In Iraq's Oil Fields, Signs Of Hope Finally Are Emerging

In Iraq's Oil Fields, Signs Of Hope Finally Are Emerging
June 20th, 2008  
Team Infidel

Topic: In Iraq's Oil Fields, Signs Of Hope Finally Are Emerging

In Iraq's Oil Fields, Signs Of Hope Finally Are Emerging
USA Today
June 20, 2008
Pg. 1
Improved security helps attract foreign investors
By Charles Levinson, USA Today
BASRA, Iraq In the oil-rich deserts of southern Iraq, a rusted pipeline snakes through piles of burning garbage, lakes of raw sewage and slums controlled by hostile militias.
Mundal Mayali, a local councilman, points to the pipeline and sighs. If oil infrastructure like this were modernized and the country's vast untapped reserves of crude explored, then this port city of Basra and indeed much of Iraq would flourish, he says.
"We are desperate for oil investment," Mayali says.
After years of violence and political dysfunction that have kept Iraq's oil production stuck below prewar levels, there finally are tentative signs that Mayali could get his wish and Iraq could begin to realize its potential as an oil giant.
Concerns over security, sabotage and smuggling are fading as the government in Baghdad takes control of oil-rich areas that were run by rogue Shiite militias just a few months ago. This month, the Iraqi government expects 10 major foreign oil companies including ExxonMobil, Shell and Chevron to sign modest contracts that could be a first step toward bigger investments.
"The government is finally sending the signal that Iraq is open for business," Mayali says. "We will rise again within a very short period when the international companies start investing."
Any major jump in Iraqi oil production is probably years away, analysts say. Former deputy Defense secretary Paul Wolfowitz's now-infamous prediction to Congress in 2003 that Iraq could "finance its own reconstruction, and relatively soon" is a reminder of the false promise the oil sector has shown in the past.
Still, the stakes are enormous for both Iraq and the global economy. With the world's fourth-biggest crude reserves, Iraq could provide the world's best hope for a medium-term solution to record-high prices of around $130 a barrel, which have pushed gas prices above $4 a gallon for American drivers.
If foreign oil companies provide money and technical know-how in deals more ambitious than those now being negotiated, Iraq realistically could pump an extra 3.5 million barrels per day into the global oil market within two to three years, says Wayne Kelley, director of RSK, an oil consulting company that has studied Iraq's oil sector for clients including the U.S. and Iraqi governments.
Such an increase would more than double Iraq's current oil output and add nearly 4% to the global supply. "That becomes a very significant amount that would help alleviate gas and energy prices," Kelley says. "Iraq truly has that capacity."
A resurgent oil sector also could hasten the withdrawal of U.S. troops by providing Iraqis with the jobs and revenue necessary to sustain recent security gains, according to the Iraq Study Group, a bipartisan panel that assessed the Iraq situation for Congress in 2006.
That would be a welcome change from the disappointments of the past five years. Instead of funding Iraq's reconstruction, oil has been one of the chief sources of income for militant groups because of smuggling, corruption and theft, according to a 2007 report by the Special Inspector General for Iraq Reconstruction (SIGIR).
The U.S. government has pumped $1.83 billion into Iraq's oil sector in the past five years to rebuild pipelines and other infrastructure, but repeated sabotage of oil installations by militants and general fears of violence have kept production flat. According to the U.S. Energy Information Administration, Iraq does a worse job of taking advantage of its oil resources than any other country in the world.
Meanwhile, world oil prices have more than quintupled since the war began.
"The war wasn't a war about oil as critics alleged, but oil was absolutely considered to be one of the big beneficial side effects," says David Kirsch, who was a State Department energy analyst at the time of the U.S. invasion in 2003 and now manages oil intelligence for PFC Energy consultants in Washington. "The idea was that a resurgent Iraqi oil sector was going to bring down prices to $15 a barrel and crush OPEC."
Instead, "the Iraq war has been one of the great contributing factors to the run-up to $135 a barrel," Kirsch says. "From that perspective, it's just been a failure across the board."
Some of the recent progress can be seen in the bleak deserts around Basra, Iraq's second-biggest city with more than 1.5 million residents. About 70% of the country's oil reserves are in this area of southeastern Iraq.
Until recently, much of the oil industry here was dominated by Shiite militia groups, some of them loyal to the anti-U.S. cleric Muqtada al-Sadr. The militias demanded that state oil companies pay them in exchange for protecting pipelines, says Farouq M.S. Ismail, director of Iraq's National Petroleum Institute.
Earlier this year, al-Sadr's militia threatened to shut down the Majnoun oil field which produces 150,000 barrels a day if the state-owned Southern Oil Co. didn't hire 100 people handpicked by the militia, Ismail says.
The government caved and made the hires.
Things have improved since March, when Prime Minister Nouri al-Maliki launched a major offensive to retake Basra from the militants. The city has remained under government control since then, and al-Maliki has moved to assert his power over the oil industry by replacing the director of the Southern Oil Co.
The number of attacks on pipelines has fallen nationwide, according to the most recent SIGIR report issued in April, which did not provide more detailed statistics. Mayali and other local officials say the amount of oil lost to smuggling has slowed to a trickle since the Basra offensive.
However, as elsewhere in Iraq, the progress on security remains fragile. At the Sheiba Oil Refinery, security guards stand watch in front of posters commemorating Shiite militants killed by U.S. forces. The rank-and-file workers of the Southern Oil Co. have protested al-Maliki's intervention.
"The militias still have influence," Ismail says.
As security improves, attention is turning to the oil infrastructure itself, much of which has not been replaced in several decades because of neglect under Saddam Hussein's rule. For example, the newest gas-pumping stations in Iraq are at least 35 years old. The oldest date to the 1930s.
In fact, some of the technology has gone backward. The pipeline network used to be computerized, but now is manned by employees who monitor pressure gauges and manually adjust the pipeline's flow, Ismail says.
That's going to cost billions of dollars, an investment of a magnitude that only foreign oil companies could provide, Ismail and other observers say. This month, such companies are set to make their first foray into postwar Iraq when the government in Baghdad plans to sign several technical support contracts.
Under the deals, the oil companies would provide technology, training and equipment for six of Iraq's largest oil fields, according to Assem Jihad, a spokesman for Iraq's oil ministry. Their participation could help bolster Iraq's oil output by about a half-million barrels per day, the Iraqi government says, and lay the foundation for much bigger investments.
"It's a foot in the door" for oil companies, says Samira Kawar, the Middle East editor for the Argus Media Group, an oil publication.
For the big money to start rolling in, Kirsch says, Iraq's parliament likely will need to pass a long-awaited oil law that would protect oil companies' long-term investments and establish how future oil revenue will be distributed among Iraq's religious groups the Sunnis, Shiites and Kurds.
The law has been stuck in parliament for years as religious groups battled on the streets of Baghdad for control of the country.
The issue is particularly contentious because oil funds nearly the entire Iraqi economy it accounts for about 90% of government revenue in a country where hardly anyone pays taxes.
Here, too, there are hopeful signs.
The recent nationwide decline in violence has improved relations among Sunnis and Shiites. That has helped al-Maliki broker several other major political compromises this spring, such as a law setting a date for provincial elections later this year.
Ultimately, foreign oil companies may believe that the modest initial contracts they're signing will help generate the political will to get the oil law approved, Kelley says. And Iraq's unique characteristics a country with lots of relatively easy-to-extract oil, but little ability to do so on its own may just be too good to pass up.
"The prize is so great in Iraq, and the window of opportunity for the international oil companies is so narrow, that none of the major operators can afford not to attend the party," Kelley says.
Other obstacles remain, including the greatest enemy of all investors: uncertainty.
Until the U.S. presidential election, it is unclear how long large numbers of American troops will remain in Iraq. Negotiations over the legal framework for a long-term U.S. presence also have hit a snag this month as al-Maliki, the prime minister, pushes to expand his government's power.
Oil companies may balk at Iraqi demands to retain some sovereignty over Iraq's resources and a large share of the profits. "The oil companies need to maintain some control, especially within a country like Iraq that is highly volatile," says Jim Ritterbusch, president of the U.S.-based energy consultancy Ritterbusch and Associates.
Also unclear: just how much oil Iraq has. Oil Minister Hussein Shahristani said last year that new studies suggest Iraq could be the richest oil country in the world; reserves may have as many as 330 billion barrels compared with the 115 billion barrels officially claimed by the government.
The question goes to the heart of future deals. Lots of easy-to-extract oil would allow the Iraqi government to demand more favorable terms from eager oil companies.
Kelley says the Iraqi claims are wildly off the mark. The former oil engineer for Halliburton says Iraq's oil wealth is probably less than 60 billion barrels of recoverable oil.
There is also the possibility that, by the time Iraq is able to get its oil out of the ground, the opportunity for a bonanza may have passed. Kelley says if crude prices remain at record levels, consumption habits could change and the "oil era" could end within a decade.
"By the time the Iraqis realize their full oil potential, the world will have completely changed," Ritterbusch says. "We could all be driving hybrids instead of SUVs."

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