US pull back, oil contracts- neither what it seems

Baghdad- On a day filled with two showy events, the real story was the bombing in Kirkuk. Thirty-three dead. Not to be morbid, but problems in Kirkuk underlie country-wide problems in the transfer of Iraqi forces taking over security in major Iraqi cities and the much-publicized failure of first round bidding for oil service contracts.

The transfer of power has been a long time coming here, and the Prime Minister squeezed every ounce of political capital out of it, with a showy parade beginning by the tomb of the unknown solider, and armored trucks festooned with flowers and balloons rolling out into the streets of Baghdad. I saw every shape of vehicle, from tank to fire truck, decorated and troop transports overflowing with banner-waving soldiers. PM Maliki reportedly didn't even mention U.S. forces in taking credit for security gains in Iraq. But as the bombing in Kirkuk highlighted, and the deaths of four U.S. soldiers on Monday, security gains will surely be tested once U.S. forces are truly out of still-volatile areas like Sadr City, Mosul and Baquba.

On the same day, on the other side of the Green Zone, the Al Rasheed hotel was overflowing with translucent ear-pieced body guards and Western-looking suits at the oil service contracts bidding event. Minister of Oil Sharistani held court on the stage next to a clear box, reinforcing the message of transparency of awarding contracts to big players- the foreign bids were opened on the stage in front of live TV cameras, where what the Oil Ministry would pay for refining services were also displayed.

Unfortunately for the Minister, only one of eight contracts was accepted by the consortium of BP and China National Petroleum Corp. an agreement to extract x-many barrels per day and be paid by Iraq per barrel produced, for the Rumalia field, the largest one of the eight. A contract for a field in Diyala didn't get a single bid.

Both Western and Iraqi papers were buzzing the failure of the event to garner more contracts, how it would be the political death knell for Sharistani, a respected reformer, but US Gov. reps I spoke with were impressed by the overall transparency of the process which they Minister insisted upon. But Ministry pay out of $2 per barrel was almost universally too low for the risks. I heard laughs amongst the audience of international oil men when the Iraqi renumerations were announced.

Some said the Ministry of Oil should have used a "step up system" rewarding Western companies for hitting a certain level of production. At the same time, Iraqi could face an OPEC quota if they increase their production too quickly. Some advisors say they would do better to raise gradually, and maybe using too many Western companies would prevent this.

It seems the Ministry plans to recover with the second bidding round moved up to the end of this year, when undeveloped oil fields will be offered, along with re-offer the five fields that weren't taken during this round. It will be interesting whether the Iraqi pay outs per barrel will rise to meet oil company risks. What choice does the Ministry have? Oil accounts for approx. 90% of Iraq's revenue and production is lagging by millions of barrels per day.

Iraq needs the international companies' up-to-date refining capabilities, but nationalist politics and maneuvering against the Prime Minister's growing power will surely continue to throw kinks in the of inking major oil deals until there's some kind of tipping point.