Iraq has long been the black sheep of the world's oil-producing family, the unreliable cousin you can't count on to show up at the party. But with Baghdad set to launch a major reform aimed at getting its oil development act together, could the reawakening of an oil giant drill a hole in oil price expectations?
At the end of this month, the Iraqi government is scheduled to hold the first of two licensing auctions offering foreign investors the rights to rehabilitate and develop more than 80 billion barrels of conventional onshore oil and natural gas reserves. The second auction is planned for December.
The auctions will reopen Iraq's oil industry to private investment for the first time since the country nationalized its oil industry in 1972, during which time wars and economic sanctions have stifled development of Iraq's vast conventional oil and gas reserves, which rank third in the world, behind only Saudi Arabia and Iran. The result has been a wobbly flow of supply from Iraq for decades, with production stuck at about 2.4 million barrels a day (b/d) - more than 1 million b/d below the country's late-1970s peak.
"In our view, these [licensing]rounds represent the largest global upstream opportunity in decades," wrote Bank of America-Merrill Lynch commodity strategist Francisco Blanch in a research report.
PLAYING RUSSIAN ROULETTE?
Baghdad is aiming to boost production to more than four million b/d by 2013, and eventually to six million b/d. That increase would represent about 4 per cent of current global oil output - a hefty incremental boost.
Are the targets realistic? Mr. Blanch points to Russia's example to show it has happened before. Like Iraq, Russia's oil industry was suffering from aging infrastructure and neglected oil fields before it was thrown open to foreign investment in the late 1990s. Production jumped 40 per cent in just four years.
"The Iraqi oil sector stands to benefit in a similar way," Mr. Blanch wrote. He said that while Baghdad's targets look "aggressive," an increase in Iraqi output to about 3.5 million b/d is quite achievable within three to four years.
DWARFED BY DEMAND
That could be a big deal for oil prices, given the profound impact Iraq's swings in oil production have had on prices in the past. Surging Iraqi output helped stop oil prices in their tracks in the 1980s and 1990s.
But Mr. Blanch believes that the slowing of production growth in other parts of the world will leave more than enough room for Iraq to sharply increase its output without killing the golden goose of oil prices.
World demand is projected to rise by up to one million b/d annually over the next several years, dwarfing the modest output increases expected from non-OPEC countries, while OPEC itself operates under self-imposed production caps.
"More Iraqi oil could moderately reduce the upside pressure on prices, but will not change our long-run positive view on oil," he said.