In June many of the world’s biggest energy companies walked away from bidding on potentially rich oil fields in Iraq. While they liked the billions of barrels of reserves that were on offer, ENI (E), ExxonMobil (XOM), Royal Dutch Shell (RDSa), and others balked at the tough terms the Iraqis were proposing.

Today they’re coming back—and getting roughly the same deal that was on
the table during the summer. On Nov. 2, ENI initialed a contract to
boost production in the Zubair field near Basra, which it estimates has
6 billion barrels of reserves. Shell, Exxon, and ConocoPhillips (COP)
also are in talks that could help boost Iraq’s oil production to more
than 6 million barrels per day—behind only Saudi Arabia in OPEC. “This
is the window in which if anything can happen it will happen,” says
Alex Munton, an Iraq specialist at Edinburgh-based energy consultants
Wood Mackenzie.

The big oil companies are reconsidering Iraq because they realize this
may be among their last opportunities to get large volumes of crude.
Britain’s BP (BP), for instance, typically turns up its nose at
anything below roughly 700 million barrels of reserves; Rumaila, about
30 miles west of Basra, may have 20 billion barrels of recoverable oil,
BP estimates. Another field in the same class is West Qurna, located
north of Basra, where a group including Exxon Mobil and Shell is
competing against a partnership of ConocoPhillips and Russia’s Lukoil
for production rights.

Majnoun, which the Iraqis will offer in December, could have 12 billion
barrels. And Kirkuk, where Shell is hoping to get a contract, has at
least 8.5 billion barrels. “It is fair to say that there are many
people negotiating now who would not have taken $2 in profit per
incremental barrel before,” Shell Chief Financial Officer Simon Henry
said during the company’s Oct. 29 earnings conference call with
reporters.

A Threat to OPEC?

The change of heart among oil majors could increase tensions in OPEC,
which had assumed Iraqi production would remain low until the world
regained its thirst for crude. As Iraqi output starts to rise, the
Saudis and other big producers are likely to try to persuade Iraq—which
belongs to OPEC but is exempt from its quotas—to toe the line. The
Iraqis, though, may want to pump the maximum, arguing that other cartel
members who have profited for years from Iraq’s market absence should
bear any future production cuts. “This is an issue that is going to
come to the forefront as deals progress,” says David Kirsch, an analyst
with Washington consultancy PFC Energy.

ENI’s deal is similar to the one BP agreed to after the June auction.
ENI and its partners, Occidental Petroleum (OXY) and Korea Gas, plan to
increase output at Zubair from the current level of 190,000 barrels per
day to 1.125 million within seven years. The companies will recover all
costs and receive $2 in profit for each barrel above today’s production
level. In June they had insisted on $4.80 per incremental barrel. But
after BP agreed to $2 per incremental barrel for tripling production at
Rumaila—signing a deal on Nov. 3 in Baghdad—the benchmark price had
been set. ENI says clarifications from Iraq on tax-related issues were
critical in the decision to accept a lower price. “We got a contract
that guarantees us the right return,” says Claudio Descalzi, ENI’s
exploration and production chief.

Of course, big obstacles remain. Security will always be a worry. If
Prime Minister Nouri al-Maliki, who has promoted the oil deals, is
turned out in January elections, the investment climate could sour. And
projects that do go through could be hampered by a shortage of skilled
workers and infrastructure woes such as a lack of oil terminals and
pipeline capacity to get Iraqi crude to foreign markets.

What’s clear, though, is that Iraq has enormous potential. Its reserves
stand at some 115 billion barrels, third largest in the world. Three
fields alone—Rumaila, Zubair, and West Qurna—could triple Iraqi
production from the current level of 2.5 million barrels per day in
less than a decade. And much of Iraq remains relatively unexplored, so
there’s always the possibility of finding more huge fields. “If Iraq
and the international oil companies are able to bring these projects
on,” says PFC’s Kirsch, “it certainly would eliminate concerns that
global production is going to peak any time soon.’

Source: Business Week

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