Will Iraq Save The World From Peak Oil?

By Eric Fox | December 02, 2009 AAA

The exploration and development of the Iraqi oil fields has large implications for the bull case in energy investing, as the current government has established a multi-year program to boost its output over the next six years.

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While jaded energy investors may scoff at Iraq increasing its capacity due to past failures, this time the world's largest international oil companies are backing these efforts with money and technical knowledge.

Iraq produced an average of 2.4 million barrels per day in 2008, and exported 1.8 million barrels per day to other countries. Oil reserves total 115 billion barrels. Iraq's plan is to reach production levels of seven million barrels per day in the near future. (To learn about how oil reserves are accounted for, read How are oil reserves accounted for on an oil company's balance sheet?.)

Attracting Foreign Companies
The first attempt by Iraq to attract foreign companies was in June 2009, and it didn't go well. Only one concession was awarded, going to BP, Inc. (NYSE:BP) and its Chinese partner in the Rumaila field. Other bidders were put off by the terms of the deal with Iraq.

In early November 2009, Exxon-Mobil (NYSE:XOM) and Royal Dutch Shell (NYSE:RDS.B) signed an agreement to develop the West Qurna oil field. This field has 8.6 billion barrels of reserves, and the two companies have a huge job ahead of them, as they plan on increasing production from 260,000 to 2.3 million barrels per day within six years.

Eni SpA (NYSE:E) and Occidental Petroleum (NYSE:OXY) were awarded the Zubair field in Iraq, with a goal of increasing production from 195,000 to 1.125 million barrels per day. Iraq will hold another auction for the right to develop 10 other, smaller fields later in December.

How Growth Affects Prices
This increased production may hurt efforts by the Organization of Petroleum Exporting Countries (OPEC) to maintain a strong oil price over the intermediate term since the extra capacity has to be absorbed into the market. This may be particularly difficult to achieve since demand growth is expected to be weak for the next several years.

The International Energy Agency (IEA) estimated in June 2009 that demand for oil won't reach the level achieved in 2008 until 2012 due to sluggish world economic growth.

Other OPEC countries are also investing in projects to increase productive capacity. Ten other OPEC members are spending approximately $120 billion between 2009 and 2013 to accomplish this increase.

Although Iraq was a founding member of OPEC in 1960, its production is not currently subject to any quotas established, and the Iraqi authorities have made public statements that the any effort to restrict its growth would be met with resistance since the country has been under-producing for years.

The Bottom Line
Some pundits remain cynical about the ability of the world to supply enough oil even if Iraq manages to achieve its goals. They believe that this capacity will be absorbed by the emerging economies that are eager to bring the living standards of their people up to that of the developed world. (To explore the key factors that determine oil prices, check out What Determines Oil Prices?)

Others believe that the extra productive capacity that Iraq is planning on bringing into the market over the next six years may have the unintentional effect of oversupplying the market, and bringing the price down. It may bring part of the commodity super cycle to an end.

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