Research and Markets: Iraq's Oil Sector - Restoring Historical Capacity May Require Investment of $5-10 Billion.

Energy Editors/Business Editors

DUBLIN, Ireland--(BUSINESS WIRE)--April 21, 2004

Research and Markets (http://www.researchandmarkets.com) has announced the addition of Iraq's Oil Sector - New Opportunities to their offering.

Iraq is unique in its oil wealth, with the worlds second largest proven reserves at low cost and close to major markets in Asia and Europe, a large number of oil fields found, but not developed, and a potential for finding much more oil and natural gas. Iraqs petroleum resources represent a potential for many large-scale projects upstream, midstream and downstream. After more than twenty years of wars and sanctions the Iraqi oil industry is in an urgent need of maintenance and investment. Oil fields need to be refurbished, pipelines and terminals repaired. Just to get the Iraqi oil industry back to its historical capacity could have a cost in the range of $5-10 billion. As Iraq's oil revenues in the last years before the war were about $16-18, there is an evident need for foreign capital and partners.

For foreign investors in the Iraqi oil industry, risk is essentially political, not geological. With a large number of oil fields found, there is little exploration risk, although there is a reservoir risk. The political risk is caused by uncertainty over what kind of government Iraq will have in the future, what oil policies it will pursue, what relations will be with the international oil industry, and, finally, what fiscal and other operating conditions it will offer. Any legitimate Iraqi government, recognised by the international community and providing stability and order, would have a strong bargaining position. The large, multinational oil companies are generally crude-short and have an interest in expanding their oil reserves. Specialised upstream companies offer competition. Nevertheless, restoring and expanding Iraq's oil industry is likely to be a long haul, involving billions of dollars and many years. In the meantime, Iraq will have an interest to stay in Opec to get high oil prices to secure economic rent and revenues. The question is how much for whom? Iraqi companies, US interests and others are in competition. Since the departure of the special US appointed counsel for the oil industry it seems that Iraqi interests will have a greater part and that US interests will be less favoured than anticipated in the wake of the war.

Political conditions do, however, remain uncertain. The range of outcomes is from a successful US or US-friendly rule, via a secular nationalist rule, an Islamic nationalist rule and a UN mandate. There are many realistic intermediary outcomes. Each one would reasonably pursue a distinctive oil policy. The first task is a clarification of Iraqi interests in relation to oil and natural gas and the place for foreign interests. The issue of ownership of hydrocarbons will await the new Constitution and subsequent petroleum legislation. Legitimacy is required to settle property rights and pending disputes in order not to obstruct investment. Investment under illegitimate government risks seizure. The key condition remains political stability and order to attract investment and facilitate operations, avoiding attacks on personnel, equipment and installations.

The Iraqi oil industry faces three distinct phases of development. The immediate task is restoring historical capacity which could require investment of $5-10 billion and take eighteen to twenty-four months. This work could be carried out under the auspices of an occupation regime. The second phase is developing prospects already found, raising capacity significantly. Cost is estimated at $40-80 billion, with a lead-time of seven to ten years, depending upon the scope of the programme. This work would need a legitimate government to attribute new contracts. The third phase would be new exploration, for which Iraq immediately has little need, and that also would require a legitimate government to negotiate fresh exploration rights. Iraq also has a substantial natural gas potential, as much associated gas that so far has been flared, could be used for industrial and power generation purposes. There is a large potential for substituting gas for oil in power generation. Finally, there is also a refinery and petrochemical investment potential.

Infrastructure investment requirements include pipeline restoration and new construction, marine terminals, and natural gas infrastructure. As for gas pipelines, dependent upon regional cooperation, there is a potential for joint ventures with, Iran, Saudi Arabia, Syria and Turkey.

Organisational and regulatory issues will govern the actual attractiveness of oil and as investment in Iraq. The historical situation has been marked by the nationalisation around 1970 and the latter-day attempts by the Saddam regime to attract foreign investment through deals initiated in a weak bargaining position due to UN sanctions. Now, requirements to hydrocarbon legislation need to be clarified. The role of the state in oil and natural gas is the major issue to be settled, followed by reorganising the Iraqi state oil interests. A framework for private investors needs to be put in place, with a definition of the room for foreign oil companies. The role of regulator needs to be settled. An urgent task is establishing a transparent funding mechanism.

For Iraq, there are several models of cooperation with private interests and setting investment rules. For the key issues of ownership, taxation and control, there are options. The potential for service contracts is evident in the first phase of reconstruction. For the second phase of low-risk expansion, the government could consider a PSA regime for Iraq. In the longer run, a licensing regime could be considered, despite the historically based aversion against a concessionary regime. The issues are taxation and the disposal of the crude. Therefore, risk, reward and taxation are important. The Iraqi state could capture economic rent through state participation, gross taxation, net taxation or a combination.

A related task is developing the Iraqi oil services industry. In this respect, the human factor is decisive. The Iraqi skills base is reasonably good, even if it has suffered over the past twenty years. The need to catch up is evident. Training needs indicate a potential role of foreign oil companies. Summing up, potential investors should consider the distinct phases and time horizons of Iraqi oil development. They should measure the political risk in relation to the resource base. Finally, investor corporate governance is essential to gain legitimacy in Iraq once the country opens up.

For more information visit http://www.researchandmarkets.com/reports/c1376