Iraq's oil industry: The endemic problem

Jun 21, 2004 02:00 AM

by Walid Khadduri

Iraq ceased oil exports because of sabotage to the southern and northern pipeline systems. The oil market’s response was initially subdued, despite generally high price levels and a tight supply/demand balance.
The domestic significance of these attacks, however, is increasing. The symbolism of Iraq’s main source of revenue being reduced to zero just days before the transfer of some authority to Iraqis cannot be underestimated.

Global markets
The shortfall of around 1.8 mm bpd of Iraqi crude created by the sabotage has barely raised oil prices $ 1 a barrel. The markets have for some time considered Iraqi oil as an insecure source of supply. End-users have stopped using Iraqi crude as the base stock for their refineries. There is a reason for this: Iraq has been in a state of war, sanctions and domestic violence throughout the past 24 years, with only two years of respite (August 1988-July 1990).
Oil facilities were destroyed during the war with Iran (Khor al-'Amaya, Fao storage tank farm, etc) and investments were curtailed to the bare minimum throughout the 1980s. The allies bombed the main pumping stations, gathering centres, and refineries during Operation Desert Storm in early 1991 and sanctions stopped all exports during the first-half of the 1990s.

While exports resumed under the UN oil-for-food program, they were often interrupted or curtailed for several weeks at a time because of political skirmishes between Baghdad and the UN. Since the occupation of Iraq last year, there have been scores of attacks against the pipeline system, refineries and power stations. The net effect of all this mayhem has been the degradation of the Iraqi oil industry, poor field management and lack of proper maintenance, as well as disrupted supplies to customers.
Iraqi oil authorities received approval in 1979 to raise capacity to 5.5 mm bpd and started the process of drawing up tenders for the contracts, only to be interrupted by the war with Iran. Since then, oil production capacity has never exceeded 3.5 mm bpd and is currently approximately 2.5 mm bpd.

The fact the markets did not panic at the loss of Iraqi exports this time around, despite the global nervousness about lack of capacity and high demand, is a testimony to the abundant supplies in the markets. This is particularly the case now that Saudi Arabia is producing over 9 mm bpd and other OPEC member states are either at capacity or even undertaking surge capacity. Producers are meeting company nominations and many barrels are in transit, as is proven by the tight tanker charter market.
The markets have assessed correctly that Iraqi oil teams will repair the damage in a few days, and if there is a delay, and it is necessary, then other producers will come forward to make up the shortfall -- basically Saudi Arabia.

The fact that the disruption happened at the beginning of the summer season has also eased the pressure. However, if these acts of sabotage continue at this frequency and with such a devastating impact, shortfalls in the winter season, with the projected seasonal rise in demand, could start having a greater effect on prices.
Meanwhile, these pipelines sabotage leaks resulted in the formation of extensive crude oil pools due to the lack of electronic communication and computerized monitoring of oil flows which have hampered prompt shut-off of the affected oil flows.

Domestic impact
But there are two factors that make the latest attacks more alarming from the domestic perspective. The first is the coordination and synchronization of the campaign, both in the south and the north, as well as the assassination of the chief oil security official in the north. The fact that one of the southern pipeline systems was hit twice indicates the boldness and effective planning of the attackers and the ineffective security system that is currently in place.
A more threatening aspect is the rising number of attacks on southern oil production and export facilities. Approximately 85 % of Iraq’s current oil exports are from the south. Most of the attacks until a few weeks ago were in the north, around Kirkuk and Baiji, while very little activity took place in the south, allowing exports of around 1.6 mm bpd.

The situation has changed now. There was first the attempted attack against the offshore export facilities at the Basrah Oil Terminal and Khor al-'Amaya, as well as another attempt against one of the main pumping stations in the region. While these attempts failed, the sabotage of the pipeline system succeeded and stopped the flow of oil. The threat to the southern oil industry could cripple the country’s oil production and exports if not checked and stopped in time.
All indications are that the interim government of Ayad 'Allawi will take tough measures to deal with the deteriorating security conditions in the country. Whether it will succeed or not is less certain. The loss of hundreds of millions of dollars in revenue at this juncture will further add to the country’s woes.

The key lesson is that security in the oil sector can only be assured once there is political stability throughout Iraq. The opposition understands that attacking oil surface facilities, along with car bombs and assassinations, is an effective means of undermining the credibility of the US and the Iraqi Government and derailing their policies.
It is obvious that the protection provided by the US troops and the private South African security firm Erinys, hired to protect the oil facilities, has failed. What the government needs to do now is not only provide better security but also ensure that the Transitional National Assembly that will convene in July to prepare for the January 2005 elections includes all Iraqis in an attempt to reach a new social contract. The exclusion of any major political groups from this process will only bring more instability to the country as a whole, and the oil sector in particular.

Source: Petroleumworld
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