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With sanctions on Iran taking effect, we can expect a reduction in the global oil supply. We must also expect that until there is a regime change in Iran, oil production and natural gas exploration cannot be continued in an effective manner. The Iranian government is not halting its nuclear activities, even with all the sanctions that are thrust upon the country. One of the reasons why the sanctions are being ignored is the fact that certain countries like India, China and Russia continue to purchase oil from Iran.

However, that should soon end, as India announced that it would substantially reduce oil imports from Iran, and instead purchase from Iraq. This is where things begin to get interesting, as Iraq is soon expected to become the third largest oil producing country in the world. The world's largest oil producer is currently Saudi Arabia. With an estimated 143 billion barrels of oil, Iraq holds more oil than Iran, which has an estimated 138 billion barrels. Iran is no longer the second largest oil producing company, as Iraq has already grabbed that spot. It is also said that when there is good news coming from Iraq, we can expect good things to happen to oil stocks.

Nevertheless, there are micro events that cause share prices to fluctuate, and that is exactly what happened when Iraq's southern oil export plunged this month. In fact, production has slipped by 170,000 barrels per day, which is quite shocking. In April, exports from Basra averaged 2.11 million barrels per day, and in May, it has averaged 1.94 million barrels. One of the reasons for this decline in oil production, in spite of the optimistic outlook, is the fact that Iraqi officials have overestimated their own production abilities.

Royal Dutch Shell (RDS.A) has been repeatedly making requests to the Iraqi oil officials to be more realistic when they announce their oil production targets. Majnoon oil field near Basra is a stronghold of Shell and its junior partner Petronas. Back in 2009, Iraq had awarded contracts to those companies that had vowed to boost production rates to 12 million barrels a day by 2017. Companies have begun to understand that such wild numbers may work against them and that these projections may not be possible.

Shell has taken the initiative to hold talks with the Iraqi officials to reduce these estimates and determine an optimum field development plan. This may entail reducing the estimates, while also working on technology, logistics and security that hinder the production of oil. Shell officials noted that Iraq may be forced to cut its targets by 40%. The company wants to communicate to the Iraqi government that an oil output of 6 to 7 million barrels per day is realistic. Thankfully, the Iraqi officials too have agreed that they may have overestimated their own production abilities.

When these talks happen and the oil production estimates become realistic, we can expect the Shell stock to rise. With a firm foothold in realistic estimates and a consistent oil production history, Shell is one of the most important oil companies in the world. Managing to secure a 45% stake in Majnoon was not an easy task. Exxon Mobil (XOM) had also bid for the project, but lost it eventually. Total (TOT) of France had tried to sign a deal with Saddam Hussein, but was not able to do so because of the UN sanctions. Other oil fields in the south include Rumaila, which is led by BP (BP), and Zubair, which is led by Eni (E). Exxon Mobil runs the West Qurna-1 field. All these oil fields have reported lower production as well.

Shell is the only oil producer among these giants that has made an effort to project realistic estimates and bring these issues to the table during talks with Iraq. These diplomatic level talks with the Iraqi government would help Shell to create a major foothold in this oil rich country. Shell also announced that it has long-term plans for Iraq and is not moving out of the country any time soon.

What I am more interested in is the way Shell will continue to play a diplomatic role in Iraq and the Middle East. Though it is an oil company, Shell probably has more influence in the region than many politicians. This is mostly because of its valuable assets in oil fields across Iraq and other Middle Eastern nations. Iraq will continue to become the favored nation for western oil companies. Shell has begun to influence the way Iraqis conduct their oil business, and one of the most important tasks was to get them to accept that they are not being realistic.

Shell has managed to make Iraqis accept that they were not realistic in their estimates of daily oil production. This is a big win for an oil company that fought hard to gain access to the Majnoon oil field. I believe Shell will continue to use its tact and business expertise to influence not only Iraq, but also larger international politics that is concerned with oil production and natural gas exploration. A company that has the power to influence a country's reality testing is the one that can increase investor confidence. The next few months will continue to see Shell strengthening its position in the Middle East and elsewhere. I expect upside of 15% by 2013.

Source: Royal Dutch Shell: 15% Upside Likely By 2013