Conquest of Iraq no guarantee of lower oil prices
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.
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