October 16, 2009 / 1:55 PM / 10 years ago

Q+A-Iraq's oil contracts, scale and obstacles

DUBAI, Oct 16 (Reuters) - Iraq is close to finalising deals at three of its largest oilfields that could nearly triple output and make it the world’s number three producer after Russia and Saudi Arabia.

How big are the deals?

The potential increase in oil output from the three deals is around 4.5 million barrels per day (bpd), which would nearly triple Iraqi output to around 7 million bpd from around 2.5 million bpd.

The increase is around 5 percent of global oil supply. It is enough oil to supply nearly a quarter of daily U.S. consumption, or more than half of China’s.

The rise in supply could put prolonged pressure on global oil prices. Oil producers are already sitting on the largest spare capacity cushion for years after the global recession reduced oil demand sharply this year. A big build from Iraq would expand the time it would take for growth in global oil demand to erode the spare capacity.

What would it mean for Iraq’s coffers?

An extra 4.5 million bpd of oil exports at current prices (around $75 a barrel) would give Iraq another $330 million per day in oil revenues, or an extra $120 billion per year.

How soon could we expect the oil?

Iraqi oil deals specify that foreign oil firms should reach target production at the fields on offer no later than six years after contracts become effective.

Executives at companies involved say oil firms would want to boost output to target levels more quickly to make the deals more profitable.

Oil companies can begin recovering costs when output has risen 10 percent from the fields. That means they will move to achieve that 10 percent rise as quickly as possible, so Iraq could see a rise of around 150,000 bpd from the three fields in 18 months to 2 years.

Oil industry executives say the expense of hitting those smaller targets would be minimal.

Bigger investment would be needed to move toward the much larger plateau production targets. But if costs were being recovered from early on, then foreign oil firms would have less money invested at any one point.

What are the obstacles?

Ratification: Two deals have been sent to Iraq’s cabinet for ratification. It is unclear when the cabinet will ratify them. As the January elections approach, politicians will be increasingly focused on the poll and may put the deals aside until later.

Legality: There are no guarantees that the contracts would be deemeed legal by future administrations, as there are still deep rifts among Iraqi politicians over control of oil wealth. Some lawmakers insist deals that do not go to parliament for approval will be illegal.

An oil law to establish the framework for foreign investment has been delayed for years, so Iraq is relying on old Saddam-era legislation untested in a democracy.

Security: One of the biggest risks for foreign oil firms is keeping both staff and oil installations secure. Violence in Iraq has dropped sharply, but attacks continue and foreign oil firms would make a high-profile target.

Infrastructure: Iraq lacks the pipelines, storage tanks and export jetties to move and export the huge new volume of oil it aims to produce. The infrastructure that does exist is often in a poor state, outdated and needs replacing. Oil firms need to see big investments from Iraq in infrastructure to match the increases in capacity they plan at oilfields.

Which fields are involved, what do they produce and what can they produce?

RUMAILA

BP (BP.L) and CNPC won the contract to boost output on the Rumaila field, Iraq’s largest, in June. Rumaila has reserves of nearly 17 billion barrels, which alone is more than all the oil held by OPEC member Algeria.

Rumaila is the workhorse or Iraq’s oil industry, providing just over 1 million bpd of the country’s 2.5 million bpd output.

BP has pledged to boost Rumaila’s output to 2.85 million bpd.

ZUBAIR

Eni (ENI.MI), Occidental (OXY.N) and KOGAS (036460.KS) have won a contract to develop the Zubair oilfield. Zubair has oil reserves of 4 billion barrels. Eni has pledged to boost output there to 1.125 million bpd from 195,000 bpd.

WEST QURNA

Exxon Mobil (XOM.N) and Royal Dutch Shell (RDSa.L) are competing with LUKOIL (LKOH.MM) and ConocoPhillips (COP.N) for a deal to develop the West Qurna oilfield. West Qurna has reserves of about 8.7 billion barrels, a little less than all the oil held by OPEC member Angola.

Exxon and Shell have pledged to boost output there to 2.1 million bpd from around 280,000 bpd. LUKOIL and Conoco have set their sights on 1.5 million bpd. (For related analysis, please click on [ID:nLE366798]) (Reporting by Simon Webb; editing by Anthony Barker)

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