First with Financial Comment from Arabia

Is Iraqi New Oil the answer to Peak Oil?

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The $100 billion in oil field development deals signed over the past week in Iraq are intended to boost output to 12 million barrels per day by 2015, rivaling current production output from Saudi Arabia.

Is this New Oil the answer to Peak Oil theory which posits that oil supplies are running out and so oil prices must inevitably go higher? Is this a repeat of the 1970s when in response to the 1973 Oil Shock new oil sources were developed, and prices then stayed low for two decades?

Iraqi legacy

After almost seven years of insurgency and civil war in Iraq and the US occupation it is hard to think of Iraq as the solution to any problem. It is generally seen as a problem, and an expensive one.

But the calm and efficient handling of the oil contracts gives some hope for the future. The geographical spread of the companies does not favor the US unduly, and gives most of the international community a stake in the future of Iraq.

Equally the process does not rob the Iraqi people of its birthright. The huge 12.9 billion barrel West Qurna oilfield, for example will now be developed by Lukoil and StatoilHydro for just $1.15 per barrel.

Global oil companies will make their money on volume, not the oil price – any gain in the oil price will go to the Iraqi state.

Shell and Petronas are to develop the 12.6 billion barrel Majnoon field for $1.39 a barrel. CNPC, Petronas and Total will develop the 4.1 billion barrel Halfaya field for $1.40 a barrel, also in the south of Iraq.

Security concerns are still paramount, but oil companies are not unused to the risk that comes with oil production. Shell has faced major issues with rebels in Nigeria in recent years, for instance.

If the production targets can be reached then a major plank of the Peak Oil theory falls. Oil supplies are not finite and can be augmented in areas where production is still very cheap, like the Middle East.

Heavy capacity expansion

Indeed, both Saudi Arabia and Abu Dhabi are investing heavily in new production capacity, while Iran remains the other possible source of future supply if that country one day decides to also embrace the seemingly rather modest demands of the global oil industry, and becomes a friend rather than antagonist of the international community.

This could be a repeat of the Oil Shock of the 1970s which stimulated the massive investment required for North Sea Oil. But the future price of oil will still be dependent on the balance of supply and demand.

Emerging markets like China and India might continue their high growth rates or undergo the sort of economic disaster typical in emerging markets due to excessive expansion and bad debts. Then again the path of the recovery in advanced countries might prove more rocky than generally assumed today.

That said supply is supply and Peak Oil is nonsense if New Oil now becomes available.


Written by Peter Cooper

December 13, 2009 at 11:46 am

Posted in Banking, Oil Prices

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