Iraq Could Send Crude Prices to the Moon

Unless you were impersonating Rip Van Winkle last week, you likely heard at least some of the shocking statements made by Libyan Col. Muammar el-Qaddafi, who continues to hang on to his dwindling power in his oil-producing North African country.

I don't know how much longer Libya's chaos will linger or how much it will ultimately affect crude oil prices. But despite minimal journalistic coverage, Iraq on Friday became the latest country in the region to be affected by the demonstrations and violence that have hit the region during the past several weeks.

Even before major companies have had time to help the war-torn country boost its oil production, Iraq's output of 2.5 million barrels a day comfortably exceeds Libya's 1.4 million to 1.8 million barrels -- depending on whose numbers you believe. So Iraq is already more significant for world oil circumstances than Libya.

A big buildup
Again, that's before ExxonMobil (NYSE: XOM  ) , Royal Dutch Shell (NYSE: RDS-A  ) , and PetroChina (NYSE: PTR  ) have had a real opportunity to work their magic in the country. Iraq's ambitious goal is a whopping 12 million barrels of daily production by 2017. Beyond that, its estimated 143.1 billion barrels of crude reserves (up from 115 billion barrels as recently as October) is triple that of Libya's and slightly more than even Iran.

Friday's outbreak hit much of the country, including Baghdad and its centrally located Liberation Square, along with several other areas of the city. It also involved rocks being chucked at riot police as they assumed a formation to protect the "Green Zone," where many foreign embassies and most of Iraq's government offices are located. At last count, it appears the northern cities of Hawija and Mosul each counted three casualties among the protesters.

The outbreaks in Iraq are somewhat harder to fathom than those in Libya or Egypt, each of which has been under the thumb of a single tyrannical dictator for decades. But, while Iraq is recovering from years of war with Iran, the ravages of Saddam Hussein, and eight years since the 2003 U.S.-led invasion, the country is still woefully short of such necessities as dependable power and clean water.

Can't we all get along?
Also, its mixture of Shiite Muslim leaders and their Sunni rivals (along with the Kurds in the north) has exacerbated the country's inability to achieve a total reduction in insurgent violence. Just last month, for instance, a suicide bomber struck in Tikrit, Saddam's hometown. The result was 52 dead -- mostly police recruits -- and about 100 wounded.

Nevertheless, if Iraq is to claw its way to peace, it'll likely be on the basis of a ramp-up in its oil production, which must include continued aid from the world's big exploration and production companies. Its original concession began in 1925, with the Iraq Petroleum Co., which was owned by BP (NYSE: BP  ) , Royal Dutch Shell, and both Exxon and Mobil. In 1972, however, Saddam nationalized Iraq's energy assets.

Nearly two years ago, the county conducted a couple of bidding sessions with oil companies from around the world. The fields initially targeted for bids were the nation's largest, all of which had previously demonstrated production capabilities, which the companies were supposed to expand.

You'll pay us what?
But the terms set by the Iraq government involved the companies being paid for each incremental barrel of oil they were able to add to a given field's production. That arrangement differed from the typical approach, wherein the companies would have received a portion of the oil recovered. Furthermore, the companies had anticipated rates above $4 per barrel, while the powers that be in Baghdad had their sights set on about $2 per barrel.

When all was said and done, the only accepted agreement to emerge from the first bidding session went to a group headed by BP and involved the government's preferred price for work on Iraq's big South Rumaila field. Subsequently, other companies have thought twice about the attractiveness of getting a foot in the door in Iraq, with its massive energy assets.

Italy's Eni (NYSE: E  ) and Occidental Petroleum (NYSE: OXY  ) , for instance, are now plugging away on the big Zubair field. And while others are at work elsewhere, members of the oilfield services sector, such as Schlumberger (NYSE: SLB  ) , are also involved with the producers.

But in addition to security concerns, the companies' efforts haven't been free of hang-ups. For instance, backlogs at airports and other points of entry have slowed the arrival of necessary equipment. Nevertheless, there also has been measurable progress. Within its first months of working on the Majnoon field near the country's de facto oil capital in the southern city of Basra, Royal Dutch Shell was able to increase production to 70,000 barrels per day, from 45,000 when the company began its efforts.

Infecting the neighborhood
What does all this mean for the world's energy picture? Along with its own emerging importance, Iraq sits geographically between Iran and Saudi Arabia. As such, an escalation of its protests could threaten its own production, along with possibly spilling over to its two neighbors, who historically aren't friends. That, in turn, could threaten approximately half of the OPEC cartel's total output.

On that daunting basis alone, it's clear that the West can't take a business-as-usual approach to major threats to oil supplies and prices. Indeed, I'm convinced that drilling in the Gulf of Mexico (including in the deepwater) should be resumed ASAP. Also, proposals within the Obama administration's newly minted budget that would remove historic tax deductions from oil and gas producers should be abandoned forthwith. And given North America's rapid run-up in domestic natural gas production (and its corresponding drop in prices), creating the infrastructure to expand gas usage should become a national priority.

Finally, as always, I urge you all Fools to place companies that ply their trade in the energy sector high up on your watchlists.  

The Fool owns shares of Schlumberger and ExxonMobil. Try any of our Foolish newsletter services free for 30 days.

We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Fool contributor David Lee Smith doesn't own shares in any of the companies mentioned in this article. The Motley Fool has a disclosure policy.


Read/Post Comments (7) | Recommend This Article (12)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 28, 2011, at 3:24 PM, millsbob wrote:

    "On that daunting basis alone, it's clear that the West can't take a business-as-usual approach to major threats to oil supplies and prices."

    so then, what you suggest is: taking the same old business-as-usual approach! pretending that we can solve all our energy problems with petroleum, and giving hilariously- (or tragically-) rich oil producers continued tax breaks.

    instead of Anything approaching a new direction.

    smart move.

    and just How Many times does it have to be proven that increased drilling in the Gulf will not get us out of this problem before you get it?

  • Report this Comment On February 28, 2011, at 8:44 PM, fulnel wrote:

    I would assume that the U.S. would open up its oil reserveI if Irac does not come on line with at

    least 2M barrels of oil, or if oil supplies drop drastically.

  • Report this Comment On March 01, 2011, at 2:36 AM, Wade32ru wrote:

    Nice article, David. Thanks.

    "And given North America's rapid run-up in domestic natural gas production (and its corresponding drop in prices), creating the infrastructure to expand gas usage should become a national priority."

    -Couldn't agree more. It would create jobs, materially reduce our trade deficit, and put the US in a leadership position in utilizing nat gas as a transportation fuel on a big scale.

  • Report this Comment On March 01, 2011, at 8:30 AM, RLR0528 wrote:

    All the mentioned oil producing countries in the Mideast are unstable and have been forever. These countries hate the US and would leave the US high and dry if they could sell all their oil production elsewhere. The US government is extremely foolish to allow these countries to control our economy by controlling the supply of vital fuel which is essential for our way of life. All our motor vehicles should be operating on electricity, hydrogen, or natural gas which we have in abundance. FIND WAYS TO END U.S. DEPENDANCE ON FOREIGN OIL! DO IT NOW!

  • Report this Comment On March 04, 2011, at 12:47 AM, rv3lynn wrote:

    Come on boys, cut the stupid BS.

    Iraqi oil production will increase. Wild eyed bombers will not prevail. The multinationals will find a way to increase production because they will profit when they do so.

    U.S gasoline demand is declining. We only need a static oil supply. U.S. oil production was on an incline curve until Obama's minions cut the balls off of the companies drilling in the Gulf of Mexico.

    If the rigs are loosed, deep water Gulf, North Dakota Bakken and south Texas Eagle Ford could put an additional 3,000,000 BOPD in the system. Twenty years of production declines could be dramatically reversed. With our new high tech drilling and completion systems we can make a serious dent in oil imports if the genius bureaucrats would just get out of the way.

    We drilled our way out of the natural gas shortage.

    We can drill our way out of most of our oil imports.

    Loose the rigs!

  • Report this Comment On March 06, 2011, at 6:27 PM, kerschnerj wrote:

    rv3lynn user name i totally agree with you there needs to be more of us in the world

    INCREASE OIL PRODUCTION NOW COME ON UNITED STATES WAKE UP AND LETS DO SOMETHING ABOUT THIS UNLESS YOU REALLY WANNA PAY 5.00 OR MORE FOR GAS WAKE UP AND DO SOMETHING

  • Report this Comment On March 07, 2011, at 12:05 AM, chaz572 wrote:

    "On that daunting basis alone, it's clear that the West can't take a business-as-usual approach to major threats to oil supplies and prices."

    You're saying we should intervene militarily to prop up an installed government friendly to our interests, and help it quell popular uprising, trading aid in maintaining power and legitimacy for cheap oil? Actually, that sounds *exactly* like business as usual.

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