Christopher Swann, Breakingviews.com
Atef Hassan, Reuters Files Employees of Schlumberger, the world's biggest oil services group, work in Iraq where the company will have nearly 600 employees by year-end.
Schlumberger Ltd.'s Iraq ramp-up could soften oil prices -- eventually. Signs of oil services companies at last investing in the volatile country mean gas-guzzlers everywhere can rest a bit easier. If its huge oil reserves can now be safely tapped, Iraq could be on the way to joining Saudi Arabia as a key swing producer.
The biggest oil services group in the world certainly seems serious. Schlumberger chief executive Andrew Gould now expects to have nearly 600 employees in Iraq by the end of the year and is banking on a market for his company's services of up to US$4-billion a year by the middle of the decade. Where Schlumberger leads, smaller peers such as Baker Hughes Inc. and Halliburton should follow.
As energy companies scavenge for hard-to-extract sources in oil sands or deep water, Iraq is one of the last, and least exploited, sources of old-style cheap oil. Assuming Iraq can hit the targets set in last year's round of oil contracts, the nation will be gushing close to an additional 10 million barrels a day by the end of the decade, according to the Energy Policy Research Foundation.
Even getting half the way to this goal -- a more realistic assumption --would eclipse other historic surges in supply, such as those from Russia in the mid-2000s and Mexico in the early 1980s. The stingy fee-per-barrel structure of the contracts oil companies have signed in Iraq means they benefit from volume, not price, giving them a powerful incentive to pump at full speed. And all this is before allowing for new finds, which some geologists believe could more than double Iraqi reserves.
Even accounting for hefty demand growth from new motorists in China and India, Iraqi oil could tilt the balance more toward cheaper oil than would otherwise be the case. It could also menace green alternatives, including ethanol, which already face unpromising economics.
Of course, Schlumberger's vision of a more secure Iraq may be premature. And it is certainly too early for Americans to dust off their SUVs. But Iraq's emergence as an oil powerhouse and a significant influence on prices is starting to look less far-fetched.
christopher.swann@ breakingviews.com - For more independent financial commentary and analysis, visit breakingviews.com
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