Are These Western Oil Majors Operating in Iraq at Serious Risk?

As violence in Iraq continues to rage, many are growing increasingly concerned about the potential impact on Western oil majors operating in the country.

While Iraqi oil production, which is concentrated mainly in the south and in the semiautonomous region of Kurdistan, has been unaffected so far, a longer-term deterioration in the nation's security situation could prompt a number of Western companies to scale back operations.

ExxonMobil (NYSE: XOM  ) and BP (NYSE: BP  ) have already evacuated some expatriate staff and nonessential personnel from Iraq, while Royal Dutch Shell (NYSE: RDS-A  ) said it plans to do the same if the security situation worsens.

With that said, let's take a closer look at some of the main Western oil majors with operations in Iraq and how much they have at stake amid the sectarian fighting.

Tankers at the Al Başrah Oil Terminal, a key Iraqi crude oil loading terminal in the Persian Gulf. Photo credit: Wikimedia Commons.

ExxonMobil and BP
Exxon held 0.9 million net onshore acres in Iraq as of year-end 2013. The bulk of the company's operations are focused on the West Qurna oil field, where it completed 23.2 net development wells last year. It also has interests in the Kurdistan Region of Iraq, where it initiated a seismic program and exploration drilling activity last year.

BP's presence in Iraq includes its 38% working interest in the Rumaila field -- one of the world's largest oil fields, which was discovered by a BP-led consortium in 1953 -- where it serves as the lead contractor in the Rumaila technical service contract. Rumaila contributed 39,000 barrels per day of production net to BP last year.

Shell and Chevron
Shell's presence in Iraq is mainly through its 45% interest in the massive Majnoon oil field in southern Iraq. Production from Majnoon, which Shell operates alongside partners Petronas (30%) and the Iraqi government (25%), reached 175,000 barrels per day last year. Shell also has a 15% stake in the West Qurna 1 field.

Shell also has a 44% stake in Basrah Gas, a joint venture with South Gas (51%) and Mitsubishi (5%) that commenced operations last year. Basrah gathers, treats, and processes gas produced from the Rumaila, West Qurna 1, and Zubair fields and sells it mainly to the domestic market.

Lastly, Chevron (NYSE: CVX  ) maintains an 80% interest in two production sharing contracts covering the Rovi and Sarta blocks in the Kurdistan Region of Iraq. The company commenced exploration drilling in these two blocks in the second half of last year and plans to continue the effort this year. Chevron also acquired an 80% stake in the Qara Dagh block in Kurdistan in June 2013.

Minimal impact to business
Overall, Iraq represents a relatively insignificant share of production for Shell, BP, and Exxon, while Chevron currently doesn't have any producing properties in the country. According to estimates by investment research firm Morningstar, Iraq represented just 1.8% of Exxon's 2013 production, 1.9% of BP's, and 0.7% of Shell's.

Furthermore, as Morningstar noted, the earnings contribution from production is likely even smaller since these companies operate under service contracts with the Iraqi Ministry of Oil that greatly limit their profitability. They "only receive a modest remuneration fee of a few dollars per barrel after cost recovery," which means the companies' Iraqi barrels "tend to be some of the least valuable" in their portfolios, Morningstar stated.

Investor takeaway
Iraq represents only a small fraction of these Western oil majors' production and earnings. The bigger geopolitical risk to these companies is Russia, which accounts for a much greater share of their production, reserves, and capital spending, especially in the case of BP. If the U.S. and its European allies impose additional sanctions on Russia for its actions in Ukraine, Western oil majors could be forced to put some of their new Russian projects on hold, jeopardizing their extensive investments in the country.

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