Oil sector to have vital role in rebuilding of Iraq

In a post-Saddam era, the operative words "reconstruction, revival and resuscitation of the oil sector" will be of greater significance in the rebuilding of a new Iraq.
As of now, Baghdad is no more in the money. Eight years of war with neighbouring Iran, followed by the occupation of Kuwait and the twelve-year stifling sanctions, have left the war-ravaged country with no resources to either tap its vast oil reserves or upgrade its existing oil wells that are functioning well below their capacity due to obsolete technology.

Iraq is awash with an abundance of oil -- its proven reserves are second only to Saudi Arabia -- and future oil sales can churn out a significant part of the revenues needed to rebuild its infrastructure. But that can only happen when the funds are made available to streamline its impaired oil industry.
According to a report released last December by the US Council of Foreign Relations and the Baker Institute, the cost of repairing existing oil export installations alone will be around $ 5 bn, while restoring Iraqi oil production to pre-1990 levels will cost an additional $ 5 bn, plus $ 3 bn per year in annual operating costs. However, in its report, the Middle East Economic Survey, believes that production can reach 4.2 mm bpd within three years at a cost of $ 3.5 bn, and 4.5 to 6 mm bpd within seven years.

Recently, the Pentagon confirmed that the Iraqis have booby-trapped its 1,685 oil wells. In the eventuality of some of these being blown up, it will make the task of reconstruction more difficult.
It took Kuwait more than $ 50 bn to restore its oil output to its pre-Operation Desert Storm level. As it is, Iraq is saddled with $ 142 bn in enforceable debt claims, besides the $ 300 bn reparations outstanding from the invasion of Kuwait, and $ 57 bn in contracts signed by the government.
Before the invasion of Kuwait, Iraq's oil capacity was about 3.5 mm bpd and, at the onset of the US-led war, it varied between 2.5 and 2.8 mm bpd. Oil production is concentrated mostly in northern Iraq in and around Kirkuk, and in the south in and around Basra.

The Kirkuk oilfield accounts for 700,000 bpd of northern oil production, which is mostly exported through Turkey. The second largest northern oil field is Bai Hassan, which produces about 110,000 bpd. Other northern fields make considerably smaller contributions.
The most important field after the Kirkuk field is the southern field of Rumaila. The north Rumaila field produces about 750,000 bpd, while south Rumaila adds another 500,000 bpd. Other large fields include Al Zubair, Missan and West Qurna.

Iraq's export infrastructure, too, is in bad shape. Iraq's largest pipeline, the Kirkuk-Ceyhan pipeline, requires urgent repairs to meet its optimal capacity of 1.1 mm bpd. It can now handle only around 900,000 bpd. A parallel 46-inch line is inoperable.
The Strategic Pipeline built in 1975 for the export of northern Kirkuk and southern Rumaila crude to be shipped through Turkey is disabled, after the K-3pumping station at Haditha as well as four other additional southern pumping stations were destroyed. A full return to the tanker terminals' capacity at Mina Al Bakr, Khor Al Amaya, and Khor az-Zubair (which mainly handles dry goods and minimal oil volumes) will require extensive infrastructure repairs.
Mina Al Bakr also is constrained by a shortage of storage and oil processing facilities, most of which were destroyed in the Gulf War. The multi-million dollar question is who will rebuild the oil facilities.

As for the overall reconstruction of infrastructure, many experts have suggested a Marshall type plan and waiving of 66 % of its Gulf War II repatriation debts. Even if such concessions are made, Iraq will still require billions of dollars to meet the basic needs of its people.
Herein comes the role of the oil majors -- the tussle will be between those backed by the Anglo-American alliance on one side and the rest on the other. Just before the beginning of the current war, Iraq had awarded mostof the contracts under the UN auspices to countries more sympathetic to Saddam Hussain -- Russia, France, China and others from the developing countries.

As of October, 2002, Iraq reportedly had signed several multi-billion dollar deals with foreign oil companies mainly from China, France, Russia and, on a lesser scale, with those from India, Malaysia, Brazil and others. Deutsche Bank estimates $ 38 bn total on new fields -- "greenfield" development -- with potential production capacity of 4.7 mm bpd if all the deals come to fruition.
Russia, which is owed billions of dollars by Iraq for past arms deliveries, has a strong interest in Iraqi oil development. This includes a $ 3.7 bn 23-year deal to rehabilitate Iraqi oilfields, particularly the 11-15 bn barrel West Qurna field (located west of Basra near the Rumaila field).

In October, 2001, a joint Russian-Belarus oil company, Slavneft, signed a $ 52 mm service contract with Iraq on the 2 bn barrel Suba-Luhais field in southern Iraq. Full developmentof Suba-Luhais could result in production of 100,000 bpd at a cost of $ 300 mm over three years.
As of March, 2002, Slavneft reportedly was awaiting approval from the United Nations to drill 25 wells at Luhais. Russia's ZarubezhNeft received UN approval to drill 45 wells in the Saddam field, which contains 3 bn barrels of oil and five tcf of associated gas, plus Kirkuk and Bai Hassan.

The largest of Iraq's oilfields slated for post-sanctions development is Majnoon, with reserves of 12-30 bn barrels and located 30 miles north of Basra on the Iranian border. French company, TotalFinaElf, has reportedly signed a deal with Iraq on development rights for Majnoon, which can lead to production of 450,000 bpd within two years or so at an estimated (according to Deutsche Bank) cost of $ 4 bn.
Eventually, Majnoon could produce significantly more oil than that, possibly well above 1 mm bpd. In February this year, TotalFinaElf said that it was confident regarding its Majnoon contract, regardless of the Iraqi government in power. The 2.5-5 bn barrel Halfaya project is the final large field development in southern Iraq.

Several companies (BHP, CNPC, Agip) have reportedly shown interest in Halfaya, which ultimately could yield 200,000-300,000 bpd in output at a possible cost of $ 2 bn. Smaller fields with under 2 bn barrels in reserves are also receiving interest from foreign oil companies. These include Nasiriya (ENI, Repsol), Tuba (ONGC, Sonatrach, Pertamina), Ratawi (Shell, Petronas, CanOxy), Gharaf (Mashino-import, Rosneftegasexport), Amara (PetroVietnam), Noor (Syria), and more.
Italy's ENI and Spain's Repsol appear to be strong possibilities to develop Nassiriya. Since most of these contracts were signed with the government of Saddam Hussain, in a post-Saddam scenario, the Allies, in all probability, will question their validity. Experts believe that American and British companies will try to grab control over Iraqi oilfields with political backing from their countries.
There are even some indications that the surviving members of the erstwhile British-dominated Iraq Petroleum Corporation (IPC) may exploit the fall of Saddam Hussain to fight for their old possessions in Iraq. IPC members -- BP, Shell, and Exxon Mobil, three of the world largest public companies -- "may argue that the compensation/nationalisation deal they agreed to in 1973 was signed under duress. This could present an incoming Iraqi government with a huge legal compensation case at a very awkward moment", warns Milan Rai, the author of “War plan Iraq: Ten reasons against war on Iraq”.

The Royal Institute of International Affairs in a report entitled "The future of oil in Iraq: scenarios and implications" also feels that companies from countries that have participated in the political and/or military campaign to oust Saddam Hussain will be rewarded with opportunities for investment to compensate for opportunities missed as a result of the sanctions regime. It says: "In this sense, the United States and the United Kingdom areclearly future stakeholders in Iraq's oil. US policy has certainly kept American and British oil companies at a distance, but they have had opportunities to express their interest."
According to the Washington-based Institute for Near East Policy report dating back to 1997, nine US companies (Mobil, Conoco, Chevron, Occidental, Arco, Exxon, Texaco, Coastal and Amoco) had already contacted Iraq to express their interest in developing oilfields. British Petroleum and British Gas had similar contacts with the Iraqi government.

There is going to be a conflict of interest as the situation changes in Iraq. A paper entitled "Guiding principles for US post-conflict policy in Iraq" suggests that Iraq's vast pool of professional corps of oil industry technocrats and technicians should be utilised to help in the restoration of the oil sector.
It says: "Due to the massive infrastructure requirements, however, Iraq's oil experts may be amenable to establishing an international consortium, with Iraqi participation and leadership, to assist with planning, coordination and implementation of a wide variety of projects."
The paper, co-sponsored by the Council on Foreign Relations and the James A. Baker III Institute for Public Policy of the Rice University, quotes Para 30 of UN Security Council Resolution No. 1284 that already authorises the UN secretary general to investigate ways that oil companies could be allowed to invest in Iraq. Thus, the legal basis for the UN to authorise and oversee foreign investment in the repair and expansion of Iraq's oil industry already exists.

As for the conflicts over contracts that are likely to arise under the circumstances of regime change and to prevent the prolonged legal delays that could hamper the development of a new government's ability to expand production, the paper recommends, "to pre-establish a legitimate (possibly UN mandated) legal framework for vetting post-hostility exploration agreements".
A post-Saddam Iraq regime will not have the time to go through such hassles. What will be required are the required funds and a smooth transition of its oil industry to its full potential as this is Iraq's only lifeline to rebuild its future.