http://www.theweekmagazine.com/briefing.asp?a_id=387
Tapping Iraqi oil
The U.S. now controls Iraq’s oil fields. Who will benefit when the oil starts flowing again?
How much oil is in Iraq?
An ocean of it. Iraq has at least 112 billion barrels of high-quality crude under its sands, about a tenth of the world’s supply. That’s enough to satisfy the world’s energy needs for a decade. Only Saudi Arabia, with 264 billion barrels, has greater known reserves. But Iraq has vast expanses of territory waiting to be explored. Only 2,000 wells have been drilled in the country, compared to 1 million in Texas. Industry experts estimate that Iraq might be sitting on as much as 300 billion barrels of oil.
So why aren’t Iraqis rich?
Saddam Hussein must take the blame. For two decades, he was more interested in expanding his power than developing Iraq’s wealth. He launched two ruinous wars on his neighbors Iran and Kuwait, and ran up a $100 billion debt. Saddam also made Iraq a pariah nation prohibited from selling its oil abroad. After the Persian Gulf War, Iraqi oil production dropped from 3.5 million barrels a day to near zero. The United Nations authorized a resumption of petroleum exports in 1995 under the oil-for-food program, and by the eve of the American-led invasion, Iraq was exporting about 2.5 million barrels per day, roughly 3 percent of the world’s supply. Seventy percent of the proceeds went to food, medicine, and other essentials, which nearly two-thirds of Iraqis depended on for survival.
What happens now?
First, billions must be invested to get the oil fields back in working order and to drill new wells. Coalition forces managed to protect most of the existing wells from sabotage, but the damage from 20 years of neglect had already been done. Saddam Hussein’s government spent little on maintenance, and equipment is “rusted, corroded, outdated, cannibalized, and improvised,” one expert said. “The pipelines are leaking lakes, refineries are dumping toxic waste,” said Nathaniel Kern, a Middle East analyst. “It is a broken-down industry.” But with a little tender loving care, the Bush administration estimates, the Iraqi oil industry could return to prewar production levels by the end of the year. Industry analysts believe that if Iraq invests $8 billion, it could reach its 1980 output of 3.5 million barrels per day in three years.
Who will have control of that oil?
The White House has promised to put Iraqis in charge as soon as possible. “It’s their oil,” Vice President ****** Cheney said. “It’s their resource.” Administration officials have said they will hand control of oil sales over to the provisional government, called the Interim Iraqi Authority, which is expected to be set up in six months. But Iraqi control will not be absolute. Deputy Secretary of State Richard Armitage recently said that Iraq’s new Energy Ministry will be run, “by and large, by Iraqis, with coalition advice.” That advice will be clear and firm: Iraq should spend the entire annual revenues from oil—about $20 billion—on the reconstruction of Iraq’s roads, power plants, hospitals, pipelines, and other infrastructure.
Will American companies profit?
It seems very likely that they will. Already, a subsidiary of Halliburton, Vice President Cheney’s old company, has been hired for $600 million to put out a handful of oil-well fires set by fleeing Iraqi soldiers, and to patch up equipment needed to get the crude flowing again. Once that work is complete, Iraq will need foreign expertise to drill and pump its oil fields. In recent years, Saddam’s government signed multibillion-dollar contracts with Russian, Chinese, and French companies to develop oil fields in southern and central Iraq. But Iraqi opposition groups now jockeying for power say they want to tear up those contracts. American and British companies would “definitely be favored” in new deals, said Faisal Qaragholi of the London-based Iraqi National Congress, “because they stood by the Iraqi people.” That’s music to the ears of U.S. oil executives like David O’Reilly of ChevronTexaco Corp., who says, “We would certainly be interested.”
When will the oil flow again?
Several major diplomatic hurdles must be cleared first. Technically, Iraq is prohibited from selling its oil or other products until United Nations sanctions are lifted. That gives the Russians and French some leverage over what happens next. The Russians are demanding that Iraq honor its contracts with Lukoil, and the Russian company has threatened a $20 billion lawsuit against any company that takes over its project to develop Iraqi oil fields. But experts say Lukoil may be willing to sell its rights to a U.S. company for $2 billion or $3 billion. Appeasing Russia’s government will be more expensive: The Iraqis owe the Russians a total of more than $10 billion. Before voting to lift sanctions, the Russians want a promise that the new Iraqi government won’t declare earlier debts null and void. The French, meanwhile, are demanding a piece of the reconstruction pie in return for lifting the sanctions.
What if the sanctions aren’t lifted?
The U.S. and the United Kingdom are looking for ways to circumvent the U.N. If the Security Council does not quickly authorize Iraq to get back in business, British Foreign Secretary Jack Straw said, “we will find legal solutions so that oil will be sold and the proceeds can go to the Iraqi people.” That could prompt a legal challenge that could slow or stop Iraqi oil sales for months. Most analysts think that since this is ultimately a matter of dollars and cents, a deal will be cut with Russia and France to lift the sanctions. “It’s a good negotiating position for Russia and France to take,” says industry analyst Stephen O’Sullivan. “We’re are looking at some sort of horse-trading here.”
Could Iraq bust OPEC?
Once Iraq’s oil begins flowing, it could have a major impact on the per-barrel price of oil. With its enormous reserves, Iraq could triple its oil production, pump out 9 million barrels a day, and destroy OPEC’s ability to control prices at between $23 and $28 a barrel. Iraq could “bring OPEC to its knees,” said Fadhil Chalabi, a former official in the Iraqi Oil Ministry. Prices, he said, could drop as low as $8 a barrel. For the West, it’s an enticing fantasy, but it probably won’t happen. Iraqi oil will certainly add to the overall supply, and tend to keep prices down. But any major increase in Iraqi production will take as much as $30 billion in investment and a decade of work. In the short run, other OPEC nations are fine-tuned to compensate for any increase in production, and could compensate by cutting their own. Over the long term, the new Iraqi government is unlikely to turn its back on other Arab nations and try to destroy OPEC, no matter how grateful it might be to the U.S. and Britain. “Iraq was a founding member of OPEC,” says Amy Myers Jaffe of the James Baker III Institute in Houston. “You can’t eradicate a country’s history because they have a new government.”
Hog
