U.S. oil majors set to call shots

The vertical split among the permanent members of the Security Council over measures to be taken to disarm Iraq is less to do with the threat posed by Saddam Hussain and more about landing oil and reconstruction contracts. A conflict of commercial interests of the U.S. and Britain on one side, and France, China and Russia on the other, has influenced their diagonally opposite stances.

Deutsche Bank in its recent report, Baghdad Bazaar: Big Oil in Iraq has laid bare their hidden agenda. The dissemination points out to only one interest - to profit from the reconstruction of Iraq.

A regime change in Iraq, in all probability, will benefit the U.S. and UK oil companies, while a peaceful resolution and the continuation of Saddam Hussain will benefit firms based in France, Russia and China.

With the world's second-largest concentration of oil reserves, and no serious investment in energy since 1990, a "new" Iraq will need oil revenues to rebuild the country and new technology and management to rehabilitate its upstream projects.

The report points out that in the event Saddam Hussain yields to weapons inspectors and, therefore, retains power, Iraq would no doubt award contracts to its current supporters - Russia, China and France. On the other hand, if Saddam's regime is ousted, then the corporate line-up in Iraq may well feature American and British companies, particularly in the event of a U.S.-led war.

Iraq's current wellhead capacity is around 208 million barrels per day.

This is just a fraction of its proven oil reserves of at least 112 billion barrels, along with 220 billion barrels of probable resources from potentially oil-rich unexplored areas.

Of the current oil production, some 400,000 bpd is used for domestic consumption and 2 million bpd is available for UN oil-for-food sales. A further 400,000 bpd is smuggled.

The Deutsche Bank report says that Iraq can double its oil production with enough money and technology. It adds that in a post-sanctions world, rehabilitation of under-invested and bombed facilities could add one to two million bpd capacity over a two to three-year period, with greenfield negotiations possibly lasting for years.

Further, it predicts that "if Iraq stays in the Opec with a quota equal to Iran's (currently 3.2 million bpd) - the most likely scenario - there would be little room for unconstrained growth". In that case, this growth will be a new but not unmanageable challenge for Opec.

Iraq will face important Opec quota restrictions and, with an end to the U.S.-Iraqi tensions, oil prices are likely to fall by $5 and could undermine energy shares as production costs of Iraqi oil is the lowest at approximately between 50 cents and $ 1 per barrel, compared with $2.5 in the North Sea and $ 4 in the U.S.

Although there are scenarios where Iraq might chase rapid growth rather than cooperation with Opec quota policies, Deutsche Bank believes that Iraq's behaviour within Opec would likely be governed by the 'self-interest' constraints that have been generally applied to key Opec members.

However, the worrying factors to Opec are - a break-up of the country into northern and southern parts that might go all out for oil production to pay for rebuilding, or a regime that feels very little allegiance to Opec after a decade of low production under UN sanctions.

Oil services companies would have a key role in the rehabilitation of fields and pipelines and contracts worth billions of dollars are at stake.

The Deutsche Bank report states that the early work will be largely dedicated to improving existing production and stimulation work would largely fall to Schlumberger and Haliburton. Other beneficiaries in the early stages would include those companies with leverage to production enhancement such as Baker Hughes. "As new production is brought on, the large cap firms would benefit," the report says.

In a post-Saddam Iraq, the U.S. oil majors could emerge as turnkey reservoir management companies on behalf of Iraq National Oil Company, with ExxonMobil and Chevron Texaco being the natural candidates. Currently, neither American nor British companies, with the exception of some small deals by Shell, have development contracts in Iraq.

Of the $38 billion projects already agreed to by the Iraqi regime, almost all of them are cornered by TotalFinaElf, Russia's Lukoil, Zarubezneft and Mashinoimport, the China National Petroleum Company and ENI.

Although the Deutsche Bank report says that the deals "look more like a political ploy than a serious development plan", current contracts favour those with the largest projects, best political support and biggest balance sheets.

The report adds that post-sanctions politics could see partnerships between Total, Lukoil, Shell and BHP and the U.S. majors plus BP "which seems to be acting as a U.S. company, despite its strong Iraqi legacy and European domicile".

Deutsche Bank believes that the U.S. majors would be given a role in the post-Saddam context, but not at the exclusion of these politically supported players.

Nevertheless, it says that the U.S. majors stand to lose if Saddam makes a deal with the UN, whereas the Europeans, Russians and Chinese look well placed in such a scenario.