Iraq: the next oil bonanza?

The oil market is buzzing with whispers over the future oil supply from Iraq. The Iraqi government is granting licenses for the giant Iraqi oil fields. The numbers are impressive: Zubair: 4 billion barrels, Majnoon: 12,8 billion barrels, West Qurna 12,9, Halfaya: another 4 billion barrels. As a comparison, Ghawar in Saudi-Arabia, the world’s largest oilfield, is said to have already produced 60 billion barrels. Still, the Iraqi government hopes that the production in these oilfields will allow the country to surpass Saudi-Arabia as the world’s largest producer of oil. They project Iraqi oil production to grow to 11 million barrels per day, five times its current production. Western analysts are more prudent and say that they would be happy if Iraq could grow to 5 million barrels per day.

The most important feature of these oilfields is that they are giant, conventional on-land oilfields at a normal depth and with satisfying pressure and water levels and that they are close to existing oil export infrastructure. This means that production from these oilfields will be cheap. Occidental Petroleum (US), Eni (Italy) and Korea Gas Corp, the three companies that team up for production at Zubair are happy to earn 2 dollars per barrel. They will invest 20 billion dollars in Zubair over the 20 years for which they have won a license. This is a completely different story than the tar sand or deep-sea off-shore oil fields of Canada, Venezuela or Brazil. Oil can be economically produced from these fields only at oil prices far over 50 dollars per barrel.

If the Western oil companies that have now been invited into Iraq manage to produce the oil bonanza for which the Iraqi government is yearning so much, this could mean a huge glut of cheap oil in the markets. The combination of increasing demand and diminishing supply from traditional cheap oil fields like Ghawar or China’s Daqing has produced the peak in oil prices of recent years. The fact that these large cheap oil fields were being replaced by much smaller and more expensive oil fields also caused the extreme volatility of oil prices which made oil prices double again in 2009. Will a glut of cheap Iraqi oil produce more stability and lower prices in the oil market?

The first question is of course whether they are indeed the bonanza that both the Iraqi government and Western oil companies clearly believe they are. After all, these are not newly discovered oilfields. Was it just the crookedness of the Saddam regime that made large-scale oil production from these fields impossible? Or are unexpected technical difficulties awaiting? And if oil production is technically possible, will the political climate in Iraq finally find the stability necessary to allow a stable flow of the oil out and the money in? Will the Sunnis, Shiites and Kurds find peaceful agreement over how to share the booty? Today, the US Marines are leaving Iraq. Is this signaling a final step for the country into a peaceful, prosperous future?

If Iraq could finally come to peace with itself and its oil riches, the question is of course what happens in the rest of the world. The combination of growing oil demand (in China) and declining oil production in other parts of the world like Saudi-Arabia could outstrip the increase in production in Iraq. This is what James DiGeorgia, author of “The global war for oil” believes. If that would happen, that would be excellent news for the Iraqi government. They would cash in the extra dollars between the low price paid to the producers and the much higher price that they would get in a world market characterized by tightness. It’s cynical, but it would be a huge payback for Iraq for all the blood and tears of the past decades. That is, if the oil bonanza doesn’t cause another period of war and terror.

Impossible to see who will prove right, skeptics like mr. DiGeorgia or the Iraqi government. Anyway, with the Iraqi oil bounty looking for its way to the market, a future of rising oil prices looks less certain. In your energy buying strategy, you shouldn’t neglect the possibility of a future of cheaper oil.

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