Violence Imperils Iraq's Oil Progress

Violence Imperils Iraq's Oil Progress
March 28th, 2008  
Team Infidel

Topic: Violence Imperils Iraq's Oil Progress

Violence Imperils Iraq's Oil Progress
Wall Street Journal
March 28, 2008
Pg. 1
Attacks in Basra Come Amid Talks With Western Firms
By Hassan Hafidh and John D. Mckinnon
The resurgent violence in Iraq is threatening nascent efforts to enlist foreign companies to help develop its immense oil wealth, an aim President Bush pushed Thursday as crucial to rebuilding the country.
Fighting in Iraq's oil-rich south raged for the third straight day Thursday in Basra, the country's oil capital, in other southern cities and in parts of Baghdad. The violence crossed over into the oil industry after a bomb detonated under a crucial export pipeline near Basra.
Oil officials said that could significantly curtail Iraq's crude shipments at a time when the fighting is already interfering with production and exports. The pipeline attack sent crude-oil prices higher, with the U.S. benchmark futures contract jumping $2.32 a barrel to $108.22 in intraday trading. It settled at $107.58, up $1.68, or 1.6%.
In a speech Thursday, Mr. Bush expressed confidence that the violence and disruptions will be only temporary. But he also framed the broader fight for Iraq in global economic terms, warning that defeat for the U.S. and its allies "would endanger Iraq's oil resources and could serve as a severe disruption to the world's economy."
The battle for Basra marks the latest clash over the region's biggest source of wealth: its oil reserves, comprising 9.5% of the world's total, according to the BP Statistical Review, an industry bible. The Bush administration and the government of Iraqi Prime Minister Nouri al-Maliki are counting on oil to rebuild and stabilize the country.
Iraq's oil is also important to world-wide markets. Unrest in Iraq and elsewhere, along with surging demand and rising oil-field expenses, have sent oil prices from $30 a barrel to more than $100 over the past four years.
But in Iraq, oil also funds the other side. Across the country, Shiite and Sunni militias routinely siphon away oil and petroleum products to sell on Iraq's black-market or smuggle overseas. The stolen oil reduces government revenue, but it also gives insurgent and militia groups a ready source of income -- officials peg the estimate at about $5 billion a year -- helping to perpetuate Iraq's violence. U.S. and Iraqi officials have said the smuggling problem is only getting worse.
The violence and smuggling frustrate major Western oil companies such as Exxon Mobil Corp., BP PLC and Royal Dutch Shell PLC. In his visit last week to the Middle East, Vice President Dick Cheney held one-on-one meetings with Sunni, Shiite and Kurdish leaders in Iraq to speed passage of a law opening Iraq's enormous petroleum reserves to more efficient production by global oil companies.
Iraq's military declared a curfew through Sunday, and the U.S. State Department ordered its Green Zone personnel into reinforced safe zones amid the barrage, according to the Associated Press. Thousands of supporters of Shiite cleric Moqtada al-Sadr protested in Baghdad. Mr. Sadr's Mahdi Army militia has charged the government with unfairly targeting it in Basra and elsewhere.
Prime Minister Nouri al Maliki, meanwhile, promised "no retreat" in the government's offensive against what it has called renegade militias.
Mr. Bush, in a speech to a largely military audience at the National Museum of the U.S. Air Force in Dayton, Ohio, praising Mr. Maliki's decision to go after fellow Shiites. "This operation is going to take some time to complete, and the enemy will try to fill the TV screens with violence," he said. "But the ultimate result will be this: terrorists and extremists in Iraq will know they have no place in a free and democratic society."
Efforts to Rebuild
Efforts to rebuild Iraq have foundered amid the chaotic aftermath of the invasion, the insurgency, funding bottlenecks, corruption and the poor state of the country's existing infrastructure. But in one potentially hopeful sign, Iraq in recent months returned to its pre-war oil production level of roughly 2.5 million barrels of oil a day. While considerably lower than its estimated potential of as much as six million barrels a day, the level offered a potential sign that reconstruction funding could strengthen.
Recently, Iraqi oil officials have said they were close to awarding as early as next month a handful of limited, technical contracts to big Western oil companies. The recent violence now threatens to upend those negotiations.
The contracts are small potatoes for super majors like Exxon Mobil and Shell. They amount to relatively small payments for the oil companies, and they don't allow for rights to reserves or control over development. Still, executives see them as a critical first step to establishing longer-term relationships in Baghdad in a time when new reserves are increasingly hard to find. They see more attractive opportunities once security improves and after Iraqi politicians agree on a legal framework for foreign investment in the petroleum sector.
But oil-development legislation has been bogged down in parliament, while Kurdish officials in Iraq's semi-autonomous northern enclave have passed an oil law of their own and are signing deals with foreign firms without waiting for permission from Baghdad.
Fading Hope
Western executives have said they won't send employees into Iraq until security improves markedly. Hopes had been raised amid recent improvement across the country. A temporary increase in American troops, a cease-fire by a key anti-U.S. militia leader and success co-opting one-time Sunni insurgents have all been credited with curbing violence.
That hope is now fading. An Iraqi official with the South Oil Co., the state-run production company based in Basra, said Thursday that oil production and exports have slowed because of power cuts and the inability of workers to get to their work sites, all blamed on the fighting.
The official also said a major oil pipeline taking crude from Iraq's southern fields to its two export terminals in the Persian Gulf had been bombed amid the fighting, threatening to reduce exports "heavily."
The contracts in discussion are designed to increase production at five of the country's prized oil fields by a total of some 500,000 barrels a day. The world consumes about 85 million barrels a day, but the supplies would be welcome in a time of a tight margin between supply and demand.
Companies would provide technical advice and assistance. But all development work is envisioned to be done by Iraq's state-run petroleum industry and local contractors. Big companies don't often agree to such limited roles in petroleum development. Their eagerness in Iraq underscores the country's promise.
Remote Prospect
Some analysts regard the prospect of bigger deals as remote. "The potential prize in Iraq is so significant that even with the very gloomy prospects, you can't completely write off the possibility of doing work if you're an oil company," said David Kirsch of PFC Energy, a Washington-based consulting firm. "You'll see some limited initiatives to get a foothold in the country. What you are not going to see though, we estimate, in the next 10 years are the conditions that allow you to do the really significant type of investments that could let Iraq hit its geologic potential of six million barrels per day."
Shell said it is interested in helping with the development of the Kirkuk oil field in the north, discovered in 1927. BP said it is discussing the development of North and South Rumaila, Iraq's two big fields in the south. Iraqi officials said Exxon is eyeing the development of Zubair oil field in the south. An Exxon spokesman wasn't immediately available for comment.
And Chevron Corp. and France's Total SA are negotiating over the West Qurna 1 oil field, according to Iraqi officials. A Chevron spokesman declined to comment on the negotiations, but said the company was "broadly supportive of a technical assistance program." Total declined to comment.
Lingering Concerns
Echoing lingering concerns expressed by other oil executives over safety amid the violence, the Chevron spokesman said the company won't enter Iraq until there is "a security situation that will allow us to put people on the ground, and at this point we're still waiting for progress on that front."
Those concerns have frustrated Iraqi officials. "Some of these companies are procrastinating because they fear that they may fail to meet contracts because of the security situation," said one Iraqi official involved in the talks.
In an interview earlier this week, the Iraqi prime minister's petroleum adviser Thamir al-Ghadhban said he still expects contracts to be signed in April. He estimated costs for the new developments -- including fees for the Western companies -- at between $400 million and $500 million for each field. Mr. Ghadhban didn't disclose what the Western companies would stand to gain financially for their participation.
--Guy Chazan in London, Russell Gold in Austin, Texas, and Robin Moroney in Washington, D.C., contributed to this article.

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