Oil prices surge as Iran moves on disputed Iraqi oilfield

:: 21 Dec  2009 ::

Dubai (Platts)
 
    US oil futures surged by nearly $1.50/barrel Friday after reports that
Iranian forces had crossed into Iraq and raised their flag over a border field
amid conflicting reports as to the seriousness of the incursion.

     The field, known as Fauqa or Fakka, lies in the border province of Missan
near the Iran/Iraq border, in an area still littered with mines left over from
the 1980-1988 war between the two OPEC oil-producing countries over control of
a vital waterway that forms their southernmost border.

     Fauqa is one of Iraq's smallest and oldest oil fields, believed to be
producing currently an estimated 20,000 b/d. It was one of three Missan fields
offered to international oil companies in Iraq's first bidding round but was
not awarded.

     Iraqi interior minister Jawad al-Boulani said an interview on Dubai-based
al-Arabiya television, which was the first to report the story, that the
Baghdad government was following the incident very closely and hoped to
resolve the matter diplomatically.

     "The incident involves well number 4 of the Fauqa field," Boulani said.
"The Iraqi government now through constant contacts through the interior
ministry, the ministry of oil and the foreign ministry as well as the prime
minister are following this matter very carefully."

     He added: "The prime minister is trying to resolve the matter
diplomatically."

     US CONFIRMATION

     French news agency AFP quoted a US military spokesman in Iraq as
confirming the incident.

     "There has been no violence related to this incident and we trust this
will be resolved through peaceful diplomacy between the governments of Iraq
and Iran," the spokesman told AFP at Contingency Operating Base Adder, just
outside the southern Iraqi city of Nasiriyah.

     "The oil field is in disputed territory in between Iranian and Iraqi
border forts," he said, adding that such incidents occur quite frequently.

     The French news agency quoted an oil industry source as saying that Iran
has prevented Iraqi oil officials from reaching the well, located east of the
city of Amara. The Iraqis have accused Iran of firing on their people,
something Tehran has denied.

     The National Iranian Oil Company and Iraq's state-owned Missan Oil Co.
Oil signed two memoranda of understanding July 15 on management of joint
border oil fields. The agreement covered research, training and drilling
services.

     Iranian oil ministry news agency Shana said at the time that Iran had
expressed readiness to provide Iraq with drilling, exploration, seismology and
demining services.

     China's CNOOC and Sinochem were sole joint bidders for a long-term
service contract to develop the 100,000 b/d Missan oil field when Iraq
auctioned six oil and two gas fields in its first bidding round on June 30.
The bid failed after the Chinese state-owned giants refused to lower their
remuneration fee.

     The Chinese joint venture submitted a bid offering to raise production
from the Missan field to 540,000 b/d.

     The Missan contract area comprises a cluster of three fields--Buzurgan,
Abu Ghirab and Fauqi. First oil production from the area began in 1976, but
was suspended in 1980 because of the Iran-Iraq war and did not restart until
1998. The area around Missan is heavily mined and the Iraqis said they would
bear the cost of demining, which is already under way.

     Oil prices held on to their gains several hours after the report first
surfaced. Front month US light futures were up $1.69/barrel at $74.34/barrel
at 1429 GMT, largely because of the Iraq news, traders said.

     There was no word from Tehran about the incident.

     Iraqi foreign minister Hoshyar Zebari, reached shortly after the reports
surfaced, said he did not have details of the incursion but that he would not
be surprised given that the demarcation of the border fields was unresolved.

     "I would not be surprised if the Iranians took action. You know we have
not demarcated the borders of these shared fields yet."

     IRAN'S MOTIVE A MYSTERY

     Analysts were trying to analyze the motives behind the timing of the
Iranian move, which came just after Iraq had a successful second oil auction
that its oil minister Hussein al-Shahristani said would raise production
capacity to 12 million b/d within six years.

     Iran's own oil production capacity has been stagnant at around 4 million
b/d and it faces declines from its reservoirs due to a lack of investment and
tighter US and UN sanctions.

     A surge in Iraqi oil production would revive the vexed issue of OPEC
quotas when and if Iraq returns fully to the cartel's fold and is allocated a
quota, having been exempt from OPEC production agreements as it rebuilds its
shattered oil industry.

     Iran and Iraq used to have what is known as quota parity within OPEC
after the end of their eight-year war, which erupted when then President
Saddam Hussein invaded Iran shortly after the Islamic revolution there to lay
claim to the strategic Shatt al-Arab waterway at the northern mouth of the
Persian Gulf.

     The incident also comes as Iraq gears up for elections early next year
and the final departure of US troops, whose presence in Iraq has complicated
the relationship between the two neighboring states.

     However relations between Baghdad and Tehran have improved since the
US-led war that ousted Saddam and brought the majority Shi'ite Muslims of Iraq
to power. Some analysts say that the departure of the last US soldier from
Iraq, scheduled for 2011, may allow the Islamic Republic to gain influence,
particularly in southern Iraq, though not all of Iraq's Shi'ite Muslim
factions look to Tehran for inspiration.

     Prime Minister Nouri al-Maliki recently formed a broad coalition in order
to distance himself from the more pro-Iranian Shi'ite Muslim parties running
in the elections.

--Kate Dourian

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