BP (NYSE: BP) Invests in Iraqi Oil

Brian Hicks

Written By Brian Hicks

Posted May 23, 2013

BP (NYSE: BP) plans to up the ante in Iraq.

The British oil giant plans to increase output in the Rumaila oil field to 750,000 barrels per day by 2017. The main goal is to reach 2.85 million barrels per day within the next decade. Short-term goals for 2013 include adding an extra 100,000 bpd to the current 1.4 mbpd production rate by year’s end.

iraq oilThe project first began in November of 2009 when BP signed a developing contract with Iraq’s South Oil Company for $15 billion. Actual production did not begin until 2010.

BP signed on with Chinese company CNPC, which took a 37 percent stake. BP has a 38 percent stake, and South Oil has 25 percent. The company wants to increase spending from $2.6 billion per year to an annual $5 billion by 2016.

There is also planned investment in building a new terminal. The five-year contract will obligate BP to take over operations by constructing a new facility and paying $7 per cubic meter for any imported and exported commodity that goes through the terminal, Reuters reports.

Iraq is opening its doors to outside investors for the sake of improving the nation’s energy infrastructure and increasing oil and gas output throughout the nation, which has enough oil to compete head-on with number one OPEC producer Saudi Arabia. Political and social strife are primary factors in holding back Iraq’s progress.

Iraqi leaders hope to bolster the nation’s wealth and further develop associated gas, or flare gas, to provide domestic energy needs.

The nation is the fourth largest in world reserves, and more development in the Rumaila field will make the area the second largest oil producer in the world after the Ghawar oil field in Saudi Arabia.

Rumaila Oil

Currently, Rumaila holds 17 billion barrels of oil and comprises a large portion of Iraq’s current 3.3 mpbd production volume. The field is located in southern Iraq near the city of Basra, about 20 miles from the Kuwaiti border.

BP’s presence alone in Rumaila has been more than helpful to the region since the company has been handing out lucrative subcontracts to other companies for new testing wells, equipment, and other infrastructure projects.

Weatherford International Ltd. (NYSE: WFT), Schlumberger Limited (NYSE: SLB), Daqing Oil Field, and Iraqi Drilling were all recipients of those subcontracts.

The field itself makes up 15 percent of national reserves, and 200 producing wells are currently in operation

If Iraq was in top form, national oil production could reach 13 mbpd in the next decade. But Iraqi officials are aiming for a modest 6 million as a long-term goal by 2017.

Iran’s ongoing tensions with the West have severely affected commodity production in the Persian nation, and as a result, Iraq is now the second largest producer in OPEC.

Companies in Iraq

Iraq may not be the safest place on the planet, but some companies are willing to take the risk.

Many companies in the West pulled out of Iraq, but the Chinese have been moving in fast. PetroChina (NYSE: PTR) and Petroleum Corp. are some companies that have major interests in the region.

The most we hear from Iraq in the political sphere is turmoil and conflict, but the land that is known as the cradle of civilization is a diamond in the rough when it comes to energy production.

Shell (NYSE: RDS-A) is currently the lead operator of the Majnoon oil field in southern Iraq. The Anglo-Dutch company also has a joint venture endeavor with Mitsubishi Corp. under the name Basrah Gas Company to capture more flare gas in the south.

In the north, Exxon Mobil (NYSE: XOM) is one many companies aligned with the Kurdistan Regional Government and Turkey to procure more oil reserves. Baghdad and the KRD are in the midst of ongoing disputes over development rights.

There is a bit of a schism between companies that deal with the Baghdad government as opposed to those dealing with Kurdistan.

The KRD and the central government have long held disputes over oil fields. The Baghdad government is unhappy with its northern neighbor because officials there have approved production and exports without the permission of al-Maliki’s administration.

But Kurdistan believes the Baghdad government is not allocating enough funds to develop northern fields, so it should operate without such permission.

Turkey relies heavily on imported commodities from the KRD and has a large stake in Iraq’s northern region.

Other companies that chose to do business with the Kurds are Chevron Corporation (NYSE: CVX) and Russian giant Gazprom OAO (MCX: GAZP), Total (NYSE: TOT), Talisman Energy Inc. (NYSE: TLM), and Marathon Oil Corporation (NYSE: MRO), along with many other companies.

Analysts believe that some companies prefer to do business with the KRD because of regional ties to Turkey, and it will prove to be a safer bet against the al-Maliki administration, long known for its corruption and failure to address security issues.

But there is just as much risk in doing business with Kurdistan because companies in the North and South stand a high chance of being sucked into long-standing ethnic and political squabbles between the two governments.

The Baghdad government has had a history of blacklisting companies that do business in Kurdistan – including Exxon Mobil and Chevron.

Such a conflict is one of the reasons why many companies have been on the fence about doing business in Iraq as a whole, but the Baghdad government may be willing to set aside the infighting in pursuit of national development.

The government cannot afford to be seen as unwelcoming to any company that chooses to do business in Iraq. After all, Kurdistan holds 30 percent of Iraq’s reserves.

If Kurdistan were an independent nation, it would make a list of the world’s top ten richest countries.

Just imagine how wealthy Iraq would become if it functioned as one cohesive nation.

Iraq is rife with political and old ethnic conflicts, but leaders are not in a position to hold too many grudges if they want to get their nation’s economy back on track.

There is no doubt companies from all over are lining up to get a piece of Iraq’s energy sector, but only governments in the North and South can secure a healthy investment atmosphere.


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