www.smh.com.au February 24 2003

Many people expect that a US-led victory over Saddam Hussein will eventually result in a gusher of oil from a liberated Iraq, bringing down petroleum prices. But the recent fate of neighbouring Iran's energy industry suggests a different future - one in which it could be years before new Iraqi oil has any lasting impact on what consumers pay for fuel.

A huge new project called South Pars, on Iran's Persian Gulf coast, attests to the billions of dollars foreign oil companies have invested in Iran since the country launched its "New Dawn" plan in 1991. Tehran aimed to revive its oil industry, ravaged by years of revolution and war with Iraq.

Yet today, Iran can't pump any more crude than a decade ago. The reason: new production has only offset the rapid decline of Iran's other giant fields that have been pumping oil for decades. Attempts to revive the Iraqi industry are likely to face the same knotty problems Iran faces: the glacial pace of negotiations to clinch contracts and the years it then takes to tap large petroleum reservoirs, even as output drops from tired old fields.

"In Iraq, the situation has been disastrous now for 20 years," says Thierry Desmarest, chief executive of France's TotalFinaElf. He expects military operations will further damage Iraqi oil facilities.

Buyers of Iraqi oil already note a decline in the quality of the crude coming from the prized Kirkuk field, an indication output capacity may be waning at the huge reservoir, which has been producing oil for 64 years. Iraq's other major reservoir, the Rumaila field in the south, also has been pumping for decades. A United Nations study of Iraq's oilfields a few years ago painted a grim scene of failing wells and equipment, environmental devastation and rampant safety hazards. Since then, little solid detail has emerged on the fields.

Even with a pro-US government in Baghdad, it might take years for Western oil giants to nail down deals, oil veterans say. Depending on the extent of the damage to Iraq's infrastructure and how long it takes for a stable government to emerge, it could be five years or more before oil from new developments boosts world supplies.

"Taking the Iranian example, it is fair to say that the way forward in Iraq will be much more complex than people imagine," said Julia Nanay, an analyst at Washington consulting firm PFC Energy. Ms Nanay did not estimate how long it would take to resurrect Iraq's oil production potential, because "no one knows what they will find there".

Iran's problems, and what they suggest about conditions in secretive Iraq, are worth considering as oil markets gyrate in anticipation of a US war on Baghdad. Oil supplies from Iraq, which exports about 1.7 million barrels a day under a UN program, are expected to dry up during any conflict.

War fears, coupled with a disruption in supplies from strife-torn Venezuela, have driven up the price of oil by 66 per cent in the year to January.

Iraq and Iran have roughly comparable petroleum reserves and once held identical output quotas as members of the OPEC cartel. The two nations severely damaged each other's industries in a brutal eight-year war that ended in 1988 - and they desperately needed to rebuild.

TotalFinaElf decided in 1990 to plunge in and its experiences since offer a window into both countries' industries.

TotalFinaElf, the lead company in Iran's South Pars project, has kept a foothold in Iraq as well. As Iraq in the mid-1990s sought to loosen the restrictions the UN imposed on its oil exports, Baghdad handed out huge production-sharing contracts to companies from France, Russia and China - three permanent members of the UN Security Council who might act as a counterweight to the US and the UK.

TotalFinaElf initialled non-binding agreements but declined to commit to actually developing the oil, which would have violated UN sanctions. But TotalFinaElf was able to do simulation studies on the fields. This data, company officials say, would enable TotalFinaElf to get the oil flowing about one year earlier than a competitor starting from scratch. Even then, TotalFinaElf reckons it would take it almost four years to start production if it won a contract from a new Iraqi government.

While TotalFinaElf efforts in Iraq were eventually blocked by the West's stand on Saddam's regime, it got a break in Iran, signing up in 1997 to develop part of South Pars.

South Pars is the Iranian part of the world's largest natural-gas field, which is shared with Qatar. The offshore field also contains large amounts of oil. Development of South Pars is such a huge undertaking that Iran has divided it into 30 sections, or phases, with detailed planning done for 15. Each phase will result in gas output equal to a quarter of France's total annual consumption, besides large volumes of oil.

Phase one, a skein of pipes and towers constructed by an Iranian company, is languishing behind schedule. Phases two and three, developed by TotalFinaElf at a cost of about $US2.2 billion ($3.67 billion), are complete.

What TotalFinaElf gets is an oil dividend. Its field produces more than 80,000 barrels a day of a light oil, which Iran will use to pay back TotalFinaElf over seven years. Sources say TotalFinaElf will get a return of about 20 per cent on its investment.

But getting this far has been a slog: it took TotalFinaElf about 12 years to complete its part of South Pars from the time it began exploring a bid in 1990. It will be decades before Iran can complete the entire project.

A clutch of new contracts are in the negotiating stage, including further phases of South Pars. Yet the slow pace of developments already threatens the country's future as an oil superpower. Iranian officials estimate production from their oil reservoirs is declining by 5 per cent annually. Unless offset by new developments, that rate will reduce Iraq's oil-production capacity from 4 million barrels a day to 1.4 million barrels a day by 2020, or about the level of domestic consumption.

To maintain its share of OPEC output and remain the group's second-largest producer after Saudi Arabia, Iranian officials say they will need production capacity of about 7.4 million barrels a day by 2020. To do that, Iran needs to build 6 million barrels a day of new capacity, or as much as the country produced at its peak in the 1970s.

Dow Jones

www.bayarea.com Posted on Sun, Feb. 23, 2003

Only a few years ago, the United States was enjoying the unprecedented economic boom of the late 1990s. What a difference a few years make -- the nation's mood and economic outlook have sagged dramatically. We have been hit hard with a relentless stream of bad news, from the dot-com debacle to corporate malfeasance, from terrorism to a sinking stock market, from a jobless economic recovery to the space shuttle explosion. To make life even more difficult, our nation is on the brink of a war with Iraq.

In these difficult times, many analysts think that a war is likely to exacerbate our economic problems. What are the economic implications of an invasion of Iraq and, more important, the economic implications of post-war restructuring and rehabilitation of Iraq?

It is a real challenge to be precise about the cost of the war and its aftermath because there are so many unknowns. These range from the length of the war to the extent of American involvement in post-war Iraq. Other questions include: How many U.S. soldiers will be involved? Will Iraq use chemical and biological weapons? Will there be urban fighting? Which of our allies will be with us in the war, and how many will be involved in post-war reconstruction?

War is always a time of national anguish. The biggest concern of a war has to do with the loss of life and pain and suffering that will be inflicted on U.S. and allied soldiers and their families and friends. Of course, pain and suffering will also be enormous for the millions of innocent people of Iraq who have been drawn into this fray.

From an economic perspective, the problem with the current situation is fear and uncertainty, and they are the enemies of vital decisions that range from consumer purchases of big-ticket items to business investment in technology and facilities. War jitters have paralyzed capital markets since December.

Even if the optimistic scenario of a quick war lasting a few months with minimal loss of life and no destruction of Iraqi oil fields materializes, the short-term economic impact could be large. Let us not forget that the 1990-91 U.S. recession was exacerbated when Iraq invaded Kuwait and the United States responded with a major attack on Iraq. Oil price hikes could be very damaging to the economy, particularly in light of the current crisis in Venezuela. It would not surprise me to see oil prices spike up to $50 a barrel at least during the first few weeks of the war, and that translates into higher inflation and a higher cost of doing business.

Some of the other economic effects include:

• A weaker dollar during the conflict, but it will rally once the war is over. This may be good news for U.S. exporters, at least for a while.

• Higher energy costs will increase shipping and trucking costs as long as the war lasts. The larger carriers will pass the costs to customers, and the smaller ones may not be able to do so and go out of business.

• Longer delays in international freight shipments as a result of heightened security checks will have particular impact on trade between the United States and its NAFTA partners Mexico and Canada. The crowding of ports such as Long Beach and New York by military ships will cause additional delays. This certainly adds to the cost of doing business.

• Movement of employees out of businesses into the war effort via reserve and National Guard call-ups will have considerable impact for many businesses. So far, nearly 100,000 reservists have been called to duty in the Middle East, and tens of thousands more will be asked to join them. Implications for businesses include finding new employees in addition to guaranteeing jobs and salary to the departed employees on their return.

• The beleaguered airline industry will be further damaged with the onset of military action even though some of the losses in passenger and freight businesses will be compensated by military needs such as troop and equipment transport.

• The tourism and hospitality industry has already been affected by fear of terrorism and a potential war, and things will get much worse with the onset of war and remain shaky for a few months even after the war is over.

• Military purchases of all kinds ranging from spare parts to newly designed gas masks and clothing (to withstand chemical warfare) to freeze-dried meals and personal supplies has been rising at a rapid rate and will continue to do so in the next several months.

A recent estimate by Mitch Daniels Jr., director of the Office of Management and Budget, estimates that the direct cost of the war to the United States will be in the $50 billion-$60 billion range. This number could be lower if other major European countries such as France and Germany, in addition to Great Britain, also join the United States in the war against Iraq. The extent of cost-sharing could be very significant if we use the gulf war as a benchmark. The allies paid for nearly 90 percent of the costs of the last gulf war. The logic of not going alone for the United States in a second war not only makes great sense in geopolitical terms, it also makes eminent sense in economic terms, particularly in light of the current state of the U.S. economy with its escalating budget deficits and a host of unmet domestic needs.

If we think the cost of war is high, we should be ready to face the cost of bringing peace and a civil society to post-war Iraq. A recent study by William Nordhaus of Yale University suggests that the post-war costs of rebuilding Iraq could range from $127 billion to $682 billion depending on optimistic or pessimistic assumptions relating to length of the program as well as extent of damage to the Iraqi infrastructure. The range of expenses includes the cost of a peacekeeping force, rebuilding of the infrastructure, paying for government services and humanitarian aid.

It is quite likely that even in the case of an optimistic scenario of a short war, the U.S. economy may be flirting with a mild downturn in the immediate aftermath of the war. In the past few years, I have been amazed by the resiliency of the U.S. economy. The recovery has continued for the past two years despite numerous hits ranging from the failure of the high-tech sector to the Sept. 11 terrorist attacks, and Enronitis. Based on our record, I am optimistic about the recovery of the stock market as well as the economy once the cloud of a second gulf war disappears.

Tapan Munroe is president of Munroe Consulting Inc. of Moraga and the former chief economist for PG&E Corp. His column runs every other Sunday. His e-mail is tapan@tapanmunroe.com.

www.vheadline.com Posted: Sunday, February 23, 2003 By: Jorge Marin

A win-win situation that requires government regulation to get going

Date: Thu, 20 Feb 2003 10:11:16 -0500 From: Jorge Marin Jorge.Marin@pollak.com To: Editor@vheadline.com Subject: Plastic in Venezuela

Dear Editor: I'd just like to follow up on a comment made by Oscar Heck, that the plastic industry in Venezuela is a natural fit.

One thing I noticed during my travels in Venezuela, is the amount of plastic containers being thrown away, and whereas the people in Venezuela are not ready for recycling on an individual basis there's an incentive that has worked here, in the States, for people to collect this material ... $.05 per soda container.

A system could be set-up with the soda suppliers where they would pay-back to the consumer their deposits, regardless of who collects it.

They in turn would need their plastic container supplier to agree to use the re-cycle material.

• It's a win-win situation, but it requires government regulation to get going.

There's infrastructure set-up in many countries that could be follow as an example.

Yes, Venezuela has all the oil it needs to make plastic, but a re-cycling program would benefit the people at the bottom of the economic scale and it would help to clean up the country as well.

This is a dream, but isn't this the way things begin anyways.

Regards, Jorge Marin Jorge.Marin@pollak.com

www.alertnet.org 23 Feb 2003 11:52

CARACAS, Venezuela, Feb 23 (Reuters) - A Venezuelan opposition leader detained last week for spearheading a two-month strike against President Hugo Chavez was placed under house arrest on Sunday after a judge charged him with civil rebellion.

State security police nabbed business leader Carlos Fernandez on Wednesday in a midnight raid that foes of the leftist leader portrayed as a political witch hunt.

Police hustled a worn-looking Fernandez out of the capital's palace of justice early on Sunday after the judge ordered him detained at his home in the western city of Valencia, his lawyer told reporters.

He faces charges of civil rebellion and instigation, although three other charges were dismissed.

Fernandez's arrest and a detention order issued for another strike leader, Carlos Ortega, stoked fears among opposition leaders of a crackdown against foes of Chavez, who brands his critics "terrorists" and "coup plotters."

Union leader Ortega, one of the president's fiercest critics, has gone into hiding as his supporters urge the international community to condemn charges they see as illegal and politically motivated.

Opponents of the populist president, who they accuse of disregarding democracy and ruining the economy, are waging a campaign to pressure him into accepting elections in the world's No. 5 oil exporter.

The opposition strike, which fizzled out during the first week of February, severely disrupted the nation's oil exports that account for half of state revenues. Venezuela's economy, already deep in recession, contracted by nearly 9 percent by the end of last year.

Chavez, who survived a coup in April, has resisted calls for a vote. He accuses his opponents of trying to sabotage the oil industry and has demanded judges jail the opponents he accuses of trying to topple him again.

The Venezuelan leader, who was first elected in 1998 with vows to ease poverty, has recently hardened his position and calls 2003 the "year of the offensive" to deepen his self-styled revolution.

www.meridianstar.com By William F. West / community editor Feb. 23, 2003

VIEW FROM THE TANK — Patrick Kelly, an employee at BP Express Lane on 22nd Avenue in Meridian, has watched gas prices soar to an all time high for the month of February.

Gasoline prices are all pumped up in Meridian, leaving motorists dismayed or outraged after refilling their tanks.

Locally, the complaints have been frequent long before prices for self-service unleaded regular passed the $1.60 per-gallon mark.

A check of prices in Meridian showed Super Wal-Mart offering the lowest price for self-service unleaded regular at $1.599, but most stations in the city have postings of $1.649.

On Saturday in Hattiesburg, unleaded regular gas was selling at $1.519, about 13 cents lower than Meridian.

Some motorists said they don’t understand why prices in Meridian are higher than cities or towns elsewhere — particularly with the presence of pipelines and massive fuel depots off Interstate 20/59 on the west side of the city.

Local distributors, contacted for a response, preferred to remain silent.

“I believe we’ll pass,” Billy Blaine, manager of Dixie Oil Co., 2918 Fifth St., said when asked for comment last week.

Representatives of two other major local distributors, Maples Gas Co. Inc., and Burns and Burns Inc., also declined to comment.

Expert opinions

Experts monitoring gasoline prices say they can’t speak for Meridian specifically.

But they said high fuel prices nationally result from U.S. dependence on foreign oil, mainly from strife-torn Venezuela, a harsh winter in the north that depleted fuel supplies and worries about a U.S. war against Iraq.

Stacey Wall , an economist, is president of Pinnacle Trust, a Jackson-based wealth management firm. He said he’s concerned about high gas prices being a drag on a national economy that has been struggling since before 9/11.

Wall said the U.S. either needs to defeat Iraq in a quick war or reach a peaceful resolution.

“As long as there’s uncertainty in the air, I think prices are going to continue to stay high,” he said.

Wall said he hopes prices will decline, but he’s also skeptical about the gasoline giants’ marketing philosophy.

“Historically, gasoline companies tend to be real quick to raise gas prices,” Wall said. “And then when oil prices eventually recede, they’re a little bit slower about bringing them back down if they can get away with it.”

“As long as nobody can prove any kind of collusion or anything, they can pretty much do it,” he said.

Wilkerson’s comments

Jerry Wilkerson, executive director of the Mississippi Petroleum Marketers Association, quickly noted that collusion to artificially inflate gasoline prices is a federal offense.

But Wilkerson said he has gotten an earful of complaints about prices from state legislators while lobbying at the Capitol. He quipped that even his minister asked him about the high prices after church last Sunday.

Wilkerson, a Madison resident and a Meridian native, frequently drives here to see his relatives. He said he’s eyed the gas prices here but doesn’t see differences between what’s posted in Meridian or elsewhere.

“Sometimes it’s cheaper over there and sometimes it’s cheaper in Jackson,” he added.

Wilkerson said he did receive complaints in the late 1990s about high prices in Indianola and Greenwood. In 1997, the former Jitney Jungle supermarket chain opened a Pump and Save in Greenwood and engaged in price war that culminated with self-service regular unleaded dropping to 78.9 cents a gallon.

Wilkerson represents about 300 wholesale distributors and convenience store chains in the state.

“Of course this is always a bad time for us when prices are going up like this,” he said. “Quite honestly, I hear this all the time, people saying, ‘Well, you all are making a killing off of this.’”

“And it’s the reverse,” he said. “Our folks lose money when the prices are going up.”

Wilkerson was referring to longstanding arguments that there are wholesalers and retailers who try to hold off increasing prices at the pumps as long as possible before passing costs on to the customers.

Other viewpoints

Kent Young, manager of public affairs for Citgo Petroleum Corp. said the corporation has received some feedback about high prices.

“But so far it’s been fairly light,” he said.

Citgo, based in Tulsa, Okla., supplies more than 13,500 stations and has long had a presence in the Deep South.

The corporation has a huge fuel depot at 180 65th Ave., but Young said it doesn’t set fuel prices at the retail level. He said that’s the responsibility of the marketer or the dealer.

Young, asked whether he believes prices will decline or stabilize, replied with a laugh: “If I had the answer to that, I wouldn’t be where I am right now.”

Joe Sims is president of the US Oil and Gas Association in Jackson, formerly known as Mid-Continent Oil and Gas. The association represents the production end of the fuel business.

Sims said a problem that could be on the horizon isn’t in oil but in natural gas.

Sims recalled the natural gas crisis in the severe winter of early 2001, when masses of poor people found themselves unable to pay astronomical heating bills resulting from price increases.

Sims said he believes the problem is that the U.S. hasn’t had a robust program for natural gas exploration.

“The country just sort of needs to take a deep breath and really get serious about an energy policy,” he said.