Big Oil Returns to Iraq Amid US-Iran War, Betting on New Contract Terms and Output Surge

Major oil companies are returning to Iraq in force, drawn by improved contract terms and the prospect of significantly higher production, even as the US-Iran war rages in the neighborhood, according to a Bloomberg Opinion column by Javier Blas.

Chevron CEO Mike Wirth told a recent industry gathering: “Look, returns follow risk; and you know, we’re not afraid of risk,” explaining why his company is negotiating with Baghdad. The column notes that for the first time in decades, Iraq offers Big Oil the kind of returns it aspires to.

With the new contracts already signed and those under negotiation, Iraq could boost its output capacity to 5.5 million barrels per day by 2030, up from about 4.5 million barrels per day before the war. Baghdad has long aimed for 6 million barrels per day, which would make it second in the Middle East only to Saudi Arabia. Iraqi Prime Minister Ali al-Zaidi has talked in recent months of increasing capacity to 8 million or even 10 million barrels per day beyond 2035, though the column describes those targets as unrealistic. A more sensible 20% to 30% increase would still be an enormous feat given the regional conflict.

The return of Big Oil follows decades of disappointment. After the 2003 US invasion, foreign companies were offered only service contracts that paid a small flat rate per barrel and did not allow them to book reserves. Many signed deals but later left due to poor returns. Now, Iraq is offering a new deal that the column says has more in common with a production-sharing agreement, giving companies exposure to rising oil prices and the ability to book reserves.

“The fiscal terms in Iraq had become more attractive,” Wirth told the Energy Intelligence Forum in London earlier this month. “Economics look better today.”

France’s TotalEnergies was the first major to move under the better terms, with a $27 billion investment over multiple years in oil and natural gas fields three years ago. Total CEO Patrick Pouyanné has no regrets despite the war. “The Middle East still has the cheapest oil,” he told the same industry gathering.

BP followed last year with another contract, and it brought ConocoPhillips into the project 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 influx of capital raises a key question for OPEC: how would the cartel accommodate Baghdad’s desire for much higher pumping? The column sees two likely outcomes: OPEC would turn a blind eye to overproduction, as it did with Algeria and the United Arab Emirates, or Iraq would simply ignore the cartel and ultimately leave it.

Iraq could face hurdles if the Strait of Hormuz remains a war zone, but it has options to bypass it. Baghdad already ships limited quantities of crude via a pipeline running north through Turkey to the Mediterranean. The end of the Syrian civil war opens another possibility: a shorter pipeline toward the west, also ending in the Mediterranean.

Today, Iraq is pumping well below its maximum production capacity due to the impact of the US-Iran war. But the column concludes that the world should expect more crude from Baghdad in the very near future, with shortages always followed by surpluses in the cyclical oil market.