Major Oil Companies Are Circling Iraq

With security in Iraq improving, international oil companies are quickly moving in, often with little or no fanfare. Hanter Gasser, Royal Dutch Shell's (RDS) top executive for Iraq, recently spent a week in Basra, site of the country's biggest fields, checking on a joint venture Shell is starting with the Iraqis to find commercial uses for the gas that is flared off during oil production. Gasser says Iraq burns off enough gas to power two countries the size of Jordan.

Shell is one of about 30 oil companies, including ExxonMobil, Chevron, and BP, that are pursuing licensing agreements with Baghdad. Iraq intends to boost production in seven fields holding an estimated 44 billion barrels of reserves, more than a third of its total. Those agreements are supposed to be awarded in a few months. "We have high interest in Iraq, and we are waiting to see the terms," Gasser says. Iraqi oil production, at a low 2.5 million barrels a day, is just where it was before the war. If Iraq produced anywhere near its targeted 6 million barrels a day, it could change the industry's dynamics and curb talk of a looming shortage.

AGAINST OPEC'S FLOW

The key player is Oil Minister Hussein Al-Shahristani, a Canada-educated nuclear scientist and chemical engineer who spent 11 years in Abu Ghraib prison for refusing to help Saddam Hussein build a nuclear weapon. He is feeling huge pressure to boost production to compensate for falling prices. In an interview in Vienna, where he was attending an OPEC conference, Al-Shahristani came across as impeccably polite. He's also a nationalist, determined that Iraq regain its rightful place in the industry and the Middle East, whatever the objections of Saudi Arabia and the Gulf states, which might not welcome the rise of another Shiite-dominated petropower.

Al-Shahristani outlined for his fellow OPEC ministers an ambitious program to reach that 6 million barrel-per-day goal in the next six to seven years. That would make Iraq the world's fourth-largest producer, after Saudi Arabia, Russia, and the U.S. Al-Shahristani estimates that achieving his goal would cost $50 billion, which he hopes to raise almost entirely from the oil companies. Such a production surge would complicate matters for OPEC, which has cut output by 12%. "I am sure some [in OPEC] hope it doesn't happen soon," he says.

Later Al-Shahristani added by e-mail: "By the time we reach 6 million barrels per day in five to six years there will so much demand for Iraqi oil as other countries will go through a declining phase, and we do not expect much restriction on our production ceiling."

While skepticism remains about Iraq's ability to execute its plan on schedule, Baghdad's desire to boost production is no longer a pipe dream. The question is how fast Al-Shahristani can bridge differences with the oil companies to get some big deals rolling. Last year, several companies were close to agreeing to upgrade five fields when Al-Shahristani pulled the plug amid controversy that BP (BP), Shell, and other majors were close to landing contracts without competitive bidding.

He's now soliciting bids to squeeze about 1.5 million more barrels a day from the eight major fields. In essence, the companies will be paid a fee of perhaps $6 for every extra barrel they can coax from the wells. The majors worry about stiff penalties being imposed if they don't hit agreed-upon production targets. They're also leery about forming joint ventures with local companies that are holdovers from the Saddam era. "I would suspect that when we go to the board of directors, there are going to be a lot of questions asked," says one executive. Al-Shahristani is listening to the complaints. He's also dangling the possibility of production-sharing agreements, which would let the oil companies enjoy the upside in profits from the oil they discover and produce.

The major oil companies are taking their time with the bidding to make sure they get the best possible terms. To keep up the pressure, the Iraqis are cutting side agreements. Baghdad has negotiated, for instance, a deal with Chinese National Petroleum to develop the Ahdab field. "This showed the Iraqis could complete negotiations on a field," says Alex Munton, an analyst at Edinburgh consultants Wood Mackenzie. Al-Shahristani is also negotiating a deal on the 3.5 billion-barrel Nassiriya field with Italy's Eni (E) and others."Because bid rounds take a bit longer, we have decided to ask selected companies that have done their homework to submit an offer to us," he says.

Despite the fits and starts, the Iraqis seem bound to gain traction sooner or later. With 115 billion barrels of reserves, Iraq's potential production capacity could eventually challenge Saudi Arabia's 12 million barrels a day, according to Helmut A. Merklein, a former senior U.S. energy official who is now a consultant. "The [only] limitation is what the market will bear," he says.

Business Exchange: Read, save, and add content on BW's new Web 2.0 topic networkA Gusher of Information

Wood Mackenzie, an Edinburgh-based oil and mining consulting company, has compiled a presentation that assesses the future prospects of the Iraqi oil industry. The 18-page document is packed with charts, maps, and other data. It also delivers a history lesson on Iraq's beleaguered oil sector.

To view the presentation, go to http://bx.businessweek.com/iraq-business/reference/

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