Bidding war for Iraq's huge oil contracts sputters into life

Government plays hardball in fees payable to international oil companies

Iraq is locked in a struggle with the world's largest oil companies over contracts that would see "Big Oil" return to the Iraqi oilfields for the first time in almost 40 years. The award of contracts began in Baghdad yesterday and was broadcast live on television to show there were no secret corrupt deals. But the process was immediately in trouble as some of the 32 international oil companies involved baulked at the low level of fees they would be paid by Iraq.

The government had hoped they would take risks to become involved once again in Iraq's oilfields, where reserves at an estimated 115 billion barrels of crude are estimated to be the third largest in the world. Iraq wants to raise its faltering oil production, income from which is desperately needed to reconstruct the country after decades of war.

At stake yesterday were six producing oilfields and two undeveloped gas fields, the most important of which is the massive south Rumaila oilfield just north of the Kuwaiti border. The contract finally went to a consortium led by BP and included the China National Petroleum Company, but only after its initial bid, as well as that of a rival consortium led by Exxon Mobil, had been rejected by the Iraqi Oil Ministry as too low. Other fields attracted less interest.

What happens to Iraq's oil will determine the future shape of the world's energy supply. Iraq and Iran are the only countries in the world which are believed to have huge reserves of undiscovered crude, but war and sanctions have prevented exploration. Beneath Iraq's western and southern deserts may be a further 100 billion barrels of recoverable oil. Decades of under-investment, limited expertise and poor management means that Iraq's oil output is falling and at 2.4 million barrels a day is below what it was in the final days of Saddam Hussein in 2003.

The Iraqi Oil Minister Hussain Shahristani has been hoping to attract international oil companies by asking them to provide investment and technology over 20 years in return for a fixed fee to be paid for every extra barrel of oil they could produce over an agreed minimum which may be higher than current production. This is risky for the companies because neither they nor the Iraqi Oil Ministry know the extent of the damage done to the giant reservoirs by reckless exploitation or how much money it will cost to restore them.

At the opening of bids in Baghdad's al-Rashid hotel, the start of which was delayed by one day because of sandstorms, the Exxon Mobil-led consortium asked for a fee of $4.80 for each barrel produced above the minimum, while BP wanted $3.99 a barrel, said Mr Shahristani. He said Iraq would pay only $2, a demand which was finally accepted by BP.

Mr Shahristani, a nuclear scientist who was imprisoned and tortured under Saddam Hussein, has to guard his back from criticism that he is selling out Iraq's only asset. He points out that the companies will not own a single barrel of Iraqi oil and that the country will get an extra $1.7 trillion in revenue over 20 years which will pay for "infrastructural projects across Iraq – schools, roads, airports, housing, hospitals".

Iraqis are frequently suspicious that the secret purpose of the US invasion of 2003 was to seize their oil reserves which are their country's only resource. Playing the nationalist card over oil has been frequent as different political parties and factions vie for its control. Mr Shahristani has been under sustained attack in parliament for not stopping a fall in oil production and for bringing in foreign companies. He responds that Iraq has no choice if it is going to more than double its output to five million barrels a day in five years' time.

The strength of Iraqi nationalism was evident yesterday as Iraqis celebrated, with an enthusiasm not seen for years, the departure of US troops from cities and towns. Boats on the Tigris, which flows through Baghdad, sported Iraqi flags. Soldiers shinned up telegraph poles to tie flags to the top. People drove through the streets with flags and plastic flowers attached to their cars as if they were going to a wedding. Thousands of Iraqi soldiers paraded in the Green Zone in celebration.

The 130,000 US soldiers who remain in Iraq outside the cities and towns will be constrained in what they can do under the terms of last year's Status of Forces Agreement. They cannot arrest Iraqis or carry out military operations without Iraqi permission, while their convoys must be accompanied by Iraqi military vehicles.