Last Updated Oct 4, 2010 3:59 PM EDT
Iraq increased the official size of its proven reserves Monday to 143.1 billion barrels of oil, which -- if true -- pushes the war-torn country past Iran to become the world's second-largest holder of conventional oil reserves. At the moment, the 25 percent increase in Iraq's oil reserves doesn't mean much. The price of crude isn't going to change overnight and Iraq won't suddenly bypass Saudi Arabia -- a nation that produces nearly six times more oil -- in exports.But the new oil reserves figure is important for Iraq for two reasons: Foreign investment and a large production quota within OPEC. For a company like Exxon (XOM), which already has a contract to boost production in Iraq, a large quota could open some additional revenue opportunities as more outside investors look for established partners to rebuild the country's infrastructure. In short, large production quota equals some stability, which in turn attracts foreign investors.
OPEC and production quotas Iraq exports some 2 million barrels of oil per day, but it doesn't have a quota within OPEC, the cartel of oil-exporting countries. A large quota would help Iraq because the country depends almost solely on oil for its foreign currency earnings.
Iraq is clearly gunning for the large quota. There's just one problem. Iraq's proven reserves mean nothing without significant foreign investment that will rebuild its old, poorly maintained oil fields, export terminal and pipelines. In short, it's not the oil reserves that are holding Iraq back, it's the country's ability to produce and export it. And that's where companies like Exxon and BP and oil field services firms like Halliburton (HAL) come in.
Foreign investment Iraq held last year two international oil auctions as part of its strategy to woo foreign investment and raise its overall production to 12 million barrels per day by 2017, which by the way is no small feat. If Iraq reaches those numbers it would put it on the same level as Saudi Arabia, an economic powerhouse thanks to its oil exports.
The oil auctions were, well, tepid at first. Out of the 22 companies that placed bids in the first auction, only one contract was secured by BP and its consortium partner China National Petroleum Co., or CNPC. In the second round, Exxon and its partner Royal Dutch Shell secured a contract to develop phase 1 of Iraq's West Qurna oil field. In all, Iraq has signed 12 deals with international oil companies.
As I've said before, the contract "wins" awarded last year are really chances, a small opening in a door to Iraq that has remained firmly shut for years. The contracts themselves won't be a boon for Exxon, Shell or the others. The terms of the contracts are far from the generous category. Companies awarded contracts will receive a flat fee, which means that even when oil prices climb past $100 a barrel, they won't benefit. Exxon and Shell, for example, will be paid $1.90 for each extra barrel of oil they extract on top of current production.
How to make money in Iraq Still, this chance could ultimately pay off for companies like Exxon that got in early. Exxon and Shell plan to more than double the number of new wells in the West Qurna phase 1 field. Not so coincidentally, this was one of the fields that saw its proven reserve numbers jump and is now considered the largest Iraqi oil field with total proven reserves of 43 billion barrels, according to Oil Minister Hussein al-Shahristani. Exxon has found that by taking the lead on related projects it can generate more revenue in Iraq. Exxon is managing a multibillion-dollar water injection scheme, which could help raise extraction rates, for example.
Oilfield services companies like Halliburton and Schlumberger also will be the big winners. Schlumberger (SLB) and Weatherford (WFT) secured in April $500 million in contracts from BP to work in Iraq. For that matter, any company that can help Iraq rebuild its oil infrastructure stands to make millions. Leighton Offshore Private won approval to build a $733 million new oil export terminal in southern Iraq.
Photo from Flickr user xcbiker, CC 2.0
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