Oil giants scramble for Iraqi riches

Contact with Baghdad makes Shell better placed than BP to reap benefit of regime change

The assault on Iraq may or may not be a war for oil, but a scramble for oil will certainly follow it.

The assault on Iraq may or may not be a war for oil, but a scramble for oil will certainly follow it.

Never again will international oil companies see such massive reserves up for grabs. Whatever the plans of the US and foreign oil groups, the Iraqis have their own 10-year programme to transform their industry.

Iraq's highly ambitious plan aims to more than double its proven reserves in a decade. That would put it on a par with the huge oil wealth of neighbouring Saudi Arabia.

This is not pure fantasy. Iraq has some 115 billion barrels of proven reserves ­ the second biggest in the world ­ but it is also reckoned to have between 100 billion and 200 billion of unproven reserves. The Saudis, the dominant oil power, have proven reserves of 265 billion barrels.

Manouchehr Takin, of the Centre for Global Energy Studies, says: "Saudi is where Iraq could be in 10 years' time. Every oil major [company] will be interested." Conspiracy theorists and some opponents of the war against Iraq contend that the Americans will simply carve up Iraq's oil resources for their oil companies and those of their allies. Few in the oil industry appear to anticipate quite such an imperialist bonanza. Iraq's existing oil plan could easily form the basis of development of the Iraqi industry, no matter what sort of regime is in place, Ruba Husari, of the Energy Intelligence consultancy, says.

If a stable post-Saddam regime run by Iraqis is established, it is likely that oil will remain nationally owned and administered by that government. This could see the same civil servants running Iraq's oil ministry as those who drew up the 10-year blueprint last year. The plan hinges on foreign involvement.

Iraq's oil resources have been starved of investment and even maintenance work for two decades, as a result of the Iran-Iraq war in the 1980s and then sanctions in the 1990s, and much of its land has seen little exploration activity. The vast western desert is an unknown quantity. Iraq's young fields could offer the cheapest cost supply of oil in the world, at perhaps $1 a barrel (compared with the North Sea's $11 a barrel). Gas exploration has been minimal.

Iraq is currently pumping out about 2.5 million barrels a day but the country aims to increase this to 10 million barrels over the next 10 years ­ similar to the Saudis' current production. To realise its potential, Iraq will need, perhaps, £20bn or £30bn of investment and that means foreign money is required.

It is possible that sanctions will be lifted if President Saddam Hussein disarms but remains in power. It seems much more likely that the US will lead a war to remove him, and Britain is likely to play a prominent supportive role. However, the companies best placed to go into Iraq are from elsewhere ­ mostly from countries opposed to the conflict, including France, Russia and China.

Baghdad has signed a series of agreements with foreign companies over the past few years although, as a result of sanctions, none of these have been activated. Six international companies hold exploration or development contracts.

These deals and other outline agreements were forged with a government that was recognised by the international community, so there is a case for upholding, under international law, any arrangements that were actually signed.

On its knees under crippling international sanctions, Iraq had offered foreign companies very generous terms ­ including equity stakes in fields, which is pretty much unknown in the Middle East.

The terms of these deals are likely to be challenged by the Iraqis themselves, once sanctions are lifted, as the new administration will be in a much better negotiating position. The successor government can argue that the foreign companies never fulfilled the contracts, so invalidating them. But it is possible that a new regime would go first to the companies that dealt with Iraq in the sanctions era, because they have an existing relationship and these companies can move faster.

Valerie Marcel, of the Royal Institute of International Affairs, says: "Iraq [post-Saddam] won't be offering the kinds of contracts that foreign companies dream of. And it will take time for the [new] regime to consolidate and set up the institutions that would be prerequisites for foreign investment." Even if existing deals are not honoured after President Saddam is toppled, those companies that have put in the work ­ processing seismic data, assessing conditions on the ground ­ are clearly in an good position in rebidding for the fields.

TotalFinaElf negotiated contracts on two giant fields in the 1990s, but it stopped short of signing. The French company does not argue it has any legal claim on the fields but it says it has a one-year advantage over other companies looking to bid for and exploit the Majnoon or Bin Omer fields.

Energy Intelligence's Ms Husari, who has just returned from Baghdad, says: "The upcoming competition among international oil companies would likely pit big European companies that had been negotiating contracts or expressed interest in reaching a deal against the US majors excluded by the Iraqis. Post-war, US giants such as ExxonMobil, ChevronTexaco and ConocoPhillips would almost certainly want a slice of the action themselves, as would BP." According to Ms Husari, Shell is already preparing the ground by regularly visiting Baghdad to press its interest in the Rattawi field with Iraqi officials but the Anglo-Dutch major refuses to comment. BHP Billiton admits to past discussions on the Halfaya field but says it has no current talks.

BP's chief executive, Lord Browne of Madingley, has already said he fears there is not a "level playing field" ­ a remark that could refer either to American operators that may be favoured by a US-backed new Iraqi regime or to the international companies that already have Iraqi deals.

The first foreign companies likely to be working in Iraq are not the oil explorers and producers but energy services companies, needed for remedial work on existing fields and to assess the country's needs and capacity. One of the leading oil services groups, Halliburton, based in Houston, has reportedly already been lined up to go in.

Mr Takin estimates that in the next two years, Iraq can boost its production to 3.5 million barrels a day (assuming the existing industry is not destroyed in the war). This will require work on existing fields. He thinks it will take at least five years for Iraq to get to 6 million barrels a day.

The real big foreign contracts could be ever further off. It is also likely that oil majors are much more cautious than the popular caricature and will want to wait for new laws on natural resources and foreign investment before making big spending commitments in Iraq.

Certainly meeting the timetable of Iraq's 10-year plan seems unlikely. It may even take until the end of this decade before long-term production contracts are offered to foreigners. Iraq needs foreign investment much more than other oil regimes in the Middle East and, when they do come, Iraqi deals are likely to be highly attractive for international companies.

While many doubt that Iraq can seriously challenge the Saudis for supremacy, as it emerges from its pariah status, Iraq's contribution will change the dynamics of Middle Eastern oil supplies.