The success of the recent oil auctions in Iraq is creating a windfall for American oil services companies. Schlumberger (NYSE:SLB), Baker Hughes (BHI), Weatherford (NYSE:WFT), and Halliburton (NYSE:HAL) have committed to drilling 2,500-3,000 new wells per year and building new pipeline and shipping terminal infrastructure that could make the country the world’s largest oil exporter.
The value of these contracts may reach a massive $60 billion over the next six years, and could generate $1 billion in new revenues for each company per year. Two offshore terminals are already under construction, and another two are on the drawing board. If successful, the project will boost the country’s oil production from the current 2.5 million barrels a day to 12 million b/d by 2016.
Iraq’s oil production peaked at 3 million b/d in 1979, and then went to nearly zero after it invaded Iran. I remember those days well, as I was issued a visa to accompany Saddam’s troops to Tehran, only to see it cancelled when the Iranians were able to mount a counter offensive. I still have the dessert camos and telephoto lenses need to cover the desert war, although the pants, regrettably, no longer fit. Iraq’s oil industry never recovered.
UN sanctions limited the regime to minimal “official” exports that covered humanitarian imports like baby food and drugs. Tanker trucks smuggled out through Jordan what they could, with the proceeds going directly to Saddam’s family. When the US invaded, bails of hundred dollar bills were found stashed in private homes, the proceeds of these black market deals.
American oil engineers were shocked by the poor state of Iraq’s energy infrastructure after 40 years of neglect. It all has to be rebuilt from scratch. If the new Iraqi government can provide the necessary infrastructure, and stabilize the political and security environment, it will become one of the largest changes to the landscape for international trade in decades. Those are all very big “if’s”. It will dump another Saudi Arabia’s worth of crude on the market.
It will also go a long ways towards meeting China’s insatiable demand for oil, and put a long term cap on prices. Of course, this is the scenario that antiwar activists predicted eight years ago, but no one else, especially the Bush administration, thought it would take so long to play out. This is so important that I can’t believe no one else is talking about it.