Carola Hoyos The oil service sector positions itself for a big boon in Iraq: PIW

Iraq has created much excitement among big international (and national) oil companies, which, over the past few months, have signed a plethora of deals to develop its biggest fields. Though the deals may lead to a big boost in oil production, they are not expected to be terribly profitable for the companies.

But what about the service industry? After a tough past year during which its customers have forced through price cuts as they have slashed costs amid a weaker refining and gas price environment, will Iraq be the industry’s El Dorado?

“With much of Iraq’s infrastructure damaged or destroyed by years of war and sanctions, foreign oil-field services firms are expected to play a pivotal role in providing equipment, services and personnel,” writes Petroleum Intelligence Weekly in its current issue.

The industry newsletter notes that US oil service companies have already begun to position themselves for a market that could grow to as much as $5bn a year, from $500m today. Oil services companies’ margins could be as high as 20-40 per cent (far better than those their customers are likely to enjoy), PIW says, quoting UBS statistics.

Here is PIW’s take:

The larger services firms have wasted no time positioning themselves. Halliburton has earmarked $100 million of its 2010 capital budget to building infrastructure in Iraq and has already secured a contract with state Southern Oil Co., but US rival Weatherford has set the pace, with $400 million worth of Iraqi contracts already secured, four rigs in operation and plans for another four by the end of the first quarter.

The looming upstream boom in Iraq raises a couple of questions, the first over who is most likely to benefit. Last year’s licensing rounds saw many state firms fare better than the majors, and services firms from China, India and elsewhere in Asia can similarly be expected to compete aggressively with the Western engineering giants

The second question is over how upstream costs will be affected. With huge expansions also taking place in Brazil and Australia and a nascent revival in Canada’s oil sands, the pieces are in place for another squeeze on services and raw materials.