VIENNA A full lifting of sanctions on Iran could spark new rivalries within OPEC as Tehran seeks to reclaim its rank as No. 2 producer from former foe Iraq.
The two neighbors both aim to expand supplies in the next few years, which could make life difficult for the Organization of the Petroleum Exporting Countries if surging output from outside the group forces OPEC to consider cutbacks.
Baghdad got off to a galloping start this year, ramping up production to 3.4 million barrels per day (bpd) and lifting exports to a record 2.8 million bpd in February, nailing its position as OPEC's second-biggest producer behind Saudi Arabia.
"It's a race for capacity. They may be neck and neck for the next few years, but my money is on Iraq pulling away from a trailing Iran," said Peter Wells of geological consultancy Neftex, who has worked in Iran.
Deteriorating security has reversed early gains, but Iraqi output of around 3.2 million bpd is still up on 2013 and Baghdad is targeting about 4 million by year-end including the autonomous northern Kurdish region.
Iran, more confident after a partial lifting of Western sanctions, has squeezed out more oil to pump 2.8 million bpd. Oil Minister Bijan Zanganeh has vowed to return Tehran to its No. 2 slot as soon as sanctions are fully lifted.
Oil experts say rates could surge to 3.5 million bpd within six months of Tehran being fully unshackled - although the prospects for a final deal between Iran and Western powers may be some way off. Even so, that may not be enough for Iran to overtake Iraq.
"Iran's infrastructure is old but functional. The biggest issues affecting production growth are likely to be bureaucracy and logistics," said a senior oil company source.
"It will be difficult for Iran to surpass Iraq on a sustainable basis in less than two years and more likely three."
The world's biggest oil companies have been expanding Iraq's southern fields - Rumaila led by BP, West Qurna-1 run by Exxon Mobil and Zubair operated by Eni - since 2010 when they signed a series of service contracts with Baghdad.
That revival has gained momentum with the start-up of Lukoil-operated West Qurna-2, considered the world's second-largest untapped deposit, and additional oil from Majnoon, where Royal Dutch Shell is in charge.
But Big Oil could also be tempted by the riches of neighboring Iran, once sanctions are lifted. To woo them, Tehran has worked up a vastly improved version of its former buy-back investment contract.
Iranian officials say their terms are far more attractive than Iraq's.
"There will be no shortage of companies wanting to help. And if the new upstream terms become clear in the course of this year it would cut the negotiating time," said a senior oil executive from a Western oil company.
Foreign oil companies at work in Iraq's oilfields have long complained about slim margins, red tape and contract delays. But they are unlikely to give up on Iraq in favor of Iran.
"There are quite a few companies committed to Iraq right now. You don't just drop everything and leave after you've built up a local organization and made investments," said an executive from a Western oil company involved in Iraq.
"But when Iran does open up, it will put more pressure on Iraq to ensure their terms are competitive."
Both straddle huge reserves of oil - Iran the world's fourth, Iraq the fifth - but Iraq may have the advantage when it comes to extracting them.
"Iraq is building up mostly from new fields with potential to exceed 8-9 million bpd by 2025," said Wells.
"Iran's capacity - built mainly from old fields plus Azadegan/Yadavaran - is likely to be restricted to around 4.5 million bpd. This could be achieved by 2019 if sanctions are removed this year and projects are awarded quickly."
There are major risks for both OPEC members when it comes to tapping their reserves.
For Iraq, internal conflicts, torturous bureaucracy and spiraling unrest pose major challenges. Exports and production since March have been cut by at least 200,000 bpd by attacks on Iraq's northern pipeline to Turkey.
For Tehran, the danger is that sanctions continue to be applied or that internal politics will stymie the process once the measures are removed.
OPEC, meeting in Vienna on Wednesday, expects its market share to come under pressure in the next few years as the U.S. oil boom and other competing sources boost rival supply, making it harder to accommodate rising Iraqi or Iranian output without a hefty cutback by Saudi Arabia and Gulf allies Kuwait and the United Arab Emirates.
"Iran should be able to get well above 3.5 million barrels per day in a relatively short time from sanctions being lifted," said Samuel Ciszuk, analyst at the Swedish energy agency.
"And with Iraq's recent and continued growth that could be an interesting challenge for OPEC to handle."
(Additional reporting by Peg Mackey; Editing by William Hardy)