If the invasion of Iraq was all about exploiting the country's oil, you'd never know it from the structure of the contracts being signed by the likes of ExxonMobil
In an analysis of the West Qurna 1 license awarded to ExxonMobil and Royal Dutch Shell
Wells assumes a 15% rate of return on the consortium's $50 billion investment in the field, and flat $60 oil. With higher oil prices, the contractors' returns improve, but they never get above 33%. To put that profitability in perspective, EOG Resources
The economics of these Iraqi technical service contracts, in which the developers get a dollar or two for every incremental daily barrel produced, are not very compelling. Why, then, are so many majors and supermajors willing to take the plunge?
My colleague David Lee Smith put it this way last summer: "It's called getting your foot in the door of a country with an estimated 115 billion barrels of oil." The promise of getting better terms on future deals has got to be the prime motivator here.
For a while I thought that this stampede into Iraq might also be an effort to bolster sagging reserve replacement ratios. Occidental Petroleum
One last thought is that earning a 15% real rate of return is not the worst deal for these companies. ExxonMobil, for example, has billions in cash and short-term investments sitting there, earning next to nothing. Warren Buffett chose to stick his company's excess cash in a railroad. That's a heck of a lot safer than an Iraqi oil field, but on this scale, the pickings are pretty slim.