By Deepa Babington - Analysis
BAGHDAD (Reuters) - Big Oil has led interest in Iraq’s oil sector since it was thrown open to investment, but the country also promises to be lucrative for oil service firms quietly fixing wells and pipelines in the background.
Oilfield service companies ranging from big players like Weatherford International Ltd (WFT.N) to small regional outfits have begun work or are sniffing out opportunities in Iraq, which must upgrade its dilapidated infrastructure after years of war and neglect.
Unlike high profile oil majors, which have to skirt resistance from politicians wary of signing away Iraq’s oil wealth to foreigners, service firms can quietly subcontract directly with the majors, avoiding lengthy talks with officials.
The sheer size of the market in Iraq -- which plans to nearly triple oil output to over 7 million barrels per day -- is unrivalled, making it increasingly important for an oil services industry facing a slump in major markets like North America due to spending cuts by energy producers.
In fact, the amount of oilfield development planned in Iraq in the coming few years will likely strain the oil service industry’s capacity and lead to inflation in the industry.
“Iraq is the place to be for oilfield service firms,” said R.P. Eddy, CEO of Ergo, an Iraq-focused research firm.
“There is much less political risk than if you’re a major. I’d be shocked if any oilfield service firm did not make a major effort to be here in the next few years.”
Iraq is striking deals with several oil companies that could transform it into the world’s third-largest oil producer and rehabilitate an oil sector that has suffered from years of war, sanctions and most recently the sectarian violence triggered by the 2003 U.S.-led invasion.
Much of the attention has centered on supermajors like Exxon (XOM.N), whose consortium snapped up an initial deal to develop the West Qurna field, while BP (BP.L) and China’s CNPC sealed a $15 billion deal to develop the Rumaila field.
However, oilfield service firms are now quietly building a presence.
The market for oilfield services in Iraq will jump from $1.3 billion in 2010 to $8 billion in 2014, estimates Ergo.
Capital spending on oilfield services in Iraq in 2011 alone will be five times that of similar spending in all Gulf Cooperation Council nations put together, Ergo believes.
A yardstick for judging the value of looming service work may be a short-lived joint venture agreed in February between Iraq and British firm Mesopotamia Petroleum Co. The project, aimed at drilling 60 new wells a year but terminated in July, kicked off with initial capital of $400 million.
In May, U.S. company Weatherford won a $224 million contract to drill 20 wells in Iraq’s south and it expects to run a $300-$400 million program in 2010.
Last month, a British delegation with executives of seven firms, including an energy technology supplier and a land drilling contractor, held talks with Iraqi officials in Baghdad.
“Iraq is going to be a very large market, and my peers will not disagree with that,” Weatherford CEO Bernard Duroc-Danner told analysts last month. “The only difference in views, if we have any, is on the timing of it.”
Some say the timing will be sooner rather than later.
“The services market will kick off in the next four months in a big way,” said Adrian Green, a partner with Upper Quartile, which advises firms on investments in Iraq. “Iraq has been starved of technology, training and development, and capital investment in the service sector for 30 years.”
In the meantime, smaller Middle Eastern firms have been consolidating their position in Iraq, said Ergo’s Eddy.
While none doubt the volume of work potentially available, there are no guarantees on margins.
Iraq pushed a hard bargain in the first post-invasion oil licensing round in June and oil majors working on already slim margins will offer similarly tight terms to subcontractors, said Samuel Ciszuk, Middle East energy analyst at IHS Global Insight.
Even if Iraq prefers western expertise and the latest technology to modernize its outdated infrastructure, tight terms favor lower-cost Chinese service firms.
BP, for instance, will rely on its Chinese partner CNPC to provide pipes and equipment for Rumaila. The Chinese firm’s involvement was crucial in helping keep the consortium’s cost down and allowing it to agree to Iraq’s terms.
Western oil service companies will stay out if the margins are too small for them, analysts say.
“Projects have to be demonstrably and materially commercial,” said Green. “There is no charity angle here.”
Editing by Simon Webb and Himani Sarkar