Iraq war might not be about oil, but aftermath probably would
www.sunspot.net By Marego Athans Sun National Staff Originally published February 9, 2003
President Bush says the conflict with Iraq is not about oil. The aftermath of a war, however, could be all about oil.
The duration and success of any military action - and whether Saddam Hussein sabotages his oil fields as he did a decade ago in Kuwait - could determine oil prices for months or years and, in turn, affect the health of economies around the world, analysts say.
As oil prices spiked to a two-year high of $35 a barrel on Friday, reflecting war jitters, interests from France to Russia to Australia to the United States were poised for a reawakening of Iraq's slumbering oil industry, which is sitting on the world's second-largest pool of proven oil reserves after Saudi Arabia's.
Under United Nations sanctions imposed after the gulf war a decade ago, Iraqi production has slumped to less than 2 million barrels a day, and the infrastructure has deteriorated. But the Bush administration is banking on substantially increasing oil output to produce billions in new revenues to lubricate an economic revival in Iraq after the ouster of Hussein.
That's the rosy version of postwar Iraq.
But even in the best-case scenario - a relatively short, bloodless war that leaves Iraq's 1,500 oil wells intact and replaces Hussein with a friendlier leader - Iraq's oil industry would be fraught with economic and political uncertainties that could even discourage investment, analysts say.
Foremost is the hurdle of rebuilding the country, estimated to cost from $200 billion to $400 billion, and the risk of doing so amid potential civil wars among ethnic groups. Rehabilitating Iraq's oil operations to bring production up to its projected potential of 6 million barrels a day - more than triple what it exported last year under a United Nations-sponsored "oil-for-food" program - would take about a decade and cost an additional $40 billion to $50 billion, analysts say.
In the short term, Iraq's wells are capable of pumping about 3 million barrels a day, which would generate from $12 billion to $15 billion in annual revenues, assuming oil prices remain strong. That is far short of the revenue needed to rebuild the country.
"You get the sense some people in Washington, particularly hawkish members of the administration, have spent Iraqi oil revenue 10 times over before they've even gotten in there," said Raad Alkadiri, an analyst at PFC Energy, an oil and gas consulting firm in Washington.
"There isn't that much Iraqi revenue to spend. To say you can rehabilitate the country, pay for an occupation and revive the economy all at the same time is ludicrous."
Iraq is virtually sitting on a sea of oil, with 112 billion barrels in proven reserves, and has probable reserves of an additional 220 billion barrels, experts say.
But only 15 of its 74 discovered oil fields have been developed. Its wells, pumping stations and export terminals are deteriorating so fast that output is dropping by 100,000 barrels a year.
Outside investment
To rescue and modernize these operations, large outside investment would be needed. American companies are banned from doing business with Iraq. But plenty of other companies - particularly Russian and French ones with longstanding ties to Iraq - are lined up to take advantage of lucrative deals when Iraq opens its oil taps.
The contracts and negotiations they have been conducting are in a precarious state, with the United States threatening to attack Iraq imminently if Hussein does not divulge evidence of his nuclear, chemical and biological weapons programs.
In 1997, the Russian oil giant Lukoil signed a $3.5 billion, 23-year contract to rehabilitate the al-Qurnah field, which has 7.8 billion barrels of proven reserves. Iraq put the deal on hold after Russian President Vladimir V. Putin supported the United States-led sanctions effort. Lukoil is trying to revive the deal, and industry experts believe that Washington has made an informal agreement to honor the contract in postwar Iraq.
The French oil company TotalFinaElf is also negotiating contracts. But any deal could be jeopardized by the French government's opposition to American use of force in Iraq.
"I do think the U.S. government will be willing to trade oil for participation - with anyone," said Fareed Mohamedi, PFC Energy's chief economist.
But, he said, "oil is not the prize in and of itself - there are bigger prizes," maintaining that the United States was more interested in stopping the proliferation of weapons of mass destruction and demonstrating its leadership in the world.
Secretary of State Colin L. Powell has forcefully rejected charges, arising from Bush's and Vice President Cheney's background in the oil business, that the United States is after Iraq's oil.
"The oil fields are the property of the Iraqi people," he said recently, and any production revenues will be held "in trust" for the Iraqis.
A U.S. occupation would, however, open up vast opportunities for U.S. oil companies as well as oil service outfits such as Halliburton, a firm formerly run by Cheney, and Bechtel, which managed the repair of Kuwait's fields in the early 1990s. They could earn billions of dollars upgrading Iraq's operations or repairing them if the Iraqis damage them. There are reports that many wellheads are wired with explosives.
The subject is a sensitive one in the U.S. oil industry and the Bush administration.
John Felmy, chief economist at the American Petroleum Institute, said Iraq presents an enormous challenge and risk.
"We have no idea what will happen. We don't know what the rule of law will be or who will be running Iraq," he said. "If we were asked by the Iraqis in the post-Saddam era to develop their resources, we'd certainly be interested, but beyond that it's speculative."
Because access to outsiders has been limited, he said, U.S. oil companies also have little information about the state of Iraq's oil sector.
It is also unclear who would get the development rights in an Iraq occupied by the United States.
"It's the $64 million question," Mohamedi said. The notion of an American bias in handing out contracts "is definitely a fear among non-American companies, and some have been pushing their leaders to help out," he said.
A recent report by the Council on Foreign Relations and the James A. Baker III Institute for Public Policy says that the Iraqis should get to keep control of the oil industry after Hussein is ousted and that the United States should create "a level playing field" for international companies competing for work in repair, exploration and development.
Complicating factors
Of overriding importance, Mohamedi said, is who within Iraq's new government will ultimately control the oil industry. "Dictatorships are fortified by oil," he said. "They can buy and bully the population in countries where revenues are huge. If you don't want a dictatorship that's unaccountable to its population, you don't want any future leader to get control of the oil revenues. They should be controlled by a parliament or distributed to the people.
"These are huge issues facing the U.S. and Iraq, and the oil sector will be at the center of that."
If the country erupts in ethnic hostilities, however, companies may not want to risk the investment, experts say.
Shiite Muslims in the south, a group long suppressed by Hussein, and Kurds, Turks and Arabs in the north may try to take control of the oil fields in their respective regions - a potential maelstrom for allied troops trying to keep order, not to mention for oil companies trying to work.
There might not even be much money in Iraqi oil, said Philip K. Verleger Jr., senior fellow at the Council on Foreign Relations. "These contracts are not as lucrative as one might think. Most of the money is going to go to the Iraqis. If the price is $20 a barrel, the company might get a buck," he said.
Though Iraq's oil reserves are vast, so are those of other countries in the region. Should Iraq, prodded by the United States, try to radically boost production, Saudi Arabia would probably respond by increasing production - driving prices down and bringing exploration to a halt outside of a few countries.
"The Saudis have an economic veto on this whole economic development of Iraq," Verleger said.
Both countries are founding members of the Organization of Petroleum Exporting Countries, which imposes quotas on members to keep prices stable. For Iraq, the quota would probably be from 2.5 million to 3 million barrels a day, experts say.
If an Iraq occupied by the United States flouted that quota and divorced itself from OPEC, "that would be a big step, a declaration of economic war on oil-exporting countries," said Yale University economist William Nordhaus, a co-author of a recent study examining the costs and consequences of war with Iraq.
Because the United States imports a relatively small amount of crude oil from Iraq, less than 3 percent of its consumption, a quick and decisive American victory within, say, six weeks should have little lasting effect on prices, analysts say.
Such a war would stop Iraqi production for a few months, but increased production from other countries would easily offset the loss.
Analysts predict that after an initial spike - evident with Friday's price jump to the highest level in 26 months - prices would be expected to settle in the low $20s a barrel.
However, if the war drags on, prices could reach 1991 gulf war highs of $40 a barrel, which contributed to a global recession in the early 1990s, analysts say. This time, there's less of a cushion because inventories are low, largely because of a protracted strike by oil production workers in Venezuela, a major world supplier. In such a case, the United States, Japan and Europe may have to reach into their reserves, which total about 1.2 billion barrels.
In a doomsday scenario, a protracted, bloody war that damages production facilities in Iraq and other countries, such as Saudi Arabia, could send prices to $60 or $80 a barrel, experts say, and keep them high for at least two years.
"The Western countries and Japan would have to release a lot of their stocks," Mohamedi said. "That could really spook the market."
Copyright © 2003, The Baltimore Sun Related articles • Americans pan France-German plan on Iraq • Powell: European Iraq plan is a diversion • Iraq hands documents to U.N. arms chiefs • Turkey reportedly accepts 38,000 U.S. soldiers • U.S. has no smoking gun in its case against Iraq • Bush's unfortunate inheritance: Iraq and war • Guardsman killed in Kuwait had joined to pay for college • Sharon met Palestinian speaker on plan for withdrawal by Israel • Big-screen warriors meet the real thing • Students debating war, but quietly • Turkish city dominated by Kurds girds for war • Saudi security boosted as Muslim hajj begins