BP set for Iraqi oil licence as cabinet approves deal

Group will share rights over 17bn barrel Rumaila field with China's state-owned CNPC

Iraq's cabinet has approved a deal with BP to develop the huge Rumaila oil field in the country's first international energy deal since the American-led invasion in 2003.

The agreement, which was brokered in June during the first round of tendering for licences to exploit Iraq's enormous and largely untapped hydrocarbon resources, should also send "a strong signal" to other energy groups that the Iraqi administration is keen to secure deals.

Abdul-Mahdy al-Ameedi, the deputy director of Iraq's Petroleum Contracts and Licensing Directorate, said: "We believe that we have a strong pillar now for our work toward realising our plans." Mr al-Ameedi was speaking in Istanbul, where Iraqi officials are meeting oil companies ahead of a second tender of oil-field contracts due in December.

Separately, Iraqi officials have also reopened talks with Royal Dutch Shell about a revised offer for licences connected to an oil field in the city of Kirkuk in the north of the country.

BP will share the licence to extract oil from the Rumaila field near Basra with China National Petroleum Corporation (CNPC), the state-owned parent of PetroChina, and the Iraqi oil ministry. A spokesman for BP yesterday refused to confirm that the deal had received official sanction, adding that the company had heard only reports of the approval and had not spoken with Iraqi officials directly.

Analysts estimate that the Rumaila field has the potential to produce 17 billion barrels during its lifetime, with Iraq aiming to increase production at the site by 2 million barrels a day.

The country has the world's third biggest oil reserves, but has suffered from a lack of investment and United Nations restrictions on exports during the Saddam Hussein era. In more recent years, insurgent attacks on Iraq's oil fields have also hampered supplies.

Most of the 32 companies that originally joined the tender process for licences connected to six oil fields and two gas fields, including the likes of Exxon Mobil and Total, withdrew complaining that the terms imposed by the Iraqis were not generous enough. BP and CNPC agreed to run the Rumaila field after Exxon Mobil turned it down.

Iraq's oil ministry offered 20-year service contracts, which stipulate that companies would not be paid anything until a minimum level of production, almost the amount already being produced at Rumaila, was reached. Above that point, the companies would be paid a certain amount per barrel up to a maximum level stipulated by the ministry.

The maximum amount being offered by the ministry in the case of the Rumaila field was a lot less than the oil companies were initially asking for: Exxon Mobil declined to accept the maximum payment, but BP and CNPC, which had originally asked for $4 a barrel, agreed to do the work for $2 a barrel. They will also be able to bill the ministry for the costs of the work the two groups have to do on the production facilities.

The deal between Iraq's government and the energy companies has caused anger among anti-war protesters, who have argued that the decision to invade Iraq in 2003 and to topple Saddam Hussein's regime was linked to oil, rather than ridding Iraq of weapons of mass destruction, which were not found following the war.

"We always said that this war was at least in part to grab the resources of Iraq, despite the wishes of the vast majority of the Iraqi people and the oil workers' union themselves," said Lindsey German, convenor of the Stop the War Coalition.

"The oil companies and the governments backing them have decided to privatise the oil industry. It confirms exactly why we went to war in the first place. People should look at this and remember all the high-flown moral reasons we were given for going to war."