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Iraq Oil Production Potential: Bloom in the Desert to Take Years
The opening up of Iraq to the oil industry presents possibilities for some of the major producers, and particularly for several large service companies. Baghdad auctioned development rights to a number of its oil fields in 2009, with Exxon Mobil (XOM), Royal Dutch Shell (RDS/A), BP (BP), and Occidental Petroleum (OXY) among the winners. Companies representing Russia, China, Norway, Italy, Korea, and Malaysia got in on the action, as well.
The draw is clear: Iraq has the third biggest oil reserves in the world. The industry simply can’t pass up an opportunity to work in a region where prospects are that good. Contract terms are acceptable, but not great. Producers will be paid a per-barrel fee above a certain threshold for their efforts. Iraq’s ambitious goal is to boost its production capacity by 10 million barrels a day by 2017, up from around 2.5 million barrels a day now.
The risks of working in an unstable nation, such as Iraq, will probably make progress at boosting oil production a drawn-out affair, however. Security concerns top the list. It is difficult for executives to send employees and hired contractors into a region where their personal safety is at risk. Consequently, oil development may be slow until security forces gain the upper hand for good. Legal and political issues are not completely settled, either. The good news is that the new government has indicated it will uphold agreements in place. Meantime, Iraq is working on a broader framework of oil laws.
Building infrastructure will also take time. Roads, pipelines, processing plants, and export facilities will need to be constructed to handle incremental oil production. The enormity of the task is a good reason to think that rejuvenating Iraq’s oil industry will take many years of persistent work.
Companies providing oilfield services and equipment stand to be the big winners in Iraq as progress is made. Tens of billions of investment dollars will be needed to upgrade plant and equipment that has been neglected for decades, and to expand capacity. That puts four large service companies, Schlumberger (SLB), Baker Hughes (BHI), Halliburton (HAL), and Weatherford International (WFT) in line to pick up big chunks of business in the coming years. Schlumberger and Weatherford are currently working on a $500 million contract awarded to them jointly by BP.
In all likelihood, expansion in Iraq will occur in stages. The first part will be to rehabilitate dilapidated oilfield equipment at existing installations. Harvesting this ``low-hanging fruit’’ will much resemble the process that took place in Russia once oilfield expenditures increased subsequent to the fall of the Soviet Union. This initial phase may take a year or two, depending on conditions. The next step will require significant capital to boost oil production capacity. The industry will be keeping close tabs on Iraq to see if the right set of circumstances unfolds for the oil companies to invest large sums of money in the country.
Iraq’s petroleum reserves will very likely be needed to keep oil prices from getting out of hand if the steady increase in fuel consumption that has characterized the global economy over the years continues apace. There are few large, reliable sources of oil outside the Middle East, and Saudi Arabia, the only producer with any sizable spare capacity, probably can’t meet increased global demand indefinitely. But oilfield development in Iraq will likely only proceed slowly, as security concerns are addressed. It’s a bit premature for investors to jump on the Iraq bandwagon yet. But shares of the large service companies would likely enjoy an added boost if a stable backdrop in that nation takes hold and they are awarded plentiful oilfield development contracts.