Iraq Wants to More Than Double Its Oil Output in Six Years. Here's What It Means for Chevron.

Iraq has a bold ambition for its oil industry. The country recently sent a delegation to Saudi Arabia seeking a higher production quota from OPEC, aiming to boost its output to between 8 million and 10 million barrels per day (bpd) within the next six years. That's more than double the 4 million bpd it produced before the war with Iran slowed oil flows through the Strait of Hormuz.

This move could have a major impact on Chevron (NYSE:CVX), which recently signed memorandums of understanding (MOUs) with the Iraqi government to enter two oil fields in the country. Here's a look at the leading role Chevron could play in Iraq's oil resurgence.

Image source: The Motley Fool.

Chevron could be crucial to Iraq's plans

Last month, Chevron signed MOUs with Iraq regarding the West Qurna 2 and Nassiriya oilfields. The first potential deal would see it assume operational control of one of the world's largest oil fields. West Qurna 2 currently produces 460,000 bpd, accounting for nearly 10% of Iraq's output and 0.5% of global supply. Iraq nationalized the field earlier this year due to U.S. sanctions on its previous operator (Russia's Lukoil). The field holds an estimated 13 billion barrels of oil. Iraq has previously stated that it wants to boost production in this field to between 750,000 and 800,000 bpd after Chevron takes over operations.

Meanwhile, Chevron initially signed an agreement in principle with Iraq for the Nassiriya project in 2025, which includes four exploration blocks and the development of producing fields. Nassiriya is a much smaller field today, but it has significant long-term growth potential. Iraq is targeting an initial production capacity of 600,000 bpd for this project within seven years of starting work.

While Iraq has several state-owned oil companies, including Basra Oil Company, which is temporarily operating West Qurna 2, it needs assistance from major global oil companies to provide the technical expertise and capital required to develop its fields to their full potential. In addition to Chevron, fellow oil giants TotalEnergies and BP have also recently signed new deals with Iraq. Meanwhile, ConocoPhillips bought an interest in BP Energy Company of Kirkuk to help support the ongoing redevelopment of four large-scale producing fields in the Kirkuk region of Northern Iraq. These deals provide major oil companies with the opportunity to invest in one of the world's largest oil-producing countries.

Lots of promise and risk

While Iraq had been producing 4 million bpd before the U.S. and Israel launched military strikes against Iran, its output cratered after Iran retaliated by attacking ships trying to pass through the Strait of Hormuz. At one point, its production tumbled to only 1.4 million bpd.

That's leading Chevron to simultaneously evaluate bypass pipeline options. While Chevron and its partners considered rebuilding an old pipeline system damaged by previous wars, that option no longer appears plausible. As a result, they would likely need to build a new pipeline through Syria, which would cost at least $15 billion and likely take four years to build. Even if built, the new pipeline likely wouldn't have enough initial capacity to handle all of Iraq's production, especially at double its pre-war level. That would leave Chevron with meaningful exposure to potential future disruptions to the Strait of Hormuz.

A higher risk, high-reward move

Chevron is working to secure commercial terms with Iraq that would give it control of one of the world's largest oil fields and another one with significant potential. It would add another major long-term growth driver for the oil giant. However, this move adds risk as Iraq currently relies almost entirely on the Strait of Hormuz to export its oil. Still, given Chevron's broad global production base, this seems worth the risk because it's such a rare opportunity to add two potentially world-class resources to its portfolio. It would enhance the long-term investment case that already makes Chevron one of the top oil stocks to buy.

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