Iraq is expected to sign a different kind of deal with Japan's Nippon Oil Corp for Nassiriya. The deals bode well for Iraq's second round of tenders, which analysts expect to attract interest. "Even if the 'wrong' faction win in January and say, 'we're going to scrap all these contracts,' in that case, the companies would not have had any time to invest anything," said Samuel Ciszuk of IHS Global Insight. So why not bid in December? (Additional reporting by Khalid al-Ansary, Aseel Kami, Jack Kimball in Baghdad, and Barbara Lewis and Tom Bergin in London; Writing by Michael Christie; Editing by Barbara Lewis) Keywords: IRAQ OIL/ ([e-mail]; [phone]; Reuters Messaging: [e-mail]) COPYRIGHT Copyright Thomson Reuters 2009. All rights reserved.

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