Managing risk investing in Iraqi Big Oil plays
The International Energy Agency recently released their World Energy Outlook for 2012 and assumed that oil prices will be $215 per barrel in 2035. This assumption is based on projections for Iraq to double oil production by 2020, and triple to 8 million barrels per day (mmbod) by 2035. A big question now is which energy companies are likely to benefit from the growth of Iraqi crude oil production.
Iraq has over 150 billion barrels of proven reserves and possibly another 150 billion barrels of unproven reserves. Though its reserves are much larger than Saudi Arabia’s, Iraq currently only produces roughly 2.7 mmbod due to political instability and the lack of sufficient investment in infrastructure during Saddam Hussein’s regime. The cost to improve infrastructure is an estimated $530 billion.
Investors must take caution
It appears companies such as Exxon Mobil (XOM) are being forced to exit operations in Iraq. Exxon recently initiated discussions with international oil companies BP (BP) and Lukoil (LUKOY) to sell its stake in West Qurna-1, which is estimated to include over 8.6 billion barrels. This may be a huge loss for Exxon due to the current daily output of 400,000 bod and a contract projected rate of 2.825 mmbod. It is possible Exxon is taking this step due to strong signals that they are not welcome to continue owning infrastructure in Iraq. Exxon was recently partially banned from Iraqi oil bidding after entering an exploration deal with Kurdistan. Chevron (CVX) was banned from bidding for exploration licenses altogether for dealing with Kurdistan.
Picking the winners and losers in this category may be difficult due to the complex geopolitical situation and religious factors impacting which firms are awarded development contracts. Furthermore even some of the winners may lose billions in development costs before realizing gains.
One path for taking advantage of the Iraqi growth opportunity would be investing in oil and natural gas services, which have already been awarded projects. One such name is Weatherford (WFT) which recently received a $843 million crude oil production unit contract in Iraq.
A safer approach for investing in the growth opportunity and side-stepping the issues of which firms are awarded contracts may be investing in the entire industry, through the SPDR S&P Oil & Gas Equipment & Services ETF (XES).
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