Iraq's Oil: Good News And Bad

Few wells are on fire, but most are in disrepair

Ominous black smoke rises from sabotaged oil wells in southern Iraq. But in reality, the Iraqi oil industry is likely to come through the war in much better shape than many analysts feared.

Heading into the second week of the war, only seven of more than 1,100 Iraqi wells have been torched, far fewer than the 600-plus the Iraqis blew up in Kuwait in 1991. A couple of fires have already burned themselves out, and Kuwaiti and American fire-fighting teams have been dispatched to Iraq to extinguish the others -- even though there are still security jitters. "We put out one well, and now we are moving on to the next one," says Sarah Akbar, a Kuwaiti petroleum engineer who has been fighting the fires.

The fact that disaster has so far been avoided has helped bring oil prices down sharply from the levels hit shortly before the war began. The price of Brent crude has dropped 5.7% to $25.22 per barrel since the war began on Mar. 19. If Iraq's oil industry manages to come through the war relatively unscathed, that would clearly mean good news for the occupying powers -- and for the future Iraq government. Allied troops have largely secured Iraq's southern Rumaila field as well as export terminals on the Persian Gulf. Only the fate of the Kirkuk field in the north remains unclear. Barring setbacks, Iraq should be able to gradually resume exports, which have been halted, after the war ends. That could eventually free up some $14 billion in annual revenue.

But the goal of Iraqi exiles and some Washington policymakers is much more than restoring the flow of petroleum from Iraq. It's to turn Iraq into one of the world's great oil powers. With the right planning, analysts reckon that Iraq's capacity could rise to 6 million barrels per day by 2009. Production at that level would make Iraq the second-largest producer, after the Saudis, in OPEC. "The emergence of a new Iraq as a super-giant producer could trigger far-reaching changes in the world oil supply map," says Fadhil J. Chalabi, a former Iraqi oil official who is now executive director of the Center for Global Energy Studies in London.

Before anything like that can happen, however, Iraq's oil industry must be saved from a slow-motion collapse. Even without sabotage or war damage, the industry is creaking after decades of neglect. It took great ingenuity by the Iraqis to keep up production when investment and spare parts were scarce. Still, the industry is under "severe stress," according to a U.N. report published in 2000. Trying to produce too much oil without sufficient maintenance has permanently damaged fields and led to their decline. The enormous Kirkuk oil field, which was discovered in 1927, may have only 10% or so of its oil left. Wells in the Rumaila field are so corroded by salt water that their casings have collapsed, allowing oil to leak to the surface. Meanwhile, most refineries produce only low quality gasoline, while spewing polluted effluent into nearby waterways.

The result: Production capacity has been declining by 4% to 8% a year, according to a recent study by Washington-based consultants PFC Energy. And it is likely to decrease further -- not increase -- in the near term. "The Iraqis face a mammoth task in just stabilizing production and rehabilitating the existing sector, never mind building more capacity," says Raad Alkadiri, a PFC Energy analyst. At least two years will be required to restore production to 2002 levels of 2.8 million barrels because most of the industry's infrastructure needs to be replaced. That could cost $5 billion or more. The U.S. Army Corps of Engineers has already awarded Kellogg Brown & Root a contract to assess operations and safety in the industry and make emergency repairs. Their subcontractor, Boots & Coots International Well Control Inc., will be helping to fight the well fires. Indeed, in an odd twist, Kuwaiti firefighters say the U.S. military asked them to slow down their efforts so the Americans could take part. "They didn't want the Americans to find [the fires] already extinguished," says Essa Buyabis, who heads the Kuwaiti group.

Only with tens of billions of dollars in capital, most likely to come from the international oil companies, can Iraq move up to the production big leagues. Yet the recent history of oil development in the region is not encouraging. OPEC quotas have discouraged countries from spending the billions needed to boost capacity. And oil inspires feelings of nationalism that impede the sort of profit-sharing arrangements that big petroleum companies seek. An inability to agree on how to develop reserves has held back dealmaking not only in Iran but also in Saudi Arabia and Kuwait. "Hell will freeze over before we get a decent deal in the Middle East," says one top oil executive. If a new regime in Baghdad succumbs to similar nationalism, negotiating development programs may prove complicated indeed.

How can Iraq avoid these pitfalls? Analysts such as Chalabi think Iraq should limit the government's role to regulating and taxing the industry. He envisions an independent company that sells up to 40% of its shares on international stock markets. "[That] will provide better management, superior technology, greater government income through taxation and, above all, rapid expansion," says Chalabi, who is expected to play an influential role.

For now, OPEC kingpins are not fretting over the prospect of Iraq muscling in on their markets. "I think it will be two to three years before you have a government process that can make decisions on matters of sovereign mineral rights," says Nader H. Sultan, CEO of Kuwait Petroleum Corp. The competition understands what a huge job reviving Iraq's oil industry will be.

By Stanley Reed in Kuwait City, with Laura Cohn in Doha, Qatar

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