While the United States and Iran are at war, major oil companies are heading into neighbouring Iraq, attracted by contract terms that for the first time in decades offer the kind of returns the industry aspires to. Chevron, BP, ConocoPhillips and TotalEnergies are among those investing, with Chevron CEO Mike Wirth telling a recent industry gathering: 'Look, returns follow risk; and you know, we're not afraid of risk.'
Iraq is emerging as a potentially significant winner of the current regional crisis, despite being a risky destination. The country is offering new contracts that more closely resemble production-sharing agreements, which give companies exposure to rising oil prices and allow them to book reserves on their ledgers, rather than the previous service contracts that paid a small flat rate per barrel.
With new contracts signed and under negotiation, Iraq could boost its output capacity to 5.5 million barrels per day by 2030, up from about 4.5 million barrels a day before the war. Iraqi Prime Minister Ali al-Zaidi has talked of increasing capacity to 8 million or even 10 million barrels a day beyond 2035, though these targets are considered unrealistic.
The author notes that while Iraq could face hurdles if the Strait of Hormuz remains a war zone, it has options to bypass it, including a pipeline running north through Turkey to the Mediterranean, and potentially a shorter pipeline west through Syria following the end of the Syrian civil war.
TotalEnergies was the first major to move into Iraq under the better contractual terms three years ago, with a $US27 billion ($39 billion) investment in oil and gas fields. CEO Patrick Pouyanné said at a recent industry gathering: 'The Middle East still has the cheapest oil.' BP followed last year with another contract, bringing in ConocoPhillips a few months ago.
Chevron has signed a preliminary deal with Baghdad for assets once owned by Russian oil major Lukoil, with a final contract expected in 2027.
The previous opportunity for Big Oil in Iraq came after the 2003 US invasion, but companies received service contracts rather than the sought-after production-sharing agreements, and many left after finding returns did not compensate for the risk.
Analysis
Why This Matters
- The influx of major oil companies into Iraq could significantly boost global oil supply, potentially lowering prices for consumers, while the US-Iran war has disrupted regional production.
- Iraq's increased output could further complicate OPEC's ability to manage global oil prices, as Baghdad seeks to pump far above its current quota.
- The development signals that despite geopolitical turmoil, energy companies are betting on long-term demand and are willing to accept higher risk for better returns, which could reshape investment patterns in the Middle East.
Background
Iraq holds some of the world's largest oil reserves, but foreign investment was largely blocked after Saddam Hussein took power in 1979. Following the 2003 US-led invasion, companies were offered only service contracts with low, fixed fees, which failed to attract sustained investment. Many majors left after finding profits insufficient for the risks. The current US-Iran war has added new instability but also created the conditions for Iraq to offer more attractive fiscal terms to secure capital and boost its production capacity.
Key Perspectives
Big Oil companies (Chevron, BP, ConocoPhillips, TotalEnergies): They see Iraq as offering the cheapest oil in the Middle East and, under new production-sharing style contracts, the potential for high returns that justify the risk, including exposure to rising oil prices and the ability to book reserves.
Iraqi government (Prime Minister Ali al-Zaidi): Baghdad aims to dramatically increase oil production capacity, positioning Iraq as a major global producer and attracting billions of dollars in foreign investment to rebuild and expand its energy sector.
OPEC: The cartel faces a challenge. If Iraq boosts output significantly, OPEC must either tolerate overproduction by a member or risk Iraq ignoring quotas or even leaving the group altogether, which could undermine the cartel's ability to control global supply and prices.
Critics/Skeptics: The author notes that Iraq's ambitious production targets (8 to 10 million barrels per day beyond 2035) are unrealistic. Furthermore, while Iraq has pipeline options to bypass the Strait of Hormuz, the ongoing war and regional instability remain significant hurdles to production and export growth.
What to Watch
- Whether Chevron finalises its deal for Lukoil's assets in 2027, as expected.
- Iraq's actual output figures over the next year: whether production rises despite the US-Iran war.
- OPEC's response to any significant increase in Iraqi output: will it adjust quotas, turn a blind eye or face a member departure?
