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April 11, 2003

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U.S. Faces Hurdles in Iraq Oil Revival
U.S. May Have to Cut Deals to Restore Iraq's Oil Exports and Revive Production

The Associated Press

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LONDON April 11

U.S. troops are within striking distance of Iraq's last big oil field, and sabotage at oil wells and facilities elsewhere appears minimal. But even this good news won't lessen the challenge ahead for oil experts planning to revive the country's most important industry.

Political disputes, legal issues and the need for billions of dollars in investment are among the hurdles Iraq must pass before it can restore crude output even to 1990 levels much less increase it beyond that.

Iraq has the world's second-largest proven crude reserves, at 112 billion barrels, but its pipelines, pumping stations and oil reservoirs have suffered for years from a dearth of funds and lack of maintenance. U.N. economic sanctions imposed after the 1991 Gulf War forced engineers of the Iraqi National Oil Co. to cannibalize parts and equipment and use outdated technologies to keep the crude flowing.

Some people, including many in the Bush administration, suggest that Iraq's oil reserves make it a potentially rich country and that it should be able to pay for its own reconstruction by selling crude.

"The reality is that to get the oil out of the ground is going to require a massive upfront investment, and companies aren't going to do that as an act of charity," said Raad Alkadiri, an analyst at The Petroleum Finance Co., a Washington consulting firm.

Alkadiri estimates that Iraq will need to invest $3 billion to $6 billion over two years just to refurbish its facilities and nudge output up to 3 billion barrels a day. Hampered by economic sanctions imposed after the last Gulf War, Iraq's capacity has fallen from 3.5 million barrels a day to 2.6 million barrels a day. However, output essentially stopped with the start of the war.

With the collapse of the Iraqi government, U.S. officials are moving swiftly to install a transitional authority to manage Iraq's oil industry before eventually turning the business over to the Iraqis themselves. Military planners and oil analysts estimate it could take one to three months before Iraq can resume exporting large quantities of crude.

Small amounts of oil flowed from Iraq's northern oil fields even during fighting around the regional oil center of Kirkuk.

That city's seizure by Kurdish fighters on Thursday brought Kurds and Americans to the edge of Iraq's giant Kirkuk oil field, and the facilities there appeared to be intact. Kirkuk pumps as much as 900,000 barrels a day.

In southern Iraq, the immediate task for American and British forces is to ensure that oil fields are cleared of any booby-traps and made safe.

Engineers will need to repair well heads damaged by retreating Iraqis and "shut in" non-producing oil wells to prevent ruptures in well shafts and to maintain pressure in the underground reservoirs. Plants that separate oil and gas are largely intact, and the limited damage to southern pipelines can be easily repaired, said Jim Placke, an Iraq specialist at Cambridge Energy Research Associates in Washington.

The main export terminal in southern Iraq the Persian Gulf port of Mina el-Bakr was captured in good condition early in the war.

Yet anyone wishing to buy Iraqi oil must first get legal title to it, and U.S. officials have so far been unable to unilaterally transfer ownership of Iraq's oil.

With Iraq in desperate need of oil income, Washington may find it has no practical alternative but to ask the U.N. Security Council to help craft an internationally acceptable method of transferring title to Iraq's crude to buyers.

The reorganization of Iraq's state-run oil monopoly presents another challenge. Philip Carroll, a former president and chief executive of Shell Oil Co., the U.S. arm of Royal Dutch/Shell Group, has reportedly been asked to head Iraq's oil industry during a postwar transition.

The appointment of a foreigner to lead Iraq's most vital industry is "a reality we cannot dictate at the moment," said Dara Attar, a London-based consultant and one of 14 expatriate Iraqi oil specialists working with the U.S. State Department to restructure the industry.

The arrangement would only be reasonable if it lasted no longer than one year, he said.

Some U.S. officials are eager to break up the industry and sell it off to Iraqis and even to foreigners, arguing that this would make it more efficient.

"I think this is a dreadful idea," Placke said. "It would introduce a whole new set of complexities that would delay and slow down everything. I don't see how privatization fits into this."

Most analysts see the need for foreign investment, especially to help Iraq develop its new oil fields.

Iraq may have access to $3.1 billion in an escrow account maintained by the United Nations under its 7-year-old oil-for-food program. But billions more will be needed, the working group of Iraqi oil experts estimates.

International oil companies are the likeliest source of money. Yet Iraq will first need to prove it has appropriate laws and other conditions conducive to stable, long-term investment.

A transitional government under U.S. control would be unable to do this, argued Valerie Marcel, an energy specialist at The Royal Institute of International Affairs.

A resurgent Iraqi oil industry would eventually pose a problem for the Organization of Petroleum Exporting Countries.

Due to U.N. oversight of its exports, Iraq hasn't participated in OPEC's production agreements for more than 12 years. Iraq's fellow OPEC members must decide soon how to reintegrate it into the group's output quota system.

Iraq will almost certainly want to export as much oil as it can, even if that means exceeding its production quota. Though that won't be a possibility for some time.

To accommodate Iraq, Saudi Arabia, OPEC's largest producer, would probably have to bear the brunt of any cut in OPEC output. The potential for a confrontation is great, and OPEC oil ministers are sure to discuss this risk when they meet later this month.

photo credit and caption:
Smoke bellows from burning oil wells above the sky of Baghdad as the sun sets in the Iraqi capital Friday April 11, 2003. (AP Photo/Lefteris Pitarakis)

Copyright 2003 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.

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