The energy industry has achieved initial oil production goals established in contracts signed with Iraq over the last two years, as that country attempts to rejuvenate its large yet neglected oil fields. The industries public commentary to date suggests that long-term oil production targets can also be met.
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Iraq Oil and Gas
Iraq has ambitious plans to rebuild its oil and gas industry after two decades of neglect and war, with a goal of increasing oil production from under three million barrels per day currently to 12 million per day by 2017. Many in the industry doubt that these goals are achievable, but to date Iraq has not officially altered its production targets.
Zubair Oil Field
In 2010, Eni (NYSE:E) was awarded the right to develop the Zubair Oil Field in southern Iraq. The company is the lead contractor on this field and owns a 32.81% share.
Eni is required under the Technical Service Contract (TSC) governing the field to increase production here to 1.2 million barrels of oil per day within six years. The baseline initial production rate of the field was set at approximately 183,000 barrels of oil per day, implying a one million barrel per day increase over that time frame. Eni is also required to keep production stable at 1.2 million barrels of oil per day for seven years.
In December 2010, Eni achieved its first production milestone, and boosted production to 201,000 barrels of oil per day from Zubair. This triggered cost recovery under the TSC and a remuneration fee of $2 per barrel for incremental production. According to Reuters, Eni has filed a production plan with the South Oil Company, the Iraqi state-owned oil company, outlining production targets over the next six years.
Eni expects production to ramp up quickly toward the targeted level and reach 300,000 barrels of oil per day by the end of 2011, and 400,000 barrels per day by the start of 2013. Eni will then increase production by 200,000 barrels per day each year until the 1.2 million barrel target is reached by 2017. The total estimated cost of the rejuvenation of the Zubair Oil Field is $18 billion. Occidental Petroleum (NYSE:OXY) is also involved with the Zubair Oil Field and owns a 23.44% share. (For related reading, see A Guide To Investing In Oil Markets.)
Majnoon Oil Field
The Majnoon Oil Field was awarded to a group of companies led by Royal Dutch Shell (NYSE:RDS.A, RDS.B). The production goals at the Majnoon Oil field are even more ambitious than Zubair, with a targeted production level of 1.8 million barrels of oil per day, up from the initial production levels of 45,000 barrels per day.
Royal Dutch Shell reported in October 2010 that the company boosted production to 70,000 barrels per day from Majnoon. In July 2011, the company started drilling its first production wells and installing pipelines in the field. The company is trying to get oil production to 175,000 barrels a day by the end of 2012.
BP (NYSE:BP) is attempting to increase oil production in the Rumaila field to 2.85 million barrels per day by 2017. The company recently reported that it successfully increased production here to 10% above the targeted level of 1.066 million barrels a day. PetroChina Co. Ltd. (NYSE:PTR) is also part of the consortium that is working on the Rumaila field, and owns a 37% share.
The Bottom Line
Although some experts doubt that Iraq has any chance of hitting the ambitious production goals established for 2017, the accuracy of long-term predictions in the oil and gas market has always been disappointing. Investors might want to go against consensus on this one and consider the impact of this supply on the world oil market. (For more on supply and demand impact the price of oil, read What Determines Oil Prices?)
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