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Big Oil’s Iraqi Disappointment

Flaring Iraq

It all looked so promising: Saddam Hussein is overthrown, post-war Iraq needs help with getting back on its feet, and foreign oil companies are quick to respond. The Middle Eastern country has one of the world’s most abundant crude oil reserves, and what’s more, the reserves are relatively easy to extract.

Indeed, the future looked bright when Shell, BP, and Lukoil entered Iraq and went to work.

A few years later, things look significantly less rosy. Oil prices are down to levels last seen in 2009. Iraq is fighting the Islamic State. The Iraqi government has no money to invest in developing those famous oil reserves. As a result, Big Oil is finding it increasingly hard to keep the ball rolling, and according to the Wall Street Journal, is right now basically on hold, biding its time and probably waiting for the situation to change.

Following the price crash that began in 2014, several production expansion projects at the fields operated by the three majors were suspended as the government found itself unable to pay them for the fields’ development. In May this year, Baghdad asked the field operators directly to cut their investments into the fields because it would be unable to repay these investments. That request came at the worst possible moment, when Iraq had just become the largest exporter of crude to India and needed to pump more oil.

Last month, however, media reported that BP, Shell, Lukoil, and the Iraqi government had reached agreements to restart the projects, with Baghdad pledging the investments it had suspended earlier due to the low oil price. The agreements should bring an additional 250,000-350,000 bpd to the country’s output, which in August averaged 4.6 million bpd.

However, these agreements also concerned the companies’ budgets. All three agreed to cut their allocations for the Iraqi fields by a significant portion, which would limit their opportunities to expand production in a way that would be meaningful in view of their individual bottom lines.

Related: Long Term Consequences Of The Oil Price Crash

That’s why, as the WSJ reports, BP is working on boosting output from its operating wells at the giant Rumaila field, instead of drilling new ones, and that’s why Shell is in no rush to double the 200,000-bpd output at the Majnoon field but is for now just “focusing on sustaining production.” That’s also why Lukoil has put on hold its output expansion plans for West Qurna-2, after lower revenues from the field affected its Q2 financial results.

The developments are kind of ironic, given the rush to enter Iraq when the dust settled after the 2003 invasion. Just this week details from the Chilcot report were released by the Financial Times, showing that ex-Vice President Dick Cheney had met with Russia’s then-PM Evgeny Primakov to offer an easier entry of Russian energy companies into Iraq in exchange for their support of the invasion.

The FT went on to cite British government officials who met with local oil companies that were worried they might get passed by for entry into Iraq’s oil and gas. Well, they didn’t get passed by, and at least one Russian company joined them in Iraq.

But, alas, the Iraqi dream has so far proven to be a disappointment.

By Irina Slav for Oilprice.com

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