Iraq is Returning to its Pre-War Self

The US invasion of Iraq and subsequent Iraq War cut Iraqi oil production down to 1.9 million barrels per day in 2006. Now that the war is over and some stability has been restored, crude output is up to 3.4 million barrels of crude a day. Roughly 74%, or 2.6 million barrels, of that crude is exported each day, and in order to keep growing output, Iraq is going to expand export capacity up to 4 million bpd by the end of 2014.

Some analysts question if this is feasible due to rising levels of violence and numerous other complications, but with output quickly climbing upward and demand from China staying strong, it looks like export capacity must be raised.

Huge oilfield
One major reason why output is expected to keep rising from Iraq is due to the development of the West Qurna-1 oilfield by ExxonMobil (XOM 0.02%) and PetroChina (PTR). Why is this oilfield so important? Because it could be home to 43 billion barrels of recoverable resources, or in other words, enough to produce 4 million bpd for almost 30 years or 35 years at current output levels.

Shareholders of ExxonMobil and PetroChina have been spooked that the recent increase in violence may weigh heavily on oil production and future growth, but don't be alarmed. The violence has been around the center of Iraq close to Baghdad, while the West Qurna-1 field is located right at the southern border hundreds of miles away.

Pick a side when they can't agree
Keep in mind that ExxonMobil is slowly divesting this asset as it focuses on Kurdistan, but PetroChina has a huge interest in the field. China's crude demand has skyrocketed this century, and every year China has to scour the world to fulfill its demand. This keeps the value of the West Qurna-1 field high and behooves ExxonMobil shareholders.

Don't let the divestment by ExxonMobil sour your outlook on Iraq. ExxonMobil is simply moving into Kurdistan (Northern Iraq) after the Iraqi government gave ExxonMobil an ultimatum; either Kurdistan or the West Qurna Field. Tensions between Kurdistan and Iraq remain high, which is why ExxonMobil had to choose. By choosing Kurdistan, ExxonMobil is betting on the region's 45 billion barrels of crude reserves and substantial natural gas reserves. The Iraqi government declared ExxonMobil's deal with Kurdistan illegal, and ExxonMobil got fed up with Iraq's actions, which is why it's divesting Iraqi assets.

Foolish conclusion
It doesn't matter who operates the West Qurna field because PetroChina has a long history in Iraq and is capable of developing the field. What is important, is that both of these oil majors are building out the necessary infrastructure to tap into a combined 88 billion barrels of crude in Iraq.

Due to the potential of the West-Qurna and Kurdistan, Iraq could see crude output rise to 6.1 million bpd by 2020, according to the IEA. This would be an additional 2.7 million bpd in output over the course of just six years, which is why Iraq wants to boost export capacity. 

By 2014, Iraq wants to increase its export capacity to 4 million bpd, which will have to be increased to at least 5 million bpd by 2020 if the guidance IEA gave is right. This would add roughly 2.4 million bpd to global supply, most of which would go to Asia. Iraq is becoming a bigger and bigger player in the global energy market, with ExxonMobil leading the charge from the North while PetroChina boosts output from the South.

OPEC's worst nightmare is operating in its own backyard