The overthrow of Saddam Hussein puts petroleum companies closer to their goal of tapping the world's second-largest proven reserves. A Western-led oil boom in Iraq, however, is still far from guaranteed.
Many political, legal and economic uncertainties stand between international oil giants and this coveted natural resource. For example: Who will rule Iraq after the interim authority is gone, and how open will those leaders be to outside investors? How will Iraq react to pressure from OPEC members fearful of losing market share (and profits) to Iraq? And, how will agreements that some foreign oil companies reached with Iraq's previous regime be sorted out?
Given these knotty issues and others, industry experts do not expect outsiders to secure oil-drilling contracts in Iraq anytime soon if ever.
It is not a given that you're going to get this surge of oil out of Iraq,'' said Jim Placke, a senior associate at the Washington office of Cambridge Energy Research Associates, which is advising major oil companies about post-war investment opportunities.
Adds L. Bruce Lanni, an oil industry analyst at the brokerage A.G. Edwards in New York: I still think it's a pipe dream.''
For now, the goal of engineering firms and oilfield services companies under contract with the U.S. government is to repair war damage, fix aging infrastructure and get existing wells pumping again as quickly as possible.
Once that is complete, experts say Iraq could stabilize production at about 2.5 million barrels per day. That's about 1 million barrels a day less than the output of a decade ago, when U.N. sanctions were imposed after Iraq invaded Kuwait in August 1990, shortly before the first Gulf War. Those sanctions prohibited foreign investment in Iraq and played a big role in the country's declining oil production.
Revenue from future oil sales will primarily be used to finance the country's reconstruction and humanitarian needs, although a portion will be reinvested in the petroleum sector.
Within three years, and at a cost of about $5 billion to $7 billion of its own money, Iraq could begin to crank out more than 3 million barrels of oil per day and work toward its 3.5 million-barrel-a-day output of the late 1980s. This would no doubt give a lift to the Iraqi economy as well as help supplement world supplies.
However, as far as the interests of international oil companies go, what really matters is what happens from that point forward. The ideal situation for them would be if Iraq's oil industry, which was nationalized in the early 1970s, becomes privatized.
With proven reserves of 112.5 billion barrels, Iraq has the potential to produce as much as 6 million barrels of oil a day, or roughly two-thirds of what Saudi Arabia currently produces, according to a report co-authored by the Council on Foreign Relations and Rice University's James A. Baker III Institute for Public Policy.
To reach that level would require tens of billions of dollars of investment as well as sophisticated drilling technology to access harder-to-reach reserves. That's where Exxon Mobil, Royal Dutch/Shell, ChevronTexaco and others could step in.
The undeveloped oil fields are really outside the limelight, but this is where the money is,'' said Fadel Gheit, an analyst at Fahnestock & Co. in New York.
A report prepared for Cambridge Energy Research Associates by Issam Al-Chalabi, Iraq's oil minister in the late 1980s, said only 15 out of 73 discovered oil fields have been developed.
The oil could well be the cheapest in the world,'' Al-Chalabi wrote, alluding to the fact that Iraq has many shallow wells. Indeed, many oil industry insiders like to say that the risk of doing business in Iraq is above ground,'' a reference to the country's complex political situation.
The holy grail for oil giants would be to arrange production-sharing agreements with the Iraqi government a common practice around the world but one that has been met with wariness in the Middle East. Neither Saudi Arabia nor Kuwait allows for production-sharing agreements, eschewing any semblance of Western exploitation or economic colonialism.
A typical production-sharing agreement puts the up-front financial risk the costs of gathering data and conducting exploratory drilling on the backs of the oil companies. Then, if oil is found, the company and the government controlling the natural resource work out a deal to share the revenue from oil sales, although not necessarily on a 50-50 basis.
Lee Raymond, the chair of Exxon Mobil, recently told an assembly of investors: I think we would apply the same criteria as we do everywhere in the world and that is you have to have confidence in the political system, the legal system and in the tax system before companies would show up to make major investments in the country.''
A spokesperson for London-based petroleum giant BP elaborated, saying the Iraqis will decide whether they want to invite foreign investment.''
Expatriate Iraqis who held senior positions in the country's oil sector before Saddam came to power are consulting with major oil companies in the event that the new regime does seek foreign investment. But there is no telling how much power these West-leaning technocrats will be given in the Iraqi oil ministry. Many of them are keeping a low profile lest they be seen as too conciliatory toward outside interests.
From their point of view, they (the expatriates) would want to have the involvement of the international industry because that's clearly the most efficient way to develop the industry,'' Placke, of Cambridge Energy Research Associates, said. But political decisions will certainly enter into it.''
Indeed, interests that conflict with those of Western oil companies will surface, analysts said; it's just a matter of when and to what degree:
Iraq will face pressure from the Organization of Petroleum Exporting Countries if it seeks to increase production beyond historical levels because, as its output grows, other nations might be forced to curb production and lose market share. Iraq, a founding member of OPEC, could easily be persuaded that pumping too much oil would cause prices to fall, hurting everyone's profitability. Conversely, it could decide to abandon the oil cartel.
Also, Iraq's new leadership might project a strong sense of nationalism or anti-Americanism and favor tight control over its natural resources. They might say 'We can do it by ourselves,''' said Robert Ebel, director of the energy program at the Center for Strategic and International Studies in Washington.
The experience of Kuwait after 1991 should temper expectations of a windfall,'' concludes the report by the Council on Foreign Relations and James A. Baker III Institute. After hiring Western firms to put out its oil-field fires and repair surface facilities, Kuwait's parliament has routinely voted against contracting with foreign firms for oil-field development ...''
Another highly charged political issue that needs to be resolved before bidding for production rights in Iraq could theoretically begin involves sorting through deals made between foreign companies and Iraq's previous regime. French, Russian and Chinese oil companies consider them legally binding, while the position of U.S. and British companies is that the agreements were signed in violation of United Nations sanctions.
Notwithstanding the long-term uncertainty surrounding the development of Iraq's petroleum reserves, there is certainly money to be made right now by fixing up the country's dilapidated oil infrastructure.
Bechtel, a San Francisco-based engineering firm, and Halliburton, a Dallas-based oilfield services company, already won massive contracts to help rebuild Iraq, although much of the work will be outsourced to smaller companies. The work, expected to generate billions of dollars in revenue over several years, includes: repairing well heads, restarting wells that were shut down during the fighting and rehabilitating pipelines, power plants and petroleum refineries.
Lanni, the A.G. Edwards analyst, said the earliest you'd see Western oil companies developing new fields is five years from now.'' That is the same amount of time some political analysts have speculated it will take for democracy to take root in Iraq.
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