BP to Be Paid in Crude for Iraq Investment Costs, Hayward Says

http://www.businessweek.com/news/2010-04-27/bp-to-be-paid-in-crude-for-iraq-investment-costs-hayward-says.html

By Brian Swint and Will Kennedy

April 28 (Bloomberg) -- BP Plc will be paid in crude for its investment costs in an Iraqi contract that offers about the same rate of return as other projects worldwide, Chief Executive Officer Tony Hayward said.

BP and China National Petroleum Corp. are spending about $15 billion in Rumaila, Iraq’s largest oil deposit, pledging to more than double production to at least 2.85 million barrels a day in the second half of this decade. Hayward predicted the company will reach an initial goal of raising output 10 percent in the next 18 months.

“We think the terms are perfectly good terms that will allow us to earn returns commensurate with returns elsewhere in our portfolio,” Hayward said yesterday at a briefing for reporters. “The cost of developing this oil is very low.”

The deal that BP and CNPC reached with Iraq’s government last year pays the companies’ costs plus a service fee of $2 a barrel, a rate that some analysts say doesn’t offer sufficient rewards given security concerns and the risk of political instability in Iraq.

“The nature of the contract is that after the first increment of 100,000 barrels a day has been achieved, then we go immediately into cost recovery,” Hayward said, speaking from Washington. “At that stage, essentially every dollar that goes in comes out in the same year.”

Base Production

BP and CNPC agreed to a base production for Rumaila of 1.066 million barrels a day. After the initial target of increasing output by 100,000 barrels day, the oil companies promised to boost output to 2.85 million barrels a day. BP’s head of production Andy Inglis has said Rumaila may become the world’s second-largest field by 2015.

BP and CNPC awarded $500 million of oilfield services contracts last month for Rumaila to Schlumberger Ltd., Weatherford International Ltd., Iraqi Drilling Co. and China’s Daqing Drilling. BP said it is building from the operation it inherited at the field.

“We benefit enormously from the fact that we inherit a going concern,” Hayward said.

--Editors: Mike Anderson, Steve Voss.

To contact the reporter on this story: Brian Swint in London at bswint@bloomberg.net

To contact the editor responsible for this story: Will Kennedy at wkennedy3@bloomberg.net.