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Tickers in this Article: XOM, RDS.B, E, SNP, USO, BP
Iraq's Oil Ministry had been hoping that Big Oil would embrace the opportunity to bid on oil contracts for the first time since the country nationalized its oil industry in 1972. The auction turned out to be a flop, however. (For a primer on the oil industry, refer to our Oil and Gas Industry Primer.)

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Any Takers?
Approximately 120 companies had initially expressed interest in the auction which took place on Tuesday. 35 of these oil companies were found qualified to bid on the contracts. Major integrated oil players, such as Exxon Mobil (NYSE:XOM), Royal Dutch Shell (NYSE: RDS.B), Eni (NYSE:E) and China & Petroleum Chemical (NYSE:SNP), were among the expected group of bidders.

The contracts were aimed to help Iraq restore production in eight of its oil and gas fields. And while the terms of the contracts were appealing to the Oil Ministry, as rising crude prices have pushed the United States Oil Fund (NYSE:USO) up 64.7% since February, Big Oil did not find the terms to be equally appealing.

A consortium led by BP (NYSE:BP) was the only group that was able to strike a deal with the Iraqi government. The group will receive $2 for each incremental barrel of oil produced in the country's 17-billion barrel Rumaila oil field. The Ministry failed to reach deals on its seven other oil and gas fields that were open for bidding.

Seeking Equity
The Oil Ministry may have gotten ahead of itself upon receiving a great deal of enthusiasm in the preceding weeks. There were two major obstacles that the auction faced. One risk to foreign oil companies was obviously security.

An even larger issue with the terms of these contracts was the fact that the oil companies bidding on these contracts would not receive ownership interests in the oil reserves - rather, they would be compensated based upon the additional barrels of oil they were able to add to the current output of the fields being bid on.

The Bottom Line
Iraq has 115 billion barrels of proven reserves, and is one of the world's largest supplies of unexplored crude oil. Iraq's Oil Ministry was hoping that this recent auction would serve as a starting point for helping the country ramp up its production from 2.4 million barrels per day currently to four million barrels per day, over the course of the next four to five years. It seems that if the Oil Ministry is genuinely interested in hitting this goal, it may want to rethink its approach. (For a related reading, take a look at our article Terrorism's Effects on Wall Street)

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