Global Policy Forum

BP Begins Big Push to Revive Iraq's Oil



By Russell Gold
March 31, 2010

BP PLC Tuesday awarded $500 million in contracts to drill wells in Iraq's giant Rumaila oil field, the first step in a mammoth initiative by foreign oil companies to revive the country's energy industry.

If successful, the effort at Rumaila and several other fields near Basra could be one of the largest expansions of crude-oil production ever achieved anywhere. Increased Iraq production could be the difference between a well-supplied global market with oil steadily trading below today's $82 a barrel and a tight oil market with triple-digit prices, struggling to meet rising Asian demand.

"It could change the map of oil," says Paolo Scaroni, chief executive of Italy's Eni SpA, which is preparing to begin work on the giant Zubair field.

Any surge in Iraqi oil production must still overcome tremendous obstacles, including fractious politics and security concerns. Iraq oil production was forecast to rebound quickly after the U.S.-led invasion in 2003. But it took six years to get back to 2.5 million barrels a day, the level Iraq was producing in 2001.

The new drilling contracts are the beginning of a long effort by a dozen of the world's largest oil companies to revive Iraq's decrepit oil infrastructure and turn it into a rival of Saudi Arabia for world's biggest crude exporter, industry officials say.

Iraq sits atop the world's third-largest supply of oil, after Saudi Arabia and Iran. But two decades of war, sanctions and neglect have left it in disrepair. Oil fields are in desperate need of investment. New wells need to be drilled. Massive amounts of water need to be pumped underground to restore pressure and revitalize reservoirs.

Iraqi officials say they plan to add 10 million barrels a day of oil production capacity by 2017. Most observers say that is too optimistic. However, they say that adding three to four million barrels is possible. Even that lower number would be a historic feat, lagging only Saudi Arabia's massive expansion in the 1970s.

Iraq has an estimated 115 billion barrels of crude-oil reserves. At current prices, that is valued at $9.5 trillion.

Numerous political and security concerns remain before this oil can be extracted. Ayad Allawi's Iraqiya bloc, which won the most seats in the recent parliamentary election, said it would like to review oil contracts signed with foreign companies. That raised concerns there could be further delays in starting work.

However, as the nation's leading parties engage in negotiations to form a new coalition government, there has been no talk thus far of renegotiating the oil contracts.

"The security situation will continue to be a challenge for some period of time," ExxonMobil Corp. Chairman and Chief Executive Rex Tillerson said earlier this month. "I think we're all hopeful that once the postelection forming of the new government moves forward and begins to reach its conclusion that some of that will subside."

The bottom line is that the lure of working in Iraq-with its plentiful oil-is too great for most big oil companies to ignore. "It makes commercial sense for us to increase production as quickly as we can," said Toby Odone, a BP spokesman.

BP and the South Oil Co. let contracts to drill 49 wells to Weatherford International Ltd.; a partnership between Schlumberger Ltd. and the state-run Iraqi Drilling Co.; and China's Daqing Oil Field Company Ltd., said Abdul Mahdy al-Ameedi, a senior official in the oil ministry. He said BP plans to increase production at Rumaila from 1.07 million barrels a day to 1.23 million barrels within 12 months.

These contracts are the first of what is expected to be a wave of oil-field-service related work let by BP, Exxon, Royal Dutch Shell PLC, Eni, Lukoil OAO and China National Petroleum Corp. over the next few months. The companies have been awarded contracts to increase production at separate fields.

Energy analysts at Sanford C. Bernstein recently wrote that developing seven major Iraq fields, including Rumaila and Zubair, would require $102 billion in investment. But they said they were "skeptical" all of the plans would be carried out.

The development of so many enormous projects-most clustered within 50 miles of each other-will create an enormous demand for workers, engineers and drilling rigs. It will also require the construction of a giant infrastructure build out, including roads, ports, oil export facilities and water plants.

Raising oil production so quickly in such a small area may prove too demanding. Recently, it took Saudi Arabia nearly five years to increase its crude oil production capacity by two million barrels a day-without overriding concerns about political stability or security, notes energy consultants IHS CERA. A new analysis by the consultants say Iraq's plan to increase production is "extraordinarily ambitious" and predicted an increase of just less than two million barrels of oil a day by 2015. "It will be incredibly complicated to pull this off," says Matt Simmons, a Houston investment banker.

Nonetheless, even a few million barrels a day of crude oil production capacity could have an enormous impact. The growth of Iraqi oil production and exports will play a "decisive role in shaping global oil markets," says Fatih Birol, chief economist of the Paris-based International Energy Agency, a watchdog for industrialized nations.

Without the boost in Iraqi production, Mr. Birol worries that global oil production over the next five years will have trouble pumping out enough barrels to match expected demand from China, India and the Middle East. Tight supplies amid growing Chinese demand sent oil prices soaring close to $150 a barrel in 2008.



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