Investor interest in Iraq grows despite reconstruction uncertainty

Multinational oil companies and oil service firms expect the US Congress to play an increasing role in shaping the pace and scope of Iraq's oil sector reconstruction and eventual renaissance.
"This is something our members expect to happen," said James Burrows, executive director of the Washington, DC-based US-Iraq Business Alliance. "Clearly the industry position needs to be heard and not always is."

Burrows recently met with US provisional authority officials and members of the US-appointed Governing Council in Baghdad. Burrows said there is "strong interest" in his group from the oil industry, but declined to specify which companies have joined.
For the next few months at least, Congress will help shape the direction of the rebuilding for one key reason: it holds the purse strings and the US government is still largely paying the bills for reconstruction. That could change later in the month depending on the outcome of a US-sponsored donors' conference on Iraq. But so far the lukewarmresponse from the international community, including some of the US's closest allies, is unlikely to change that political dynamic.

Last spring Congress approved the White House's initial $ 62 bn request, which largely funded military operations but also included $ 1.7 bn for reconstruction and $ 489 mm for war-related repairs to the country's oil system. Now US President George W. Bush is asking Congress for more money; the proposal provides $ 87 bn in supplemental funds for Iraq and Afghanistan. Of that $ 87 bn, the White House wants $ 21 bn toward reconstruction activities in Iraq, including $ 1.2 billon earmarked to continue what has proved to be a painfully slow process to repair mostly delivery and processing equipment that continues to be vulnerable to sabotage and theft.
Congress is still expected to approve most, if not all, of President Bush's request. Still, there will be sharp questions along the way. And there are a growing number of lawmakers, both Republican and Democrat, who want the reconstruction money to be a loan instead of a direct grant. That proposal is currently opposed by the White House and failed its first test in a Senate committee. Backers of the plan say they will reintroduce it on the Senate floor when the chamber reconvenes.

The Senate already unanimously approved a plan earlier this month requiring most future contracts to rebuild Iraq be granted on an open and competitive basis. The administration would still be able to award non-competitive contracts, as it did with Halliburton earlier this year, but it would have to provide a written explanation to Congress.
The measure reflects growing unease with the White House's past spending plans for the country. Reflecting that concern, two amendments sponsored by Sen. Patrick Leahy (D-Vt.) were approved in the earlier committee process. One measure establishes criminal penalties for contractors convicted of defrauding the government on Iraq-related contracts. The other legislation directs the US provisional government inIraq to publish monthly oil production and revenue statistics.
And during the upcoming floor debate on the bill Sen. John McCain (R-Ariz.) is expected to propose outside audits of US spending in Iraq. He told reporters the measure is meant "to reassure the taxpayer that the money will be well spent and not disappear into a black hole."

The House has not formally tackled the spending proposal yet, although it is expected to start when the Senate returns. House Republican leaders have privately told the White House the budget request this time around will almost certainly be passed, but will have some strings attached-namely requirements similar to the Senate request to make the contracting process more open and transparent.
This, in no small way, reflects the ongoing crusade by House Democrats, led by Rep. Henry Waxman (D-Calif.), a senior member of the House Energy and Commerce Committee, to turn up the political heat on the White House with regard to the controversial no-bid oil services contract made to Halliburton.

Some oil analysts have told Waxman that the contract's value could potentially reach $ 7 bn; administration officials dispute that figure, noting that other competitive contracts for oil services work are already in the pipeline and are expected to be awarded shortly. The issue clearly is not going away, however.
In a Sept. 26 letter to Joshua Bolton, director of the White House's Office of Management and Budget, Waxman also took aim at the latest request for oil repairs, and his comments might be recycled by other lawmakers as the debate continues on in Congress in the coming weeks. Waxman told Bolton that President Bush's latest spending plan for the oil fields in Iraq is "opaque" and is 2 1/2 times larger than a detailed estimate projected less than two months ago by the US-led Coalition Provision Authority (CPA), Corps of Engineers, and the Iraqi Ministry of Oil.

In the short-term, oil service companies -- Halliburton included -- are expected to benefit the most from reconstruction efforts since longer-term exploration projects could still be years away. Oil revenue is eventually expected to help finance domestic programs and infrastructure that directly benefit the Iraqi people; in the near term US officials are counting on export sales to help finance war-related repairs that are taking much longer than originally anticipated because of ongoing looting and logistical issues.
Under the administration's latest estimates, Iraqi oil revenue is projected to be $ 12 bn in 2004, and $ 20 bn in both 2005 and 2006. But US officials acknowledge oil money, even at today's fairly high prices, will not be enough to help finance the massive capital investments needed to restore basic services. Most analysts predict that running Iraq will be an annual drain of at least $ 15 bn for the next few years.

But given that Congress is now working on what has become the most detailed blueprint so far on Iraq reconstruction, multinational oil companies are taking a harder look at what may lie ahead once the country's political situation stabilizes. To that end, many companies plan to participate in a US-sponsored conference in Baghdad slated for December.
The event organizer, London-based oil consultant Paul Bristol, told Oct. 2 it would be a "brainstorming session" for companies looking to consider. Executives from most major multinational oil companies, including ExxonMobil and Shell, have said publicly that they want to see a stable political environment before even starting serious discussions.

Nevertheless, those same executives privately concede they want to keep close track of what is happening on the ground in a place that holds the world's second largest oil reserves. US-based oil companies are now mulling the idea of becoming members of a bilateral industry trade group, modelled after associations such as the US-Russian Business Council.
Meanwhile it remains unclear what impact, if any, a recent shift in US advisors to the oil minister will have on the timetable oil companies can expect to take a more active role in developing reserves.

Last month CPA announced that a former ConocoPhillips executive, Robert E. McKee III, would replace Phillip Carroll as senior adviser to the Iraq Oil Ministry. No explanation was given by the administration for the departure of Carroll, a retired senior executive with Shell. Carroll largely stayed out of the public spotlight, with Iraqi oil officials generally responding to media requests about oil operations.
McKee's position as chairman of Houston-based Enventure Global Technology, a joint venture between Shell and Halliburton, may cause some consternation from Democrats, but the administration appears to be confident that their decision to hire him was a good one to help move the reconstruction process along.

In 1992, McKee was honoured by the board of trustees of the Colorado School of Mines "in recognition of his distinguished career achievements." Before assuming the top job at Enventure last spring, McKee had recently retired from ConocoPhillips as executive vice-president, exploration and production. McKee held the same position with Conoco during 1992-2002.
Prior to his most recent appointment by CPA, McKee was on the board of directors of the American Petroleum Institute and the National US-Arab Chamber of Commerce; he is a member of the Society of Petroleum Engineers and was chairman of the US-Russia Business Council's energy committee.
McKee also was listed on the website as on the board of directors for Questar, an exploration and production company headquartered in Salt Lake City. He is a past chairman of the Southern Regional Advisory Board of the Institute of International Education, a member of the advisory committee of the University of Texas Engineering Department, and a member of the Colorado School of Mines Advisory Board.

US occupation authorities in Iraq predict the latest infusion of aid from Washington will expand oil production from the current 2 mm bpd level to 3 mm bpd by midyear 2004. Some lawmakers, mainly Democrats, remain sceptical; they say the White House has avoided its own interagency reports that warned oil production export levels might not rebound enough to finance war-related repairs in a timely fashion.
A breakdown of the pending $ 1.2 bn request shows that the single largest proposed expense is $ 575 mm to repair refineries and pipeline delivery systems that have been in various states of disrepair since the 1991 Gulf War. Additionally, four topping plants would be built for a total cost of $ 125 mm. Another $ 68 mm would be used to buy 250 LPG trucks and 200 fuel tankers that could be used as a backup whenever domestic product distribution lines are cut because of sabotage or looting.

The administration also wants to beef up security around key infrastructure areas; that is estimated to cost $ 60 mm. There is also $ 6 mm in the budget for the oil minister and directors to have their own security force, including bodyguards, and $ 5 mm to be spent on oil industry consultants.
The Bush administration also proposes to spend $ 900 mm to import refined product for domestic needs and create a 30-day product reserve that includes stockpiles of diesel and LPG.