Big Oil Cranks Up Investments in Iraq

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As it becomes harder and harder for major oil companies to discover and develop global oil reserves, four major oil companies plan to make a $100 billion investment in Iraq to upgrade the country's three most productive oil fields.

The situation in Iraq
Iraq is home to the world's fifth-largest oil reserves and is currently the third-biggest producer in OPEC, at an average level of 2.9 million barrels per day. The three fields targeted for investment -- West Qurna Phase 1, Rumaila, and Zubair -- produce a combined 2 million barrels per day.

Iraq is the only OPEC member operating without the constraints of a production quota, which has been suspended since 1998. This is expected to come to an end in 2014, as the country targets a production level of 4.5 million barrels per day in 2013 and a staggering 12 million barrels per day by 2017. Production from the three fields is expected to generate just more than 50% of Iraq's total production by that point.

Players involved
ExxonMobil (NYSE: XOM) plans to invest $50 billion to improve the West Qurna Phase 1 field. It does not have as advanced infrastructure as the other two, thus the higher dollar figure. Royal Dutch Shell (NYSE: RDS-A) will hold a 15% stake in the effort.

BP (NYSE: BP) and Eni (NYSE: E) will upgrade the other two fields. Eni has announced it will spend about $20 billion working with Occidental Petroleum (NYSE: OXY) and Korea Gas on its Zubair field project.

The investment is part of a 20-year contract that requires the companies be paid costs and remuneration fees on barrels produced above a 10% baseline increase.

Impact on OPEC
Though OPEC expects global demand to increase 5.3% over the next five years, requiring a production output of 92.9 million barrels a day, analysts expect some tension within OPEC when Iraq returns to the quota system. OPEC sets the quota limits to prevent production from exceeding world demand. As Iraq frees its reserves, it will likely eat up some of the other countries' market share.

That could happen, or we could see something similar to what occurred during the first half of this year, when political strife in Northern Africa shut down production and forced other OPEC nations to ignore their quotas to keep up with demand.

Looking ahead
It is impossible to say now what effect the planned increase in Iraqi production will have on world oil supplies. Geopolitical risks with potential to curb production and ramp up prices loom large right now. The United Nations is expected to release information today regarding Iran's attempts at building a nuclear weapon. Nigeria is also considered more unstable than usual, after extremist attacks killed 150 people.

Click here to use My Watchlist to stay up to date on the stability of the OPEC nations.

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