Postwar Iraqi boom 'not a given' - Many critical issues to resolve, say analysts
The Canadian Press / Calgary Herald, Saturday May 03
Lee Raymond, chairman of ExxonMobil, says a competent political and legal system would have to be in place before most major oil companies would consider making any investments in Iraq. Although the region holds tremendous potential in established and underdeveloped oilfields, many critical issues would have to be resolved.
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 postwar investment opportunities.
Adds 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 one million barrels a day less than the output of a decade ago, when UN 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 US of its own money, Iraq could begin to crank out more than three 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 six 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 ExxonMobil, Royal Dutch-Shell, ChevronTexaco and others could step in.
"The undeveloped oilfields 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 oilfields 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 chairman of ExxonMobil, 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 spokesman 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."
Bechtel, a San Francisco-based engineering firm, and Halliburton, a Dallas-based oilfield services company, have already won massive contracts to help rebuild Iraq, although much of the work will be outsourced to smaller companies.
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