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Dragon Oil (LON:DGO) today took another step towards diversification as it secured a new exploration project in Iraq.
This morning it revealed that it was part of a consortium that has been awarded the rights to Block 9, in the Basrah Province of southern Iraq. This was part of Iraq’s fourth bidding round.
The firm’s flagship asset is the highly cash generative Cheleken oil field in the Caspian Sea, where it is scaling up production to 100,000 barrels a day by 2015. And in recent months it has been assessing several opportunities to expand its business into new areas.
“Entry into Iraq has been under consideration for some time and so represents a strategic move for Dragon Oil,” said chief executive Dr Abdul Jaleel Al Khalifa.
It will be a joint venture with Kuwait Energy (operator, with 40 per cent) and Turkish Petroleum Corporation (owning 30 per cent). Dragon will own 30 per cent of the venture.
And unlike contracts awarded previously by the Iraqi government this represents an award of exploration acreage rather than existing oil and gas fields.
Dragon revealed that the consortium will have five years to assess whether or not Block 9 can be developed into a commercial oil field. If successful the consortium can then apply for a 20-year development licence.
Through the terms of the contract the consortium will receive US$6.25 per barrel of oil equivalent. This relates to subsequently produced oil, should a commercial discovery be made and developed, and it kicks in once a prescribed level of production has been reached.
The Iraqi bidding round takes is effectively a reverse auction, whereby competing bidders apply for the contracts with a volunteered remuneration fee – and the lowest fee wins.
It is reported that 47 companies are eligible to apply for the 12 new blocks on offer in this bidding round, which is the fourth in the post-war period.
Analysts are following the outcome of the bidding intently to gauge the industry interest in Iraq, where they believe less favourable terms are putting off major investors.
In a note yesterday Credit Suisse analyst Thomas Adolff said Iraq has ‘failed to create an ideal operating environment’ for oil companies unlike Kurdistan’s regional government in the north of the country – which has seen a boom in investment in the past 2 years particularly.
He warns that Iraq’s latest bidding round may show signs that international oil companies are losing interest.
“Recently, we have started to see some exodus, and possibly the 4th licensing round may provide further signals.”
He adds: “The failure to attract relevant IOCs and further exodus of relevant IOCs will impact longer-term production growth in Iraq. We look to the fees offered in the 4th licensing round, whether Baghdad may be forced to offer better terms for exploration risk.”
Meanwhile for Dragon Oil the move into Iraq is significant as it has the potential to add exploration upside to what is already a rewarding, albeit predictable, production growth story.
“This was an exploration bid round and, consequently, this award leading to a long-term partnership with Iraq for the exploration of their natural resources represents a milestone for Dragon Oil's exploration strategy in this country.”
He adds: "We look forward to working closely with our joint venture partners to apply our experience and technology in Iraq.
“Today's announcement marks a significant achievement towards the diversification of our asset portfolio for Dragon Oil."