Market News

 May 05, 2009
Oil investments in Iraq: shrewd or stupid?

 Iraq has been crying out for foreign investment in its oil fields, and after years of conflict and enormous efforts from authorities to convince overseas wealth funds that Iraq is safe enough for their cash, oil firms have started to stack their chips in the nation's favour.

In June this year, Iraq opened its doors to the world's largest energy companies, only for many of them to walk out on bidding for some of the globe's dwindling oil reserves. However, it was not the fear of political and social instability that prevented firms from parting with their cash, but the tough terms of offer the Iraqis were proposing.

But now the companies are returning to the Middle East state in search of the lucrative contracts they turned down just a few months earlier.

American-led team gaining access to Iraq's oil

The Iraqi Oil Ministry have announced today that it is to award a consortium led by Exxon Mobil Corp. and Royal Dutch Shell PLC the right to develop the West Qurna-1 field in southern Iraq

The pact is the latest in a series of deals that Iraq has signed or initialed with some of the world's biggest oil companies, such as the ones reported in NGO&G yesterday between Iraq, British oil giant BP and China's CNPC.

The companies are coming back as realization hits them that this could present the last opportunity to get their hands on large volumes of crude.

BP's decision to return to Iraq is particularly interesting. Typically, BP bawk at anything below roughly 700 million barrels of reserves but Rumaila, about 30 miles west of Basra, may have 20 billion barrels of recoverable oil, BP estimates.

"Invest in Iraq and you repeat past mistakes"

But in April 2008, BP's board and investors accused the company of repeating past mistakes by investing in Iraq as the board came under fire from shareholders at the annual meeting in London. BP's chairman Peter Sutherland also said that the firm would not "exploit weakness for short-term gain", insisting that he believed "Iraq's oil belongs to the Iraqi people."

This no longer seems to be a concern as they look to tap into Iraq's bounty.

For Exxon and Shell, two of the largest publicly listed oil companies, the deal grants entry into a country that boasts one of the world's largest reserves of petroleum, which have previously been off limits to Western firms.

But the tough terms still remain. The structure of the deals - essentially service contracts - won't allow foreign companies to boost their own reported reserves and production numbers. Still, executives see them as providing access to Iraqi oil officials and a chance to work in the country's fields, both crucial if Iraq continues to open up to international companies.

Obstacles remain

But obstacles still remain. Security across the country is still poor, though overall violence has fallen since the worst of Iraq's sectarian violence, following the 2003 US-led invasion.

Also, the health of the oil fields also come under questioning. As the WSJ reports, Iraqi oil officials have complained for years that Saddam Hussein pushed them to produce too much oil, too quickly, without much needed investment. Oil analysts have worried that may have damaged reservoirs irreparably.

As the government looks to boost production in order to help revive its economy, this level of foreign investment will be crucial. In December, Iraq will hold a second bid round for a further ten unexplored oil and gas field. At the moment the move to invest looks shrewd, but with Iraq's recent history in mind, it could yet prove to be a costly gamble.