OVL managing director DK Sarraf told FE that previously, foreign oil companies were awarded service contracts where they were given an assured rate of return on capital, but now they are paid a fixed fee per barrel of oil produced. We have recently held two rounds of negotiations. The new contractual system will not be disadvantageous to us, said Sarraf.
It was earlier reported that OVL might have to spend over $ 1.5 billion in exploration of the block and a similar amount in developing it, but these could be not be verified.
An oil ministry official, however, said OVL might have to sweeten the offer. The ground realities have changed in Iraq since the war. There is a new government in place now. OVL is keen on retaining Block 8, but the Iraqis are seeking a new deal that would be more favourable to them. The last meeting between the two sides was held in August and they will meet again soon, the official said. The renegotiation follows a visit to Iraq by oil minister Veerappa Moily in July. During the visit, Iraq also offered India contracts for three oilfields without needing to bid for them.
Iraq moved to the new service contract model in 2009 when it held its first round of licensing of hydrocarbon blocks after the war. The oil firm in the service contract will be the operator of the block earning fees per barrel sold without holding any equity in the field. Iraq has so far held four rounds of licensing since the end of the Saddam era.
In keeping with its interpretation of the constitution, Iraq, through its state-run oil companies, maintains control over upstream petroleum development. Analysts, however, note that Iraq's previous round of licensing held in 2012 saw poor international turnout partly due to the stringent contracts that offer a fixed fee per barrel of oil instead of an equity stake, infrastructure bottlenecks and political instability.
Sunjoy Joshi, director, Observer Research Foundation, said that service contracts are suitable in countries where the risks in exploration of hydrocarbons are lower and the prospectivity is higher, like in Iraq. Less prospective countries like India offer equity stakes to foreign companies in order to attract foreign investments and technology.