Chevron Will Explore a Pipeline to Bypass the Strait of Hormuz. Here's What it Means for the Energy Stock.

Chevron (NYSE:CVX) is making a big push into Iraq’s oil market. The oil giant recently signed memorandums of understanding (MOUs) with the Iraqi government to enter two oilfields. Chevron also plans to evaluate potential pipeline routes that would bypass the Strait of Hormuz. That would help ensure the oil giant could get Iraqi crude to global markets.

Here’s a look at Chevron’s plans and what it means for the energy stock.

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Adding a potential major new resource base

Last year, Chevron signed an initial agreement with Iraq for the Nassiriya project, which consists of four exploration blocks and the development of other currently producing oil fields. Nassiriya has significant potential. Iraq believes it could produce 600,000 barrels of oil per day within seven years of starting work on the project.

Chevron also entered exclusive talks with Iraq earlier this year to take over management of the massive West Qurna 2 oilfield. Iraq nationalized the field last year after the U.S. imposed sanctions on its former operator, Russia’s Lukoil. West Qurna 2 produces about 460,000 barrels per day, making it one of the largest oilfields in the world, accounting for about 0.5% of global supply, and almost 10% of Iraq’s output.

Chevron has now signed formal MOUs for both oilfields, putting it a step closer to taking over control. Additionally, the company is in discussions with Iraq regarding the preparation of technical studies and the evaluation of potential pipeline routes that would bypass the Strait of Hormuz.

Alternatives needed

The Strait of Hormuz closure has hit Iraq hard. Production from its main southern oil fields initially plunged 70% to 1.3 million barrels per day because it couldn’t export oil through the Strait amid Iranian attacks on ships. Output was still more than 50% below its pre-war level in June despite increased oil flows through the Strait. That has had a major impact on its economy, as oil accounts for about 90% of its income and funds nearly all public spending.

That led the country to approve an agreement between its national oil company (Basra Oil Company), Chevron, and other partners to study strategic export pipeline projects. It’s evaluating several options, including rebuilding the Kirkuk-Baniyas pipeline between Iraq and Syria, which has sat mostly dormant since suffering damage during the 2003 U.S.-led invasion of Iraq.

Iraq isn’t the only Persian Gulf country looking to bypass the Strait with a new pipeline. The UAE is working to double its export capacity outside the Strait by building a second bypass pipeline, which it expects to finish next year. Meanwhile, Saudi Arabia is considering an additional 2 million barrels per day expansion of its pipeline to the Red Sea. They are part of seven projects currently under construction or in the planning phase, which could grow the region's bypass capacity to over 14 million barrels per day by the end of 2028, or more than 60% of its pre-war export volume.

A potential needle-mover for Chevron

Chevron is closing in on a deal to take over the operations of a major Iraqi oil field and a large-scale development project. They could be major growth drivers for the oil giant if it can get the oil to global markets. That’s why Chevron is also exploring potential bypass pipeline routes. Securing these oil deals and solidifying a pipeline route would significantly enhance Chevron’s long-term growth visibility, making it an even better long-term investment.

Matt DiLallo has positions in Chevron. The Motley Fool has positions in and recommends Chevron. The Motley Fool has a disclosure policy.