In October, Hussain al-Shahristani, the Iraqi oil minister, announced that his country’s proven oil reserves were now 143bn barrels, the second largest in the Middle East after Saudi Arabia, the world’s top producer.
Not to be outdone, Iran quickly declared its own upgrade. Its oil minister said the country had 150bn barrels in reserves, up from a previous estimate of 138bn barrels.
Subsequently, Saudi Arabia, holder of the top spot, pointed to the enduring size of its reserves, while Kuwait declared that an upgrade of its reserves was on the way.
Despite the war of words and huge numbers involved, the issue of reserves is likely to be important, analysts say, only if there is a big fall in the oil price. Then, the ability to pump according to quota becomes critical because quota is partially related to reserves.
“Reserves are not really that important except in the minds of producers. Iraq is putting down a marker and issuing a declaration of intent,” says Bill Farren-Price of Petroleum Policy Intelligence, a consultancy.
Nonetheless, the reserves bidding war indicates the significance of – and perhaps the nervousness engendered by – Iraq’s return to the international marketplace. The Iraqi authorities say that they want to achieve production of 12m barrels a day “within six or seven years”.
While analysts say that this target is highly improbable, even an additional 3m barrels on top of its current 2.5m barrels a day may not be welcomed by other Opec members, given the fragile state of the international economy.
“Everyone is prepared to make way for the Iraqis and to allow them to build export capacity again. It’s only if they start pumping above incremental demand growth that it becomes an issue,” Mr Farren-Price says.
What is certain is that for the international oil companies Iraq represents the biggest opportunity to access natural resources of recent times. Nomura estimates that seven of the top 10 countries with the highest reserves shut out western oil companies and that only three – Canada, Iraq and Kazakhstan – allow them in.
Libya, for example, of which much had been hoped, is proving disappointing. In four licensing rounds between 2005 and 2007, the big oil companies competed for blocks, attracted by the largest proven oil reserves in Africa. So far, they have little to show for their huge investments.
Iraq’s Rumaila oilfield, on the other hand, has 17bn barrels of oil in place – and was not included in Mr Shahristani’s upgrade figure.
The technical services agreement to develop Rumaila was won last year by BP and the Chinese National Petroleum Company. The intention is to boost production from about 1m b/d at present to 2.85m b/d. If achieved, this one field will produce more than all Algeria’s fields combined.
There is though a downside to the Iraq proposition. BP and CNPC agreed to receive a fee of only $2 a barrel for production from Rumaila. Statoil of Norway and Lukoil of Russia, which won rights to develop West Qurna, also in southern Iraq, are due to receive only $1.15 a barrel.
As a result of these tight terms, Richard Quin of Wood Mackenzie, the Edinburgh-based consultants, estimates that Rumaila accounts for only about 1 per cent of BP’s portfolio in net present value terms.
He says that even after the disaster of the spill in the Gulf of Mexico, the US still offers majors such as BP a much better value proposition than the Iraqi service contracts, which come with very tight terms.
Take, by way of a contrast, Qatar’s Pearl gas-to-liquids plant, jointly owned by Qatar Petroleum and Shell. It is due to be finished by the end of the year and is to produce diesel, kerosene, naphtha and lubricant oils.
Wood Mackenzie estimates that Pearl is worth to Shell $32bn on a net present value basis – 15 times more than the most valuable oil project for international oil companies.
Nor has development in Iraq gone smoothly, as the country is plagued by violence and a political crisis after rival parties failed to agree on a government more than eight months after inconclusive March 7 elections. The authorities have also not passed a long awaited hydrocarbons law and an Arab-Kurd dispute over oil-rich areas in the north remains unresolved.
Analysts say oil infrastructure has held up remarkably well. Even so the majors have much to do to refurbish facilities. Some areas are still in need of large-scale mine clearance.
CNPC was the first company to enter the Iraqi oil sector after the US-led invasion of 2003. Security consultants say the depth of misunderstanding between the Chinese and Iraqis is enormous. But the majors have little choice, as they have to take a long-term view and other prospects are dwindling or inaccessible, analysts say.
An equity analyst who follows Iraq says: “The fundamental issue is that for the international companies, access to resources is limited. The Iraq bidding round shows them giving away their souls just to get access to the resource. What other opportunities have they got? Put yourselves in their place and ask where are their new projects going to be in 30 years’ time? At least with Iraq you put your spade in and up comes the oil.”