Would Iran feel threatened by tripling of oil output from Iraq?

By Michael Christie and Simon Webb

BAGHDAD/DUBAI, Dec 9 (Reuters) - The geopolitical power balance in the Middle East faces upheaval if Iraq succeeds in tripling oil output, and fellow Shi'ite power Iran will feel more threatened than rival Sunni oil giant Saudi Arabia.

Iraq's potential leap into the ranks of the top three global oil producers could result in a strengthened Shi'ite Muslim front within OPEC if Baghdad aligns supply policy with Tehran.

That would rattle Riyadh, already suspicious of the rise to political supremacy of Iraq's Shi'ite majority since the fall of Sunni dictator Saddam Hussein. Disunity within OPEC could increase, undermining efforts to present an image of harmony.

But oil development in Iraq is more likely to feed tensions with Iran, draw away potential foreign investment from Iraq's neighbour and fuel social discord by depriving Tehran of much-needed money should it result in lower oil prices.

Revenue from the additional 4.5 million or more barrels per day that Iraq is hoping to pump could also give it the economic might to challenge Iran's influence over the Shi'ite world.

"Iraq's development is inevitable," said analyst Gala Riana of IHS Global Insight. "The changes in the balance of power won't be immediate, they are longer term and bring difficulties that Iraq and surrounding countries will need to deal with."

OIL INVESTMENT

Both Iraq and Iran need huge investment in their dilapidated oil industries. Iraq's opening to global energy firms, albeit on tough terms, gives it the edge in attracting the billions it needs to execute oilfield development of an unprecedented scale.

That would make it harder for Tehran to attract the cash it needs at a time when the Iranian state is already under enormous social and political pressure following the contested re-election of hardline President Mahmoud Ahmadinejad.

Even worse, Chinese state energy giants are participating in Iraq, leaving them less resources for elsewhere. Tehran has turned to Asian state firms for money and technology as Western companies have shunned it due to politics and sanctions.

"Why would you want to invest in Iran? It's very risky. You have the sanctions and the politics. If you're in Iraq, you would want to limit your exposure to another risky country in the region," said a senior western oil executive.

Iran could well become the destination for those that lose out in Iraq's oil auctions, he added.

If all of the contracts Baghdad is offering are signed, Iraq could boost its output capacity to 10 million bpd - rivalling Saudi Arabia's 12.5 million bpd and Russia's 10 million bpd, and leapfrogging over Iran, which says it can pump 4.2 million bpd.

Iran is more dependent than top oil exporter Saudi Arabia on high oil prices to finance social spending programmes. Higher output from Iraq would be bearish in the long term for the oil price and could also claw away market share from others.

"Another price downturn like that of last winter would really put the squeeze on the Iranian government, already suffering unpopularity from economic mismanagement, as well as the obvious political problems stemming from the election," said David Mack, a former U.S. envoy to the Middle East.

UNDER SWAY OF ARCH-FOE?

Saudi Arabia will watch the rise of Iraqi oil power and its relationship with Tehran with caution. Dominated by the puritanical Wahhabi sect, many of whose adherents view Shi'ites as apostates, Riyadh regards Persian Iran as its arch-foe.

But analysts say the view that post-Saddam Iraq is under the sway of Iran is often overstated.

Many of Iraq's Shi'ite leaders sought shelter in Tehran under Saddam, but Iraqi nationalism runs strong, as do memories of the 8-year Iran-Iraq war that killed a million people.

Even if a general election next year ushers in an overtly pro-Iranian government in Baghdad, the impact that increased Iraqi oil output might have on economic and political tensions inside Iran may drive the two neighbours apart, analysts say.

Ultimately, staunch U.S. ally Saudi Arabia would rather see a developing and prosperous Iraq than a country that serves as a base for al Qaeda. The kingdom has become entangled in neighbour Yemen's internal conflict and deepening instability.

"It's in our interest that Iraq emerges stable, we don't want another Yemen," said one Saudi official. "If Iraq becomes a regional economic power, that will help the Saudi economy." (Additional reporting by Rania El Gamal in Kuwait; editing by James Jukwey)