Waiting For The Oil To Flow Again

Iraq's oil prospects looked remarkably good following the ouster of Saddam Hussein in April, 2003. After all, the Iraqi oil fields suffered surprisingly little damage through the fighting. Suddenly the Bush Administration's vision of fashioning Iraq into a pro-American oil power didn't seem like idle fantasy.

The ensuing year has thrown a lot of cold water on such dreams. Not only is Iraq years from achieving its potential of producing 6 million barrels a day, but it is also still struggling to achieve its prewar output of 2.5 million -- let alone the 3.5 million or so it produced before the 1979 war with Iran.

The reason is clear: Saboteurs have attacked Iraqi pipelines and other installations on an almost daily basis. The attacks, the latest of which came June 9, are crimping exports and slowing rehabilitation work. But U.S. policy has contributed to the problem as well. Occupation authorities have opted to leave major investment decisions for a future Iraqi government. As a result, they have barely spent what's needed just to get the industry going again. "Time has been wasted," says Vera de Ladoucette, senior director for Middle East research at Cambridge Energy Research Associates in Paris.

Still, Iraq's oil fortunes could brighten now that the country has an interim government. Thamer al Ghadban, the new Oil Minister, is an experienced technocrat who is expected to pursue several oil field development projects that have been languishing and could quickly add 400,000 barrels a day to production. "We are confident that by yearend we will be producing around 3 million barrels per day," he said on June 6. Reaching such levels isn't out of the question, but it would require a simmering-down of the turmoil in Iraq. Blown-up pipelines, deteriorating wells, and internal battles in the Iraqi government could all block progress. "There are so many problems that something invariably goes wrong," says Jamal Qureshi, an analyst at consultant PFC Energy in Washington.

First, of course, comes security. Until the U.S., together with the nascent Iraqi government, restore some semblance of calm and order to the country, little will be possible. Were that to happen, oil services companies such as Schlumberger and Halliburton could probably take Iraqi production back up to 3.5 million-barrels-a-day. But until they're convinced that Iraq is safe, oil companies won't want to put their employees in harm's way.

There's little doubt, though, that Iraq is sitting on a huge pool of oil. With an estimated 110 billion barrels of reserves, production of 6 million barrels a day or more would surely be possible. But hitting such heights would require investment of at least $25 billion to develop new fields, estimates Muhammad-Ali Zainy, senior analyst at the Center for Global Energy studies, a think tank in London. The major international oil companies -- a likely source of such financing -- are unlikely to sign big contracts until a legitimate government is in place. And that won't happen before 2006 under the existing blueprint. Oil from such new fields would not come onstream until 2008 at the earliest, experts say.

Ghadban's first priority is to overcome the setbacks of the past two months. Until recently, the fields in southern Iraq, which produce about 80% of its output, had been mostly immune to the sabotage that has halted flows from Kirkuk in the north to Ceyhan in Turkey for much of the time since the war. But in late April, insurgents in small boats detonated explosives near the main Basra Oil Terminal in the South, briefly shutting it down. Then, in early May, saboteurs managed to knock out one of the terminal's two feeder pipelines, slashing its exports from 1.6 million to 1 million barrels per day for about 10 days. The decrepitude of Iraq's fields is also starting to exact a toll. Ladoucette says rising water content, a sign of geriatric wells, is now crimping production in the Kirkuk fields. Despite such serious problems, there's little doubt that, given enough care and money, Iraq's oil industry could become a world leader. But as with so many other aspects of that country, realizing Iraq's oil potential will require a long, tough march with unforeseen twists along the way.

By Stanley Reed in London

    Before it's here, it's on the Bloomberg Terminal.