Join        Login             Stock Quote
Top News :  

The $40 Billion Opportunity In Iraq
By: Morningstar   Monday, April 26, 2010 1:58 PM
The second auction, held in November 2009, was a stunning success. Numerous industry consortiums bid successfully for contracts which, when added together, suggest that Iraq's oil production capacity could reach 12 million barrels per day in six to seven years. Actual oil output will be based on market demand, and there is language in the contracts to compensate the oil and gas companies if oil production is reduced. A significant near-term hurdle is the passage of a comprehensive oil law that justifies the legal framework for the auctions.

Infrastructure Issues Loom Large

Infrastructure challenges present one of the biggest short-term constraints. Iraq produces 2.5 million barrels per day, and exports 1.9 million barrels per day. The country has indicated that it is working on a new plan to build pipelines and export terminals. The amount of cash being spent on the issue is immense, as Iraq is expected to receive about $200 billion annually from the development contracts, and the oil and gas companies have indicated plans to spend about $100 billion developing the fields. Two floating oil terminals are already under construction, and the country plans to build two more, bringing its oil handling capabilities to about 3.6 million barrels per day. Foster Wheeler (FWLT) has been awarded a contract to assist with the engineering for some new oil export facilities which would bring Iraq's exporting capabilities to 4.5 million barrels per day. Water constraints are also being addressed, with ExxonMobil (XOM)  and Iraq working on plans to use seawater for pumping operations.

Though infrastructure is a challenge, we believe that the initial wells will not be technically difficult. Oil and gas companies indicated that they plan to target easy-to-drill wells to boost the fields' initial production rates by 10%, which will trigger the cost-recovery portion of the contracts. After the first year, the drilling will graduate to more technically challenging wells. Therefore, we expect that the services firms will be able to generate above-average margins drilling easy wells for the first year, and Iraq oil production should move towards 2.6 million barrels per day by the end of 2010.

Schlumberger and Weatherford Are Early Leaders

The scale and success of the production increases in Iraq are uncertain. However, we think the winners are easier to identify. The Western oil services companies such as Schlumberger, Halliburton, Baker Hughes, and Weatherford will all play key roles in Iraq's oil production plans. The firms are valuable because they bring needed services expertise and numerous Western services technologies that will help the country fully exploit its long-neglected reserve base. The short timeline of the production ramp-up suggests that the industry should generate healthy operating margins in the 15% to 20% range.

If we assume that Iraq oil production reaches 8 million barrels per day, we think Iraq-related services revenue will start to ramp up in 2011, and cross $1 billion in revenue for each of the major services firms in 2013. By 2016, we estimate potential annual revenue will top $3 billion per firm. At that time, we assume over 400 rigs will be working, and the number of wells drilled will run between 1,500 and 2,000 annually.

Comments Closed


Related Press Releases
Popular Articles
Recent Articles by Morningstar
  • No Stories Found

Subscribe to Email Alerts rss feed or RSS feeds rss feed for articles from more than 800 contributors and press releases, SEC filings and full text news from thousands of sources.

Fundamental data is provided by Zacks Investment Research, and Commentary, news and Press Releases provided by YellowBrix and Quotemedia.
All information provided "as is" for informational purposes only, not intended for trading purposes or advice. iStockAnalyst.com is not an investment adviser and does not provide, endorse or review any information or data contained herein.
The blog articles are opinions by respective blogger. By using this site you are agreeing to terms and conditions posted on respective bloggers' website.
The postings/comments on the site may or may not be from reliable sources. Neither iStockAnalyst nor any of its independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. You are solely responsible for the investment decisions made by you and the consequences resulting therefrom. By accessing the iStockAnalyst.com site, you agree not to redistribute the information found therein.
The sector scan is based on 15-30 minutes delayed data. The Pattern scan is based on EOD data.