Priming The Pump
Iraq's future depends on reviving its oil industry, but many obstacles loom
It could come to a head May 12, when the U.N. Security Council, dominated by war-opposing countries, faces a deadline on extending the oil-for-food program. The United States will argue that oil sales must proceed quickly for the sake of Iraqi citizens. "Opponents are going to have to recognize the facts on the ground," says Daniel Yergin, chairman of Cambridge Energy Research Associates. "To frustrate the ability of Iraq to put that oil to work in reconstruction wouldn't serve any purpose and would only end up harming longer-term interests of those countries."
Prior claims. Other legal disputes loom over Saddam's work in the 1990s with French, Russian, and Chinese oil companies. U.N. sanctions hampered deals, and only one contract, with Lukoil, Russia's top oil producer, was ever signed. Last week, Lukoil pledged it would sue in the international court in Geneva to protect its rights, suggesting it would even seek to impound Iraqi oil tankers and tie up development for years.
Meanwhile, Iraq's oil fields have deteriorated over two decades of war, sanctions, and isolation. Some fields have been permanently damaged by overproduction and bad practices. The country has been unable to import sufficient spare parts or modern equipment, and Saddam is believed to have diverted funds for capital improvements. The nation's 2002 exports of 2 million barrels a day were 40 percent of the peak reached before the Iran-Iraq war in 1979. "Saddam's legacy is really misuse, not only of oil but of all resources, human or material," says Zainy. He predicts it will take $5 billion and two years just to return Iraq's oil fields to their former capacity.
A tiny club of companies worldwide specializes in such repair work. Vice President Dick Cheney's old firm, Halliburton, because it already has a contract with the U.S. Army to put out Iraq's oil fires, has a leg up over rivals Schlumberger and Baker Hughes. But by far the biggest money question is who will be chosen to develop new oil fields in Iraq and under what terms. Only 15 of the 73 proven oil fields are pumping out crude. Iraq's long-stated goal has been to increase production to 6 million barrels per day, geologically possible but daunting. As much as $40 billion in new investment is needed. Only the major oil firms have the needed capital and technical expertise, but they'll want a guaranteed piece of future profits before making a long-term commitment.
Some Iraqi exiles endorse the idea of "production-sharing agreements," like those used in Nigeria, Azerbaijan, and other developing countries. Under PSAs, oil firms split the profits from sales with the country and can book the value of their fixed shares of the oil fields on their balance sheets. Still, many Iraqis view such deals as bargaining away the nation's patrimony. And oil analysts believe the new government will face popular resistance to the first major entry of private oil firms since Iraq's oil industry was nationalized in 1972. "They'll have to show their nationalist credentials," says Valerie Marcel, a fellow at the Royal Institute of International Affairs, author of a study predicting no major agreements will be signed with oil companies for some time. Said a recent joint Council on Foreign Relations and Baker Institute report on post-conflict Iraq: "Put simply, we do not anticipate a bonanza."
Iraq's black gold
[Complete chart data are not available]
U.S. officials hope to reverse Iraq's two-decade decline in oil production.
[labels]
Millions of barrels a day
1980 3.5
1990 2.9
1973
'80
'90
'00
'03*
'10*
*estimates
0
2
4
6
Source: Energy Information Administration
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