Saddam's Capture: The Potential Outcome for Oil - TheStreet

With Saddam Hussein in captivity, the focus in Iraq will now likely turn to oil

Although today's news doesn't mean the end of ambush attacks against U.S. and coalition forces, the overnight raid that nabbed Iraq's most wanted may immediately change the perceptions of the country's ability to deliver oil to market.

There's been a lot of talk about Iraq's ability to boost production quickly and impact global energy markets. However, rogue attacks against military and strategic interests, including oil fields and pipelines, have impeded the nation's impact on worldwide crude supply.

A lot of crude is within Iraq's borders; the problem is getting it to world markets. The thought has been that Saddam's knowledge of Iraqi oil operations and his coordination of sabotage against oilfield interests -- from production fields to pipelines -- have actually increased instability in the energy industry since the "official" end of the war.

Many Western companies have avoided actively gaining access to Iraqi fields due to both the obvious security concerns as well as uncertainty about whether business in the war-torn country could ever be profitable.

New Opportunities

Saddam's capture, at least symbolically, is a major step in changing that perception. While plenty of challenges remain to bring stability and security back to Iraq's energy fields, this psychological victory will certainly cause some U.S. companies to begin revisiting possible new opportunities in Iraq.

There is plenty of work for companies besides

Halliburton

(HAL) - Get Report

. For example, many of the drilling rigs in Iraq are either original rigs from or contain components from

National-Oilwell

(NOI)

. The company has said recently that it expects to be very involved in the resurgence of the Iraqi oil patch.

Competitors of Halliburton, such as

Schlumberger

(SLB) - Get Report

,

Weatherford

(WFT) - Get Report

and

Baker Hughes

(BHI)

, will also likely be supplying equipment and services to Iraqi drillers. More focused service companies will ultimately be in the mix, too. For example, a company like

BJ Services

(BJS)

may provide well-stimulation services in Iraq as the old wells are revitalized.

Re-energizing Iraqi production fields is a significant challenge for the country. The degradation of wells from neglect and damage will likely make it more difficult to restart meaningful production than most pundits have predicted. You only need to look to Venezuela and its problems in restarting production after the oil strike last year to see the impact of neglect. There should be plenty of demand for Western technology and, hence, revenue opportunities for the aforementioned companies.

Over time, major oil companies may come into Iraq as well. It's hard to predict who will end up with an interest in Iraqi production, but you can bet that majors like

ExxonMobil

(XOM) - Get Report

,

ChevronTexaco

(CVX) - Get Report

and

Royal Dutch

(RD)

, among others, will be in the hunt.

Finally, Iraq will need pipeline construction and remediation work. Companies like Halliburton's Kellogg Brown and Root division will get their share, but others may also benefit.

Plenty of Oil, but When?

As

mentioned in the Columnist Conversation early Sunday and as

pointed out by my

Street Insight

colleague Doug Kass, oil prices will likely feel pressure Monday as a result of the news. While an appropriate response, it is important to understand that oil doesn't flow like water. A crank of the spigot doesn't bring more oil to the surface.

As a result, while the per-barrel price of oil may dip, I wouldn't expect it to drop into the low-$20s, something some pundits have predicted before. In fact, while significant, the capture of Saddam alone doesn't immediately change any production metric in Iraq. It certainly should signal a turning point in redeveloping Iraq's oilfields and delivery system, but there is plenty of work to do even before redevelopment and remediation begins in earnest.

Oil will may test the $30 level and maybe trade into the high-$20s, but anything more than that is likely an overreaction to only one piece -- granted a very important one -- to a very complex puzzle.

Sunday is a day to celebrate the fact that a major strategic U.S. mission has been accomplished. It also may very well signal the beginning of a new chapter in Iraqi energy development. However, it only begins a new chapter in the Iraqi energy playbook, and it may be the most arduous and expensive chapter in the story of Iraq's re-emergence as a major player in global energy markets.

At time of publication, Edmonds was long ExxonMobil, although holdings can change at any time.

Christopher S. Edmonds is vice president and director of research at Pritchard Capital Partners, a New Orleans energy investment firm. He is based in Atlanta. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While Edmonds cannot provide investment advice or recommendations, he welcomes your feedback and invites you to send it to

Chris Edmonds.