Big Western oil dogs slapped down in Iraq

Implications: Andrew E. Kramer, James Glanz and Campbell Robertson reported in the September 12 issue of the International Herald Tribune that an Iraqi plan to award six no-bid contracts to Western oil companies has been withdrawn. The Iraqi oil minister said that the talks had dragged on for so long that the companies ( ExxonMobil, Chevron, Royal Dutch Shell, Total, BP and some smaller firms) could not meet production schedules. The contracts were not lucrative but did provide the companies with a foothold. They remain eligible to bid on other work. The projects were estimated to increase Iraqi oil production to 2.9 million bbl/day. During the summer, several senators appealed to the State Department to block the deals on the ground they would undermine agreement on a hydrocarbon law. Senator Charles Schumer of New York said he was pleased at the cancellation. The Iraqi oil ministry plans to go ahead with other oils deals even without an oil law.

Analysis:  The several oil contracts were a part of the 377 announced oil and gas projects (Oil & Gas Journal of June 9, 2008) that would have added to the flow of crude oil and natural gas liquids over the next five years. Even if the Iraqi oil ministry goes ahead with new offers, without an oil law approved by the U.S., the projects are likely go to non-Western companies who are fundamentally indifferent to U.S. foreign policy. China and Russia will be the main beneficiaries. With continued downward pressure on crude oil prices, the cancellation will have little or no immediate effect. But should the world economy improve over the next two years, then the loss of that 500,000 bbl/day stream could result in a reversal of the demand/supply equation. Nevertheless, the truth is that Iraq is unlikely to ever again be a large producer. Supergiant fields Kirkuk and Rumaila are in advanced decline. Many of the mid-sized fields are also declining. Smaller oil fields will become increasingly important. The future of oil production in Iraq will be redevelopment of old fields with new technology and stepped up drilling in the small fields. Many, many drilling and work over rigs will be required. Even as new oil comes on line, the decline of the older fields will erode total capacity. Iraq is well-explored. So a new petroleum law is more or less meaningless. As civil strife permits, repairs to facilities will continue. Where possible, shut-in wells will be returned to production and the new entrants, China, Russia and a few others will contribute to production maintenance in small increments. But Iraq’s petroleum future is largely in its past. Expect 2.5-2.75 million bbl/day for several years followed by a steady decline. Their nominal reserves are huge. Their real reserves are slender.