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Iraqi oil: One big sticky
mess
By David Isenberg
While
antiwar protesters chant "no blood for oil", most
informed commentators assume that the United States is
at the point of no return regarding a future war with
Iraq. Thus, the real question is, whither the future of
Iraqi oil.
There are many views on this and it
is not yet clear exactly what will happen. But what is
evident is that there is keen interest in increasing
Iraqi oil production as soon as possible. For whose
benefit is yet to be determined.
But first, some
facts on Iraqi oil, taken from an analysis by the Center
for Cooperative Research. According to the US Department
of Energy (DOE), in terms of proven reserves Iraq has
112 billion barrels of oil, second only to Saudi Arabia.
This represents 10.8 percent of the world total. Plus,
its oil is high quality and Iraq’s oil production costs
are among the lowest in the world.
Furthermore,
DOE notes that the "true resource potential may be far
greater than this, however, as the country is relatively
unexplored due to years of war and sanctions. Deep
oil-bearing formations located mainly in the vast
Western Desert region, for instance, could yield large
additional oil resources (possibly another 100 billion
barrels), but have not been explored."
Viewed
another way, that represents a staggering amount of
potential revenue. Assuming $30 per barrel and between
160 billion to 200 billion barrels potential, that is
about $4.8 trillion to $6 trillion to be found in the
gross value of the oil reserves of Iraq.
In late
2002, Iraq reportedly signed many deals with companies
from Italy (Eni), Spain (Repsol YPF), Russia (Tatneft),
France (TotalFinaElf), China, India, Turkey and others.
The New York Times reported that by late 2002, Russian
companies had acquired the rights to sell roughly 40
percent of Iraq's oil on world markets. Many
commentators assumed that this was at least partly to
give Iraq economic leverage with other countries in an
effort to get them to oppose US plans to invade Iraq.
For example, in 1997 Russia's biggest oil
company, LUKoil, secured a 23-year $3.5 billion contract
to develop and extract 667 million tons of oil per day
from the West Qurna oil field in Iraq. The West Qurna
field has an estimated 11-15 billion barrels in oil
reserves. But Iraq cancelled the contract in
mid-December 2002. Baghdad was reportedly angered by
reports that LUKoil had sought assurance from the UN
that the company's contracts would be honored in the
event that Saddam Hussein was ousted from power.
Similarly, the largest of Iraq's oil fields
slated for post-sanctions development is Majnoon, with
reserves of 12-20 billion barrels, and located 30 miles
north of Basra on the Iranian border. French company
TotalFinaElf reportedly has signed a deal with Iraq on
development rights for Majnoon.
But it is far
from certain that a post-Saddam regime will honor those
contracts. Furthermore, the way a war is conducted could
deter foreign oil companies, at least for a while, from
exploiting oil fields. Putting aside the issue of
possible physical damage to the petroleum infrastructure
or their deliberate destruction, as Iraqi forces did to
Kuwaiti wellheads in Desert Storm in 1991, there is the
issue of human casualties.
At least some US
petroleum companies presume a massive loss of Iraqi
civilian life. This leads them to conclude that for a
long time they ought to stay out of a postwar Iraq,
potential financial benefits notwithstanding. Iraqis
would associate US petroleum companies with the war,
particularly with the administration's motives to wage
it. US petroleum company facilities and personnel inside
Iraq would become targets, from Iraqis and/or al-Qaeda
types.
US petroleum company personnel and
facilities in other Middle Eastern countries might also
become targets. These companies have insufficient faith
in the US government's will and/or ability to guarantee
company facility and personnel safety. Given the likely
civilian death toll, the companies assume a serious and
violent backlash. The companies feel that the risks are
too great to justify post-war involvement to their
shareholders.
Even if they are, legal issues may
dissuade them. As the Philadelphia Inquirer’s foreign
affairs columnist Trudy Rubin noted, Iraq, like the rest
of the Gulf, has a state-owned oil company. No foreign
oil company has operated in Iraq since 1960.
Multinationals buy Iraqi oil for refining, but they have
no equity share in the oil fields, nor do they get any
percentage of oil for services performed.
And
once Saddam is gone, any new oil arrangement will
require the passage of new laws by a new, democratically
elected parliament. This process will be time-consuming,
but - if the Bush administration really means to support
democracy - it must accept the results. And the results
may not be to its liking.
Kuwait after Desert
Storm illustrates the point. After the Gulf War, US
companies expected to be invited to develop new Kuwaiti
oil fields. Kuwait's government was willing, but the
elected parliament refused.
On the other hand,
Iraq could present opportunities beyond mere production.
Some analysts suggest that a US-friendly regime in
Baghdad could utilize the existing pipeline from the
port of Eilat on the Red Sea to Haifa to convey oil to
the Mediterranean, and/or eventually refurbish the
Kirkuk-Haifa pipeline (closed since 1948) to ensure oil
supplies to Jordan, Israel and Europe. There is a
refinery at Haifa that could handle the flow; the quid
pro quo would logically be the normalization of
Israel-Iraqi relations (still in a legal state of war
since 1948 when Iraq first attacked Israel).
A
US-friendly regime in Baghdad could also open the doors
toward an oil pipeline from the Caspian region, through
Georgia, Turkey and Iraq. With the oil/gas pipeline now
being planned in Afghanistan, this would completely
circumvent Iran, and provide two reliable paths to
tankers in the Gulf region from the Caspian.
Some of those advocating war have suggested that
Iraqi oil could pay for the costs involved. An article
in the current issue of Insight magazine reveals that a
National Security Council working group headed by former
assistant secretary of state Elliott Abrams has
recommended that the United States assert de facto
control over Iraq's oil wells. Abrams apparently has the
backing of Vice President Dick Cheney, Secretary of
Defense Donald Rumsfeld and Deputy Secretary of Defense
Paul Wolfowitz.
But this is extremely unlikely.
No Iraqi government could allow oil revenues to be used
to pay US costs and survive. Even Pentagon officials
acknowledge that continuation of oil revenues for
humanitarian and development efforts a-la the food for
oil program will continue to be the number one priority.
Few things are more likely to alienate the Iraqi
population on any postwar US presence than the
perception that the US is exploiting Iraq's oil for its
own benefit.
Furthermore, Iraq is highly
unlikely to produce more than 3 million barrels per day
during the next five years. That seems reasonable since,
according to the US Energy Information Administration,
in 1990 Iraq was pumping a bit over 2 million barrels a
day and its 10 month average in 2002 was 1.955 million
barrels.
A joint report by Rice University’s
Baker Institute and the Council on Foreign Relations
issued last month found, "Oil production capacity in
Iraq is dropping by 100,000 barrels per day (bpd)
annually. Significant technical challenges exist in
stanching the decline and eventually increasing
production ... It will take 18 months to three years and
$5 billion to bring the Iraqi oil industry back to
pre-1990s production levels of 3.5 million bpd, in
addition to $3 billion in annual operating costs. To get
to the oft-quoted 6 million bpd will take years and
require massive expansion of infrastructure, billions of
dollars in investment and a stable political
environment. War and its aftermath could further limit,
not increase, Iraq’s oil production."
And an
op-ed on December 8 by veteran energy industry analyst
Daniel Yergin in the Washington Post noted, "If oil is
the question, Iraq is not the answer." He pointed out
that "... to get back to 3.5 million barrels could take
three years or more, at an estimated cost of at least $7
billion. This would put Iraq back into the leagues of
Norway, Iran, the United Arab Emirates, Mexico and
Venezuela. Another 2 million barrels per day would
require a major push, and it would still leave Iraq
several rungs below the capacity of the Big Three
producers Saudi Arabia, the United States and Russia.
Making that leap to 5.5 million barrels a day would come
sometime after 2010 - at a cost of upwards of $20
billion."
Given that Iraq is encumbered with
massive loan and reparation obligations and about 30
percent of its petroleum profits go to reparations, the
likelihood that it can pay for a US war and occupation
is similar to the lifespan of a snowball in hell.
As for those who see US domination of Iraqi oil
as a way to break OPEC's ability to control prices, they
should think again. Analysts say a surge in production
would do no one - except, possibly, Western consumers in
the short term - much good. Increased Iraqi oil
production would be harmful even to the major US oil
companies, who would see their profit margins cut with
lower prices.
And for oil-producing countries,
the results could be very bad news. Russia depends on
oil revenue to run the government. The Kremlin already
has said that it could not live with the price of
Russian crude oil falling below $18 a barrel. Lower
prices could render Russian oil more expensive to
produce and, thus, uncompetitive. This would cloud the
prospects for attracting foreign investment to tap
Siberian oil deposits.
The Saudis are said to be
amassing a war chest of nearly $100 billion to weather a
period of low oil prices, although many doubt Saudi
Arabia has the finances to create such a large emergency
fund.
(©2003 Asia Times Online Co, Ltd. All
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