In this case, we think Iraq poses the greatest opportunity for Weatherford, especially given its status as the smallest of the four major services firms. The firm has won a number of early contracts in the region over the past few years, while its competitors are still trying to build out their presence in the country. However, we expect the capital investment required in Iraq will be extensive, and Weatherford's constant reliance on the markets for cash may prevent it from taking full advantage of its Iraq opportunities. The need for additional capital could make a merger with industry peer Halliburton, which has very healthy balance sheet, a strong possibility in 2011 or 2012.

The impact of Iraq on industry leader Schlumberger will be diluted, thanks to its wide-ranging international operations. The reduced contribution is despite the fact that we believe Schlumberger is positioned to earn above-average market share some of the industry's highest margins, thanks to its wide-ranging portfolio of services. However, our estimates could be revised higher after the merger with Smith is completed, if Schlumberger can successfully establish more of its product lines in the region. We also think the company has best-in-class experience at executing integrated-project-management (IPM) contracts. In our view, the IPM contract framework is the most likely way Iraq will choose to hand out the services contracts. The difficult operating environment could make quarterly profitability lumpy for the services firms, as we believe the contract framework depends on a stable drilling environment to earn the greatest profits.

If Iraqi oil production turns out to be around 5 million barrels per day in 2016, we assume a much-reduced level of Iraqi services expenditures. We estimate the annual market size would be about $10 billion in 2016, and it would take about $20 billion in services contracts from 2010 to 2016 to drill the needed wells in the auctioned-off fields. We assume it will take until 2015 for Iraqi revenue to cross $1 billion for each of the major services firms. The number of wells drilled annually will only be between 800 and 1,000, and about 200 rigs will be operating in the country. Understandably, the opportunities and profits for Weatherford, Schlumberger, and others will be greatly reduced from an 8 million barrel-a-day production scenario.

If everything goes very well for Iraq and the services firms, production could reach 11 million barrels per day in 2016. In this case, infrastructure, security, and political concerns are all mostly resolved, and the country becomes quite stable. The annual market size could approach $30 billion in 2016, and services contract awards could total $60 billion from 2010 to 2016 in this optimistic case. We believe Iraqi-related revenue for each of the major services firms could cross $1 billion annually in 2012. We expect over 600 rigs to be operating in the country by 2016, and the number of annual wells drilled to be between 2,500 and 3,000. This scenario would be an extremely positive one for the services firms, and the industry would benefit from sharply higher revenue and profits.

Overall, we think it is clear that there are large opportunities for the services industry in Iraq, but the country must overcome numerous hurdles for the industry to obtain any measure of success. If Iraq manages to add just 3 million barrels a day to its production during the next decade, the achievement would still rank among the industry's greatest accomplishments. Thus, adding 10 million barrels a day in production is a huge undertaking. Still, if Iraq can come close to realizing its potential, we think the services industry is extremely well-positioned to earn considerable profits.