Exploring new oil fields in Iraq: a risky business

The previous Iraqi constitution prohibited foreign ownership of the nation's oil. Further, Shiite Muslim clerics issued religious decrees decades ago that still stand, supporting the nationalization of the oil industry.

Even if the majority of Iraqi legislators go along with the plan, they will have to sort out key issues. How decentralized should the economy be? Will regional governments control the oil and its revenues or will the national government?

Oil is the "lifeblood of the country," says Raad Alkadiri, a director of PFC Energy, an energy consulting firm in Washington. "It's the principal export and principal source of government revenue. It gives you political weight."

The US and Britain have hoped that their efforts to oust Hussein might give their oil companies an advantage in seeking postwar Iraqi oil deals. But a new Iraqi government may be reluctant to give such powerful nations added economic leverage over the country, says Mr. Alkadiri. Instead, it might let contracts go to the highest bidder, whatever its nationality. Or oil companies may form multinational consortiums to bid in Iraq.

Last month, Iraq awarded its first post-Hussein oil contract for $136 million to a Turkish-British-Iraqi consortium to develop an extension of the Kirkuk oil field.

The business risks of searching for oil in a volatile area also loom large. "Oil companies will want to see some of these constitutional issues better clarified before they make major investments," Alkadiri says. He doubts any major foreign oil investment is likely before the end of 2005 or 2006.

Still, the new Iraqi oil strategy makes economic sense, oil experts say. Its potential reserves are huge.Estimates range from some 45 billion barrels to as high as 100 billion barrels, a top-end estimate that would nearly double Iraq's proven reserves.

Oil exploration, of course, involves geophysical risk. It could take hundreds of millions of dollars to find there is no oil. If adequate oil reserves are found, it would take more money to build the infrastructure to get it to the world markets. The total could run to $2 billion to $3 billion, estimates Mr. Simmons.

That's money Iraq doesn't have. The revenue it earns from its current oil fields are needed both for reconstruction and other government expenses, as well as fixing up these fields, experts say.

So foreign investment will be required - and the search for oil will be quite feasible, technically speaking.

"Iraq is one of the relatively less difficult areas of the world," says Mr. Gold. The oil is under dry land, not a thousand feet of water. It is located in the Middle East, where it could be exported with fairly short pipelines and existing ports.

When new Iraq oil comes into the world oil market, its impact on oil prices will depend on the demand- supply situation at the time, oil experts say. It could also hang on the willingness of OPEC members, especially Saudi Arabia, to make room for Iraqi oil by trimming its own output - if that is needed.

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