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Costs and security fears weigh on Iraq oil auction

Only two deals were struck, but Baghdad looks ahead to production and the resulting revenue.

BAGHDAD - Iraqi officials cheered and clapped as the first oil field up for bid went to a major international consortium at the opening of the country's biggest postwar auction yesterday. But from there, the chill set in.

Oil executives from around the world made deals on only two fields, both in Iraq's relatively stable south, while shunning six in regions with sporadic violence where the risk outweighs the profits that the Iraqi government is offering.

Iraqi officials portrayed the day as a success because they secured deals that will ramp up production in the two giant fields. But the lack of energetic bidding highlighted Iraq's difficulties in turning its wealth of oil - the world's third-largest reserves - into a financial bonanza.

Energy experts say Iraq has been tightfisted in the deals it has offered major producers. There is also a long-running feud between the central government in Baghdad and the Kurds over control of petroleum reserves in the north.

Security is yet another issue, particularly in central Iraq and areas north of the capital. Violence in general has been down for more than a year, but dramatic attacks still happen. Bombings killed at least 127 people in Baghdad on Tuesday.

"Iraq can absolutely get big commitments" from oil firms, said Samuel Ciszuk, Mideast energy expert with London-based IHS Global Insight. "But with the current situation, they can only make progress on the biggest and cheapest fields" where the security risks and development costs are low.

One big reason oil majors haven't rushed back into Iraq are the terms that the government is offering. Companies must accept 20-year service contracts and receive a flat fee per barrel produced for their services instead of production-sharing contracts, which are much more lucrative.

Iraq's first postwar international oil auction in June, billed as oil companies' first chance in over three decades to grab a share of Iraq's oil wealth, was an embarrassment. It netted only one deal on the spot: Britain's BP and CNPC nabbed the 17.8 billion-barrel Rumaila field in the south. Two other deals in the south were brokered later.

Yesterday's deals involved a partnership of Royal Dutch Shell and Malaysia's Petronas for a southern field with an estimated 12.6 billion barrels of oil. The second field, Halfiya, went to a consortium led by China National Petroleum Co. It holds 4.1 billion barrels.

Major U.S. oil companies have not spoken publicly about the bidding process, saying only that there is interest in Iraq.

Mark Gilman, an analyst with the Benchmark Co., said most oil companies wouldn't put up with the risks in Iraq were it not for the vast reserves underfoot. "The reason for participation, in my view, is to get a foot in the door," he said. Oil companies are wagering that not only will the security improve, but the country will also eventually offer more lucrative production deals, he said.

Drawing in international oil powerhouses is vital for Iraq, which relies on petroleum for 90 percent of its government budget. It may also be crucial for an energy-hungry globe.

The International Energy Agency predicted yesterday that global oil demand would rise slightly faster in 2010 than previously forecast, driven by increased economic activity in Asia and the Middle East.

Gates Meets With Troops

Defense Secretary Robert M. Gates said yesterday that plans were on track to reduce U.S. forces in Iraq in 2010 and that Iran risked sanctions if it

failed to cooperate on its nuclear program.

Speaking to soldiers and airmen in Kirkuk, Gates was asked whether political turmoil might threaten plans to send more U.S. troops home after Iraq's March elections. He said all indications are that Iraqi leaders are tired of war and want a united country.

Gates also said significant international sanctions would be levied if Iran continued its nuclear program, adding that all options, including military action, must stay on the table.

On Afghanistan, Gates said that troops would face a "tough fight" but that the security situation would improve as more troops arrive.

Earlier, he met with Prime Minister Nouri al-Maliki and expressed condolences for bombings that claimed 127 lives this week. He offered any help Iraq might need.

The bombings have raised tough questions about the ability of Iraq's security forces ahead of next

year's phased withdrawal of U.S. troops.

The U.S. says it plans to keep the bulk of its 120,000 forces in Iraq through the March 7 elections, but plans to leave the country entirely by December 2011.

- Associated Press