Iraq Looks to Rebuild Once Prominent Energy Sector by Opening its Doors to Foreign Oil Majors

Contributed by: Money Morning (http://moneymorning.com) -

By Jason Simpkins
Associate Editor

Iraq has officially opened the door for foreign oil companies to invest in the country’s rich energy sector for the first time in more than 30 years.

Thirty-five foreign oil majors have been invited to bid for contracts to provide technical support and help boost production in eight oil and natural gas fields.

The contracts will be awarded in 2009, as Iraq’s oil minister, Hussein Shahristani, hopes to increase production by 2 million barrels of crude oil per day by 2013.

Iraq has the world’s third largest proven petroleum reserves, according to the Energy Information Administration (EIA). While Iraq boasts proven reserves of 112 billion barrels, the EIA estimates that up to 90% of the country remains unexplored. Only 2,000 wells have been drilled in Iraq, versus approximately 1 million in the state of Texas alone. The war-torn country could have another 100 billion barrels of oil buried in its uncharted territories.

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The energy sector is crucial to Iraq’s economy and development, as crude oil export revenues represented around 60% of its gross domestic product (GDP) and 89% of government revenue, according to the March 2007 review by the International Monetary Fund (IMF).

However, wars with Iran, Kuwait and the United States have roiled the country’s infrastructure. Adding to the pain, political and economic sanctions have set Iraq’s development back decades.

Its failed invasion of Kuwait and the resultant trade embargos caused Iraq’s oil production to drop from 3.5 million barrels a day to about 300,000 barrels a day. Production in the country has regained some of its footing since then and currently stands at an approximate 2.5 million barrels per day. However, Iraq’s Shahristani has pledged to lift out put to 4.5 million barrels a day by 2013.

To accomplish this, Shahristani is offering to pay foreign oil majors such as ExxonMobil Corp. (XOM), BP PLC (ADR: BP), Total SA (ADR: TOT), and Royal Dutch Shell PLC (RDS.A, RDS.B) for their training and consultancy services. Shahristani draws the line, however, at offering foreign companies any portion of the oil to be extracted.

In fact, at a news conference in Baghdad, Shahristani was openly critical of the Kurdish regional government for signing deals that offer foreign companies shares of the oil they extract. Any firm that has already signed an agreement with Kurdistan, such as IGI Group, was left off the list of potential bidders for Iraqi service contracts.

“We do not see the necessity to have anyone sharing the Iraqi people’s oil,” the Los Angeles Times quoted Shahristani as saying. “The Iraqi oil will remain under complete Iraqi control under the auspices of the national oil company once it is established.”

The issue of sovereignty remains a sensitive subject, as many critics have theorized that the U.S. invasion of Iraq was, at its core, a plot to seize control of the country’s natural resources. Three U.S. senators have already urged the Bush administration to stop these deals for fear they would inflame sectarian tensions in the wore-torn country.

Another point of contention is that Iraq’s parliament has yet to approve a national oil law to regulate foreign contracts. Discussions remain deadlocked in discussion over how oil revenue is to be divided among the country’s diverse and volatile regions.

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