Can Iraq Prove To Be The Next Big Market For Baker Hughes?

by Trefis Team
+34.11%
Upside
53.28
Market
71.45
Trefis
BHI
Baker Hughes Incorporated
Rate   |   votes   |   Share

The global oil industry looks set for another production boom with news that the United States could become the world’s largest oil producer by the end of the decade. Another huge production jump could come from Iraq, a country that has been roiled by war and international sanctions over the last two decades. Iraq has the world’s 4th largest petroleum reserves and is one of the few places in the world where a bulk of the reserves may have been barely harnessed. [1] We believe that this region could provide solid opportunity to oil field services firms like Baker Hughes (NYSE: BHI), which assist oil firms in upstream activities like exploration and production. However, we believe that there are significant risks and issues that need to be addressed before international firms can participate wholeheartedly in this promising market.

Opportunities In The Iraqi Market

The oil sector plays a prime role in Iraq’s economy contributing to almost two-thirds of GDP. Exploration activity in the country is marginal at best in relation to the country’s potential with just about 67 active rigs drilling for oil at the end of October. In contrast the United States, which is estimated to have just a fifth of Iraq’s proven oil reserves had over 1300 active rigs. [2]

According to the International Energy Administration (IEA), oil production from Iraq is expected to double from the current 3 million barrels per day (mb/d) to 6.1 mb/d by 2020 and up to 8.1 mb/d by 2035. (Iraq Energy Outlook, IEA) The country has opened up large oil fields like the West Quarna, which is the world’s second largest and the Majanoon oil field that had been shut for years due to the sanctions.  Given that the country sorely lacks the skilled manpower, technology and equipment that is required to carry out exploration and production, oil field services firms like Baker Hughes could help by providing the required services.

Challenges Facing The Iraq Oil Sector

1) Infrastructure And Logistical Issues – The country is starved for investment in its energy infrastructure and lacks the facilities required to refine and transport its production. Unless export terminal infrastructure picks up, it will be difficult for the country to fully scale up oil production. Another bottle neck is the country’s antiquated refining infrastructure. The IEA estimated that the country will need an about $25 billion in annual investments, up from the $9 billion being invested in the sector currently. (Iraq Energy Outlook, IEA)

2) Political Risks – There have been thorny relations between the country’s central government and the semi-autonomous Kurdistan Regional Government (KRG) region which lies in the countries north east. The Iraqi government does not formally recognize contracts that the KRG inks with international oil firms, and has also restricted firms chances of winning bids in other parts of Iraq if they have positions in KRG. [3]

While this has caused some large international oil firms to reconsider their positions in the KRG region, smaller oil and gas producers like WesternZagros Resources have been very active in this region. Since many smaller firms do not have the technical and engineering prowess of larger firms, they could require firms like Baker Hughes to assist them in exploration.

3) Legal Issues – The oil and gas sector in the country faces regulatory uncertainty and a general  lack of clarity with regards to the laws. The proposed Hydrocarbons Law which governs the contracting and regulation in the oil industry has been under review by the countries Council of Ministers since 2008, but has yet to be passed. [1]

4) Security Risks – Security has always been of concern in Iraq and  following the withdrawal of US troops last year, it could prove to be more of an issue.  The oil sector has been the target of  attacks,  given its importance in building the country’s post-war economy.  In the past, militants have targeted oil fields and oil infrastructure like pipelines. Continued security issues could slow down the oil industry’s development.

Where Does Baker Hughes Currently Stand In The Iraqi Oil Space?

Baker Hughes has been making steady progress by bagging contracts in the Iraqi market. The company inked a deal with Russia’s Lukoil last year  to drill  in the West Qurna-2 oil fields. The firm also secured a $640 million contract for drilling 60 wells at Iraq’s southern Zubair oil field.

However, the firms operations in the region have been slow to pick up. [4] The firm has been experiencing high start-up costs relating to equipment movement and logistical issues, and the firm mentioned that at present Iraqi operations were a compression of the firms margins. A lack of clarity in rules and institutional inefficiencies have also slowed down the firms operations in the country.

We have a price estimate of $54 for Baker Hughes, representing a 28% premium to the current market price.

Understand how a company’s products impact its stock price on Trefis

Notes:
  1. EIA Country Analysis [] []
  2. Rotary Rig Count, Baker Hughes []
  3. Iraqs Oil Boom, InvestmentU []
  4. Baker Hughes Q3 Earnings Call Transcripts, Seeking Alpha []
Rate   |   votes   |   Share

Comments

Name (Required)
Email (Required, but never displayed)
Baker Hughes Incorporated Logo
  • commented 2 years ago
  • tags: RIG HAL SLB BHI
  • I am willing to go to Iraq, have previously worked there