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BEARISH FLIP. That picture could change dramatically if the U.S. military staves off Iraqi sabotage and puts in place a new regime committed to hurry-up modernization. If Iraq opens its oil taps, that would be a powerful psychological force for lower oil prices worldwide. "The whole market will flip from bullish to bearish," says Fareed Mohamedi, chief economist at PFC Energy in Washington.
What about tapping some of that oil to pay for the war? According to Secretary of State Colin L. Powell, the U.S. won't fund its military campaign from Iraqi oil revenues, but it does reserves the right to use some of Iraq's black gold for reconstruction. "The oil of Iraq belongs to the Iraqi people," Powell said on Jan. 21. "It will not be exploited."
So who will reap the big bucks from getting Saddam's oil fields back on track? At this point, Iraq is believed to have contracts worth about $38 billion pending with such companies as Italy's ENI, Royal Dutch/Shell, Australia's BHP (BHP ), TotalFinaElf, and Russian giant Lukoil. Sanctions have precluded American companies from doing business in Iraq, and foreign concerns are likely to continue to exploit their long-standing links. Yet the sanctions have also stalled efforts by non-U.S. companies to complete their deals and start development.
EXACTING REVENGE? France is by far the biggest player. The giant TotalFinaElf now has development rights to roughly 25% of total Iraqi reserves. In theory, the country's long relationship with Iraq's oil technocrats could put French outfits in good shape for more deals after any war. But at the moment, many French industry officials remain convinced that the Americans will exact revenge if France fails to fully support the war effort. While Russian contracts may be honored, "ours won't be," predicts a top executive of TotalFinaElf. That's why some French observers insist that when push comes to shove in the U.N., France will march in step -- mainly to protect its oil stakes.
Russia is in a more delicate position. Iraq owes Moscow $8 billion in Soviet-era debt. In 1997, Lukoil signed a $3.5 billion, 23-year deal to revive Iraq's al-Qurnah field, which has 7.8 billion barrels of proven reserves. But the accord was put on ice since President Vladimir V. Putin's support for the U.S.-led sanctions drive.
Now Lukoil is sending a high-level delegation in February to heal the breach -- the second such diplomatic overture in recent weeks. Lukoil President Vagit Alekperov claims to have Kremlin assurances that his interests will be protected in a post-Saddam regime. That has many industry observers convinced that an informal accord with Washington is in place, one that would restore Lukoil's stake in Iraq.
UNCERTAIN IMPACT. For American energy companies, smarting from the charge that former oil execs George W. Bush and Vice-President Dick Cheney are spearheading their interests, the subject of economic gain from an Iraqi intervention is extremely sensitive. U.S. oil executives queried by BusinessWeek would not speak on the record. Privately, industry sources familiar with discussions with the Administration say the talks focused on nitty-gritty issues such as snuffing out oil fires Saddam's forces may set. And the industry remains torn on what impact war in Iraq will have on its fortunes.
In the short term, Iraqi infrastructure rebuilding projects might be sweet deals. Yet over the long haul, a flood of Iraqi oil could depress world prices. Bottom line in the Oil Patch: Keep your lip zipped, hope George W. is right, and go along for the ride.
Copyright 2003, Bloomberg L.P.
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