Priming The Pump
Iraq's future depends on reviving its oil industry, but many obstacles loom
Muhammad-Ali Zainy seized his chance to escape the reign of Saddam Hussein at a meeting of the Organization of Petroleum Exporting Countries in Vienna in October 1982. As a chief engineer and manager in Iraq's Ministry of Oil, Zainy had been tapped to represent his country at a conference on future energy choices. But the trip gave Zainy the opportunity to flee what he calls "the brutality--the sheer, bloody dictatorship" that had consumed his homeland. When the OPEC session ended, Zainy joined his wife and four children, whom he had sent ahead to London, and they boarded a plane for the United States.
Now, 20 years after his defection, Zainy is poised to play a key role in rebuilding the oil industry he left behind. Although the U.S. government has made no official announcement, and Zainy has declined to confirm it, sources say that he will colead an advisory committee the Pentagon is assembling for the thorny but crucial job of overseeing Iraq's black gold. Sources say Zainy is scheduled to meet this week with Philip Carroll, the retired Shell Oil chief executive whom the Bush administration also has reportedly selected to run the panel.
The committee will supervise, and perhaps have veto authority over, decisions on oil production and sales to be made by technocrats already on the ground in the 40,000-worker Iraqi oil industry. Oil, Iraq's primary revenue source, will undergird the effort to restore roads, hospitals, schools, and basic services. "War with Iraq is not all about oil, but the day after the war is over, it's all about oil," says Lawrence Goldstein, president of the Petroleum Industry Research Foundation.
No gusher. But getting Iraq's oil gushing again will not be easy, even though the fields appear to have sustained little war damage. Iraq's new oil managers will face international legal disputes over their authority. They'll confront an oil production and delivery system with huge untapped potential--one of the world's largest reserves--but badly deteriorated from misuse and neglect. Then they must grapple with the contentious issue of how far to open up Iraq's riches to the Big Oil firms. Too much involvement by U.S. officials or former oil executives like Carroll could be "a grave error," says Issam al-Chalabi, a former Iraqi oil minister now in exile. "It will only consolidate the views that the war on Iraq has been nothing but to secure oil." Postwar planners are highly sensitive to the issue: "It's important to show the oil is used for Iraqis and will be controlled by Iraqis," says one U.S. official.
Currently, no oil is flowing out of Iraq, and workers last week still fought fires in two southern fields. Also, the big Kirkuk field in the north remains a worry; neighboring Turkey wants assurances that the region's Kurdish majority will not be in control. But once the security of the fields is assured, the stage is set for a confrontation in the United Nations over U.S. authority to direct Iraq's oil sales. White House spokesman Ari Fleischer, noting that the United States "provides products around the world" without U.N. approval, said none was needed to begin selling the oil. But oil industry experts beg to differ, since this particular product belongs to Iraq and sales have been restricted under international law. Since 1996, Iraq has been permitted to sell petroleum under the U.N.'s oil-for-food program, which aimed to direct food and medicine to the needy while economic sanctions remained in place. But now, "who would buy the oil absent U.N. approval?" asks Robert Ebel, a Center for Strategic and International Studies energy analyst who has been advising the State Department. "No oil tanker would be expected to load up, absent a title guarantee." Secretary of State Colin Powell last week said the United States will seek a U.N. resolution recognizing the U.S.-led coalition as the legitimate governing authority in Iraq, while fending off a leading U.N. role.
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
This story appears in the April 21, 2003 print edition of U.S. News & World Report.