The balance of risk and reward for investing in Iraq's vast oil reserves is changing, according to a report by Turner Investments.
The report, called Oil in Iraq: A Profitable Gamble? considers safety risk for oil company employees and their families, risks to operations from bombs and landmines, and political risks ranging from a line of officials seeking bribes to sectarian wars between Sunni, Shia and Kurd factions.
For all the problems, the authors believe there is one big reason why oil companies will seek to profit from Iraq:
"Iraq could hold the greatest potential for growth in global oil production. With 115 billion barrels of oil, Iraq has the world’s third-largest proven reserves, behind only Saudi Arabia and Iran. Some geologists believe that Iraq’s reserves are even greater than that, as many oil fields have yet to be fully explored. There are few, if any, places that have as much oil that’s untapped and close to the surface (and thus relatively economical to extract) as Iraq does."
Iraq has clearly not been an instant success. As the report states, "energy companies have in fact balked at getting entangled in Iraq’s spider web of domestic problems." It goes on to say that in a major auction in June 2009, "only a single deal was struck in that auction; other energy companies considered the risks of a long-term investment in Iraq too formidable to overcome." This year, Iraq has seen four major gas deals and many more oil investment projects announced.
The authors say: "Our own sense is that companies have become decidedly more optimistic about their prospects in Iraq over the past 12 months. Their optimism evidently has been stoked by the 12 development contracts to increase oil production that have been awarded to international companies such as BP, ExxonMobil, Occidental Petroleum, and Royal Dutch Shell."
The authors concurred with Morgan Stanley's forecast that "Iraq can roughly double its oil production by 2016, to 4.2 million barrels per day." That would represent one of the biggest increases in oil capacity in history. They continued: "Doing that would likely require a fourfold increase in capital investment, with $50 billion being spent between now and 2016. The money would fund the drilling of more than 1,700 new wells and upgrading 1,000 existing wells that have been decaying for years. BP alone plans to spend some $15 billion in a joint venture with China National Petroleum Corporation to boost production at the Rumaila field."
The authors conclude: "In short, we think Iraq represents too big of a prospective bonanza for Western oil exploration-and-production companies and energy-services companies to pass up. In truth, the companies are increasingly concluding that the pluses of doing business in Iraq outweigh the undeniably large number of minuses."
(Source: Turner Investments)