Kuwait flow to halt during war - Fear of Iraqi missiles to close fields

www.canada.com Jack Fairweather The Telegraph; With files from Reuters Friday, January 31, 2003 CREDIT: Herald Archive, Associated Press

If President George W. Bush orders crude withdrawn from the U.S. strategic reserve, oil could begin to flow within 10 days.

Kuwait will turn off its oil taps, among the most productive in the world, if full-scale war breaks out against Iraq, said officials Thursday, threatening to sharply increase petroleum prices.

Kuwaiti officials have prepared an evacuation of the country's oilfields, many of which are near the border with Iraq where 110,000 U.S. troops are gathering for military action. An official at the state-owned oil company, Kuwait Petroleum Company, speaking on condition of anonymity, said: "Iraq still has its short-range missile capacity intact and may use them against Kuwait.

"We cannot put our employees' lives in danger and will have to leave the oilfields if a war between America and Iraq escalates."

A missile strike on the oilfields of Kuwait, one of the largest producers with three per cent of the world market, would have huge effects on the price of oil.

During the first Gulf War, oil prices more than doubled, and claims have been made that should Iraq target the regional oil industry this time round, prices could leap as high as $80 US per barrel.

Insurance companies are also threatening to declare the Gulf area a "no-go area" in the event of war, meaning that many tankers will not travel to the region for fear of being attacked, further reducing supplies.

Saudi Arabia has promised to make up shortfalls if Iraqi oil production ceases. But if Kuwait stops pumping, and with Venezuela's oil industry still not back to full output after a strike, the Saudis might struggle to do so.

Kuwaiti fears of an attack by Iraq seemed to be confirmed by Tariq Aziz, the Iraqi deputy prime minister. Kuwait would be part of any "battlefield" created by a U.S.-led invasion, he said.

The U.S. Energy Department is already poised to move oil into the market in as little as 10 days should President George W. Bush order a drawdown of emergency oil reserves in the event of a war with Iraq, officials say.

A withdrawal of millions of barrels of oil by the United States and other industrialized countries is expected in order to calm energy markets and ensure adequate supplies following the announcement of any U.S.-led military action against Iraq.

When that happens, the U.S. Energy Department has a set of procedures in place that will quickly enable it to notify major oil firms that the government wants to sell crude, schedule pickup of the oil and transport it to refineries.

Such a drawdown of reserve oil may not be necessary, as Saudi Arabia has said it will pump more oil to make up for a cutoff in Iraq's crude exports in a war.

The U.S. Strategic Petroleum Reserve now holds 599 million barrels of crude, worth about two months of U.S. oil imports. It can be drawn at a rate of 4.3 million barrels a day for 90 days, then the rate drops as storage caverns are emptied.

Other industrialized countries that are members of the International Energy Agency, which would co-ordinate a global release of oil reserves, have a total of 700 million barrels in emergency oil. Most of that is held by Germany and Japan.

Some IEA member countries, such as Britain, do not have government-controlled oil reserves. Instead, oil companies are required to maintain excess crude inventories.

Department officials would not say whether IEA members had made a decision to release emergency oil if Iraq is attacked, or what would be the United States' share.

The scenario on how IEA members would release oil has already been worked out, but the amount for each country is a last-minute decision that can be settled among the IEA's governing board, department officials said.

During the 1991 Gulf War, the United States accounted for half the oil that was released among IEA members.

"It wouldn't necessarily be that this time around. That's not a standard understanding," one department official said.

The department has a list of companies it believes would be interested in buying oil from the stockpile, and these can be notified within several hours within Bush's order.

Oil companies, and the public, will then be able to view the terms of an oil solicitation on the department's Web site. Offers for how much companies are willing to pay for each barrel of reserve oil would be due electronically several days after the president's announcement.

Energy Department officials said it would take about a day to select the winning firms. The department has planned for the entire process -- announcement of an oil release to delivering to energy firms -- to take 15 days.

However, department officials said the oil could be put into the market as soon as 10 days if firms had space immediately available on pipelines or empty tankers waiting nearby to transport the crude.

The oil could then be shipped to refineries for processing in a few hours, depending on the location of the reserve site.

A barrel of crude yields about 86 litres of gasoline, 43 litres of diesel fuel and heating oil and 18 litres of jet fuel, according to the Energy Department.

The government stores its oil in underground salt caverns at four sites in Texas and Louisiana. The typical cavern holds 10 million barrels and is cylindrical, with a diameter of 65 metres and a depth of 650 metres -- large enough for Chicago's Sears Tower with 55 metres to spare to spare.

The four reserve sites are connected to major commercial pipelines with easy access to refineries. "Our sites in total are connected by pipeline to almost 50 per cent of the country's refining capacity," the official said.

Oil sold at the reserve's West Hackberry site in Louisiana would have to travel only a few hours by 16 kilometres of pipeline to huge refineries owned by Citgo and Conoco that together could process about 560,000 barrels of crude oil a day.

At the other extreme, shipments to Illinois refineries that serve Chicago and the Midwest would take more than a week.

The Energy Department has been running the reserve's four sites to receive oil to meet the Bush administration's goal of filling the stockpile though those shipments have been suspended to keep more oil in the market. The operation could be reversed quickly, department officials said.

"To reconfigure our sites to go out (with oil), rather than in, is not a big deal. It would be ready before day 10 (after a drawdown order) to pump oil out," a department official said.

The delivery process could take longer if pipelines are bottlenecked with prior shipments, as the government does not have the authority to override private delivery contracts.

Separately, department officials downplayed the possibility of a pipeline owner not making space on its system for reserve deliveries in order to drive up crude or product prices.

In California's energy crisis two years ago, the state accused pipeline owners of clogging up their systems to raise the price of natural gas shipped to power plants.

Department officials said that was not likely to happen with oil because, unlike natural gas, oil can be transported by both pipeline and competing tankers.