MOSCOW -- Russia's oil industry will remain the favorite of the international investment community despite the likely emergence of new opportunities in Iraq, analysts and fund managers say.
Even if Iraq's oil wells survive the war unscathed, it will take years - and billions of dollars - before the Middle Eastern country will provide Western oil majors with the returns that Russia does.
"Russia is much further along the curve compared to Iraq," said Paul Collison, a global emerging markets oil and gas strategist at UBS Warburg.
Russia's largest oil producers such as OAO Yukos (R.YUK) and OAO Lukoil Holding (R.LKO) have posted double-digit production growth during the past three years as they become more financially transparent and reveal beneficial ownership. And as countries look to diversify away from Middle East crude, Russian oil has become an attractive option.
Multinational oil companies have taken notice.
Russia's oil industry was given a de facto promotion to investment grade when BP PLC (BP) last month said it would invest $6.75 billion as a partner in what is to become Russia's third-largest oil producer.
Exxon Mobil Corp. (XOM) Chief Executive Lee Raymond said earlier this month the company will consider strategic partnerships with local Russian producers, along with Russian projects it could develop independently.
Russia has proved itself to be a stable political and economic regime, which is what Iraq needs before money will start flowing there, Raymond said.
The relatively cheap reserves in Russia fueled the BP deal, but now that Iraq's 120 billion barrels of proven reserves will be opened up to development, does that mean that global oil majors will stop sniffing around for other Russian acquisitions?
Probably not, Collison says.
"Even if you assume damage from the war will be minimal, then capital costs in Iraq are still going to run into the billions of dollars," he said. "It's not like turning on a faucet. And when more Iraq oil comes onto the market, it'll displace expensive production in the North Sea, Alaska and on-shore China."
Iraq produces 2 million barrels a day compared with Russia's 8 million b/d. Iraq exports 1.7 million b/d while Russia exports 3.5 million to 4 million b/d.
Any substantial output boost in Iraq will take four to seven years, taking into account the time it would take for the new government to settle and for project, contracting and subcontracting tenders to be conducted.
Meanwhile, major oil consumers such as U.S., China and Japan continue to actively court Russian officials as they move to diversify their crude imports.
Despite the disagreement between the U.S. and Russia over Iraq, the U.S. still wants Russia to be strong oil producer, U.S. Energy Secretary Spencer Abraham said during last week's visit.
"Of course, we can't tell our companies where they should buy their oil" but the U.S. is looking at ways to aid Russia's expansion of oil export capacity, Abraham said.
He said he discussed a planned $5 billion pipeline from Siberia to Murmansk - which will make direct exports to the U.S. feasible - during a meeting with Russian Energy Minister Igor Yusufov.
Such projects will be feasible only if oil prices stay above a certain threshold.
Most Russian oil companies plan their capital expenditures and rate of return on equity based on an oil price of $16-18 a barrel and are safe bets at or above that range, said William Browder, Chief Executive of the Russia-dedicated Hermitage Fund.
The Organization of Petroleum Exporting Countries said Wednesday it would cut output if its basket price fell below $22 a barrel. It currently is at $27.18.