He is a thoughtful, clear thinker and a wonderful writer, as is apparent in this Washington Post commentary on whether or not our intentions in Iraq are entirely based on getting more oil. Yergin is very eloquently making a point that I think is key — Iraq’s oil industry needs capital investment, its development will be slow and therefore a long-run investment play, and given the nature and structure of the industry it will take place through a consortium of oil companies from a variety of countries. Here’s an excerpt, but read the whole thing:
It is often assumed in the “it’s all about oil” discussions that Iraq would turn over its current 2.8 million barrels per day of production capacity to international companies — that this is the new “prize” up for grabs. But that’s another shaky assumption. If the new Iraqi government brings in foreign companies, it will have to split revenue — keeping perhaps 88 cents of every dollar of earnings for itself, but with 12 cents or so going to the companies. Why not keep the whole dollar for itself and simply buy what it needs in terms of technology and equipment for the existing fields?
What a post-Saddam government will need is capital — lots of it — for exploration and new production from its currently undeveloped fields. And that is where a new regime is likely to turn to international oil companies. But which ones?
It will have no shortage of suitors. Once things are clear, companies will be eager to get in line to sign contracts with a country that has 11 percent of the world’s proven reserves. (Saudi Arabia, the highest, has 25 percent; the United States, just two.) But they will be very cautious when it comes to spending billions of dollars until they are pretty confident about security and stability — and “stability” applies not only to the new regime but also to the contracts they sign.
Companies from several countries — Russia, France, Italy and China, among others — already hold contracts, but they are not operational because of U.N. sanctions still in place. Companies without contracts, including the American ones, will have to assess how much time and trouble they are willing to bear. For the oil companies, the big issue, wherever they operate in the world, is how to manage the range of risks — from the geological to the political. In response, they often work together in consortia and partnerships. This approach hedges their bets, spreads their investments and diversifies their portfolios.
And that’s likely to be the outcome for Iraq. The companies with existing contracts will likely team up with other companies — American, European, Canadian, Australian, Japanese — to form new partnerships. Such partnerships would meet the crucial need of a new Iraqi government, which would want to strengthen its position by dealing with a diversified political portfolio of companies representing many different nationalities.