Iraq's Oil Minister Speaks to BusinessWeek

Iraq's Oil Minister, Hussein Al-Shahristani, finds himself in a crucial role. Iraqi oil production has been stuck at around 2 million to 2.5 million barrels per day since the ouster of Saddam Hussein. That's considered well below the country's capability.

Al-Shahristani, a Canadian-trained nuclear scientist and chemical engineer, is trying to persuade the international oil industry to invest what he estimates to be $35 billion to increase Iraqi oil production, eventually increasing production to 6 million barrels per day.

While there is plenty of interest in Iraq, which has the potential to be an oil power comparable to Saudi Arabia, companies still have doubts about a host of issues. These range from the tough terms Iraq is offering to security to being forced to work with Iraqi oil companies. Following the recent OPEC seminar in Vienna, Al-Shahristani spoke frankly with BusinessWeek London Bureau Chief Stanley Reed about these issues, as well as about OPEC and tensions between Baghdad and the Kurdish Regional Government. Edited excerpts follow.

What will increased oil production mean for Iraq?

Iraqis have been deprived of their oil wealth for decades. Previous regimes wasted the oil wealth, and as a result, much Iraqi infrastructure has been destroyed, not only in the oil sector but throughout the country. To rebuild, the country needs huge revenues that can only come from the oil sector.

We want to build a country that will be a model of prosperity and democracy. We thought we could do it right away after the fall of the regime of Saddam. But all of the international terrorists poured into the country, mostly from the Arab countries that don't have elected governments. Now [with security better] we want to start a reconstruction program.

How quickly do you expect production to increase?

[We expect] a 1.5-million-barrel increase in three to four years' time.

What will this ambitious program mean for Iraq's role in the oil world and OPEC?

Iraq's coming back to its role as one of the main producers and exporters of oil is of concern for those countries that have benefited from Iraq's [not being able to produce to its potential]. We have not discussed this with OPEC. They know this is our plan. I didn't have any contact from them. I am sure some will feel they hope it doesn't happen soon.

Are you feeling pressure to increase production?

Very much so. A country that depends very much on oil revenues obviously will look toward the oil sector to gain required revenues. We are facing a dilemma in Iraq because [our] oil industry suffered destruction under wars and boycotts, and we lost many competent engineers under Saddam.

The oil industry has been doing a great job to keep output at current levels. I get visitors from international oil companies who say they are amazed we are [able to keep production up.] However, now we need to rebuild all of our industry.

Are you going to make changes in your plans to ease the international companies' concerns?

In Istanbul [at a meeting with the companies], there were many questions and changes suggested to the model contract. We have found most of the suggestions and changes reasonable. There is still one pending point about the first bid round. An Iraqi oil company, South Oil, is operating the fields. How the Iraqi operator is going to be integrated with the international oil companies is still under discussion. We fully understand that the companies do not feel comfortable with making such large investments if they don't have control over the operating group to make sure they produce according to the time schedule.

When you have people in the fields for many years, you don't expect them to leave their jobs for others. [We will try] to find a way to have them seconded to the new company, to be trained with salaries paid with incentives to improve performance.

Why are you agreeing to deals outside of the framework with companies such as China's CNPC and ENI (ENI.MI)?

CNPC signed a contract under Saddam. It was a production-sharing contract. We renegotiated that contract and made it into a [less advantageous] service contract. Because the bid rounds are taking a bit longer, we decided to ask selected companies who have done their homework to submit an engineering procurement and contracting offer that has nothing to do with oil. They are willing to do that.

Yesterday you mentioned that you might be willing to do production-sharing deals.

As part of the second bid round, we are considering offering some exploration blocks. We have not yet made a decision on which blocks.

Massoud Barzani, the president of the Kurdistan Regional Government, recently criticized you. How are you going to resolve those differences?

[This is a] serious problem. They have signed contracts that were without bidding, not transparent, and questionable. The Iraqi government cannot accept any contract sharing its oil with companies that have not offered the best packages through transparent public bidding. The KRG has no right to sign rights for oilfield development in Iraq. Barzani and others seem to have other interests in the contracts.

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