Iraq's Energy Sector Is Moving Forward – With or Without the U.S.

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Iraq on Wednesday broke the record - 207 days - for the time between a parliamentary election and the formation of a government. But while Iraq's government is at a standstill, the country's energy sector remains dynamic and U.S. companies can't afford to wait for the political climate to thaw before diving in.

Iraq is slowly retaking the shape of one of the world's most prolific oil producers. Its reserves are actually 25% larger than previously thought.

"Iraq's oil reserves which are extractable are 143.1 billion barrels," Hussein al-Shahristani, Iraq's oil minister, said earlier this week, basing his comments on data provided by Organization of Petroleum Exporting Countries (OPEC).

The OPEC figures are about 28 billion barrels higher than previous estimates. The added reserves would be enough to lift Iraq to No. 3 in the world - immediately above Iran, which has some 137 billion barrels of the "black gold" bubbling beneath its borders.

At $82 a barrel - roughly where oil was trading at midweek - the newfound oil would be worth about $2.3 trillion. And that may just be the beginning.

Up to 90% of Iraq remains unexplored, according to Energy Information Administration (EIA) estimates. Only 2,000 wells have been drilled in Iraq, versus approximately 1 million in the state of Texas alone. Iraq could easily have another 100 billion barrels of oil hidden within its uncharted territory.

At 2.5 million barrels per day (bpd), the country's production is considerable, but there is room for improvement. Some analysts estimate production will rise to 10 million bpd by 2020, while the Iraqi government has set a target of 12 million bpd by 2016. That would return Iraq to the ranks of the world's elite, as only Saudi Arabia and Russia are capable of producing more.

Crude oil export revenue represents around 60% of Iraq's gross domestic product (GDP) and 89% of government revenue, so a fourfold increase in production would be a significant boost to the economy. The added production could quadruple Iraq's per-capita GDP and leave the country with financial reserves in excess of $350 billion, according to Farouk Soussa, Citigroup Inc.'s (NYSE: C) chief economist for the Middle East.

The International Monetary Fund (IMF) forecast Iraq's growth at 2.6% for 2010, far lower than the 7.3% it projected in April. However, the International Monetary Fund says that economic growth will climb as high as 1.5% in 2011, as the country boosts its oil production and crude prices increase.

Higher oil prices could accelerate the rebuilding of Iraq's oil sector and have already attracted copious amounts of attention from abroad.

"International oil companies have pledged $120 billion to increase Iraq's oil production over the next five years," said Abdullah Al Ajaji, director of MerchantBridge & Co. Ltd..

Investments have also flowed into the construction sector, with international and national oil companies and the Iraqi government pledging to spend $250 billion over the next five years according to Al Ajaji.

Iraq auctioned off more proven oil reserves in the past six months of 2009 than are collectively held by the United States, Mexico, and the United Kingdom.

Royal Dutch Shell PLC (NYSE: RDS.A , RDS.B), OAO Gazprom (OTC ADR: OGZPY), Lukoil (OTC ADR: LUKOY), China National Petroleum Corp. (CNPC), and Malaysia's Petroliam Nasional Berhad (Petronas) all announced major new deals after participating in the biggest oil-field auction in history.

Lukoil and Statoil will redevelop Iraq's West Qurna-2 field, which is believed to hold more than 12 billion barrels of oil reserves, for a production fee of $1.15 per barrel. Royal Dutch Shell and Petronas will develop Majnoon, a similar-sized oil field. Additionally, the state-owned Petronas will join forces with Total SA (NYSE ADR: TOT) and CNPC on the Halfaya field, which has proven reserves of 4.1 billion barrels.

CNPC in the first licensing round in June joined British oil giant BP PLC (NYSE ADR: BP) as the first companies to win an Iraqi oil contract in more than three decades. The two oil giants signed a deal giving them the rights to Iraq's Rumaila field, one of the nation's largest 17.7 billion barrels of proven reserves.

Under terms of the 20-year contract, BP and CNPC have six years to boost the field's production to 2.85 billion barrels per day (bpd).

China, which recently surpassed Japan to become the world's second-largest economy, may have the most to gain from Iraq' resurgence. A net exporter of oil as recently as the 1990s, China's oil consumption reached 8 million bpd in 2009 - up from 4.9 million in 2001. 

The International Energy Agency (IEA) said last month that global crude demand would average 87.9 million barrels a day next year, with Chinese consumption accounting for about one-third of world growth.

The agency revised the 2010 estimate 50,000 barrels a day higher, to 86.6 million, to reflect China's accelerating industrial activity. China's implied oil demand rose 7.4% in August from a year earlier, more than twice as fast as in July.

China's crude imports rose 13% last month from a year earlier, and consumption has risen following the startup of two new refineries, with a total capacity of 260,000 bpd. August refinery output was up 7.2% from a year earlier to 34.73 million metric tons, or 8.18 million bpd, according to data from the National Statistical Bureau.

Chinese energy companies are well suited for projects in Iraq, because they have less experience and fewer business opportunities than their larger, Western counterparts. Many Western companies are shying away from Iraq because of unfavorable contract terms and security risks. But with exploration costs soaring, and many of the world's premium reserves already spoken for, China is ready and willing to invest heavily in Iraq.

The Red Dragon actually was the first country to sign an energy deal with Iraq in the post-Saddam era. CNPC in 2008 agreed to a $3 billion deal to develop the Ahdab oil field, 100 miles southeast of Baghdad.

Exxon Mobil Corp. (NYSE: XOM) and Royal Dutch Shell won the right to develop Iraq's West Qurna-1 oilfield, but by and large U.S. corporations have been virtually invisible in Iraq. 

Of the more than 40 companies to take part in the last licensing round, only seven firms present at the auction were American and only one actually entered a bid. Some industry observers had feared that the underlying goal of U.S.-led invasion of Iraq was to gain control of that Middle Eastern country's oil reserves, but so far that hasn't been the case.

"We haven't really seen U.S. companies, and that is because of intense competition," said Thamir Ghadhban, a prime ministerial adviser and former oil minister. "The issue is financial and technical and not at all political. This confirms Iraq can manage its oil policy and activities without politicization."

A senior U.S. trade official on Wedneday said that American companies can no longer afford to wait until there is "nice, neat order" before going after business deals in Iraq.

"We believe that American companies can compete with anyone in the world, but we do have to show up," said Francisco Sanchez, the U.S. undersecretary of commerce for international trade. "The time is now. I think American businesses that want to take advantage of opportunities, if they wait a year, and wait until everything is in a nice, neat order they are going to cede opportunities to businesses from other parts of the world."

Sanchez currently is leading a delegation of executives from 14 U.S.-based companies visiting Iraq.

"Opportunities to create partnerships and to engage is not a year and a half from now, or two years from now where perhaps you'll see a continued reduction in attacks or violence," he said. "If you want to really play a role here, you have to be here now."

The United States spent some $700 billion on the Iraq war and is the country's third-largest trading partner after Syria and Turkey.

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