Victory in Iraq likely would bring cheaper oil — eventually

www.usatoday.com Posted 2/25/2003 1:50 AM     Updated 2/25/2003 9:09 AM
By James Cox, USA TODAY

Blood for oil, say the doves. No, blood for "vital U.S. interests" — with oil far down the list — says the Bush administration. Whether or not the looming war with Iraq is about oil, much of the peace surely would be.

If the United States pushes Saddam Hussein from power, that would set off a struggle for control of Iraq's vast oil riches. The result, ultimately, could be a world awash in cheap petroleum and less dependent on the one player determining global prices, Saudi Arabia.

Iraq's proven oil reserves are estimated at 112 billion barrels, enough to meet current U.S. import needs for a century. But much of Iraq is barely explored, and probable reserves there are thought to be as great as 310 billion barrels. The Saudis, by contrast, have known reserves of 262 billion.

"Iraq is the only source that could displace Saudi Arabia," says Fadhil Chalabi, a former top official in the Iraqi oil ministry, now at the Centre for Global Energy Studies, a London consulting firm.

A swift, decisive victory over Saddam might be tonic for the ailing U.S. economy. It would vaporize the current $5-a-barrel "war premium" on oil and end the uncertainty economists blame for stalling a long-awaited recovery in financial markets and the broader economy.

Long term, the implications are huge. The U.S. — first by installing a military governor in Baghdad, then through a friendly Iraqi regime — could gain enormous influence over world supplies and prices for crude. It could create a second "swing producer" to rival Saudi Arabia and act as a counterweight to the Saudis' sway over OPEC.

But before any of that happens, a lot of things have to go right, cautions Toby Dodge, an Iraq expert at the University of Warwick in Britain. "Short term, a liberated Iraq isn't going to affect (global) output. The Iraqi oil industry is in an absolutely dreadful state. Medium and long-term, as Iraq develops its resources, there's clearly going to be a lot more oil about."

What's got to happen:

In the short term

U.S. Special Operations troops would have to race to secure oilfields in the north and south before Saddam's army can torch the wells there. Reports indicate he has moved ammunition and explosives to Iraq's fields.

Retreating from Kuwait in 1991, Iraqi troops blew up nearly 700 wells, causing an environmental disaster and more than $20 billion in damage. By choosing what military observers call the "Nero option," Saddam could trigger an even bigger catastrophe this time. That's because Iraq's fields cover a much greater expanse than Kuwait's, and sabotaged terminals and loading facilities could send millions of barrels spewing into the Persian Gulf.

The fighting would need to end quickly — within days, not weeks — so Iraqi oil could begin to flow back to a starved market. And there can be no damage to fields and facilities in neighboring Kuwait or Saudi Arabia. The world already is struggling to replace crude lost as a result of recent strikes in Venezuela and Nigeria. A war would suck 2 million barrels of Iraqi oil off the market each day — 4.5% of global exports — until the taps could be turned on again.

OPEC has hinted it might suspend production quotas temporarily so cartel members can pump at will to make up for lost Iraqi supplies. But Saudi Arabia and, possibly, the United Arab Emirates, are the only OPEC countries with spare capacity to tap.

Midterm

The Bush administration is desperate to avoid giving ammunition to anti-war protesters who argue that a U.S.-led war against Iraq amounts to blood for oil. To mute those charges, Secretary of State Colin Powell vowed that Iraq's future oil revenue would be put into a trust to pay for Iraq's reconstruction and meet humanitarian needs.   WHO PUMPS THE MOST OIL? (Millions of barrels a day, 2002 estimates) Non-OPEC countries USA 8.17 Russia 7.50 Mexico 3.60 China 3.36 Norway 3.35

Organization of Petroleum Exporting Countries Saudi Arabia 8.51 Iran 3.53 Venezuela 3.09 Iraq 2.93 United Arab Emirates 2.42 Nigeria 2.10 Kuwait 2.04 Algeria 1.53 Libya 1.37 Indonesia 1.36 Qatar 0.79

Sources: AP, International Energy Agency, USA TODAY research, Deutsche Bank estimates

But the administration hasn't spelled out how the trust would work and who would run it. Middle East experts caution that the U.S. would enrage Arab skeptics if it used any Iraqi oil proceeds to pay the war tab.

Putting oil revenue into a trust fund would mean eliminating the United Nations oil-for-food program, which has collected and dispersed money from Iraqi sales since 1996. Iraq's neighbors and creditors are likely to resist that idea until they know what would happen to their various claims.

Kuwait wants Iraq to pay billions in reparations from the Gulf War. Iran has demanded the same for the 1981-89 Iran-Iraq war. Turkey says it might assert a historic claim to part of the oil from Iraq's northern fields. Creditors such as Russia say Iraq owes more than $100 billion in foreign debt.

With Saddam gone, it wouldn't be long before oil company executives would be prowling hotel lobbies in Baghdad. U.S. oil majors ExxonMobil and ChevronTexaco are "natural candidates" for contracts in Iraq, says a recent report by Deutsche Bank. Bechtel, the San Francisco-based engineering giant, and oilfield services companies Halliburton, Schlumberger and Baker Hughes also could expect to get lucrative deals there, Deutsche Bank says.

Initially, President Bush plans to place a military governor, probably Army Gen. Tommy Franks, in charge of administering Iraq after Saddam is gone. Within months, Franks would be replaced by an American civilian governor, who could be in the awkward position of having to decide what to do with billions in development contracts the Iraqi dictator has signed with oil companies from France, Russia, China and 20 other countries.

Any American authority might be smart to leave control in the hands of Iraq's many respected technocrats and engineers. Iraqis of all stripes are fiercely nationalistic and determined to guard their oil resources from foreign domination, experts warn.

"No quasi-imperial governor would have the ability to award long-term oil contracts in Iraq," Dodge says. "It would be politically unacceptable, domestically and internationally, not to mention a nightmare for the governor."

Long term

After two decades of war and a decade of sanctions, Iraq's oil industry is crumbling. Only 24 of 73 fields were producing last year, according to Alexander's Gas & Oil Connections, an industry authority.

The U.S. and Britain have repeatedly gone to the U.N. to block Iraq's purchase of spare parts and technology, arguing that the gear has potential "dual use" for military purposes. As a result, Iraq can't make vital repairs and do maintenance on its aging wellheads, pipelines, pumping stations, refineries, storage facilities and shipping terminals. In addition, Iraqi engineers have done permanent damage to underground reservoirs by injecting them with water and other liquids to keep short-term production levels from falling.

Iraqi oil production peaked at 3.5 million barrels a day in 1979. Now, Iraq risks a 5% to 15% annual decline in capacity because of shoestring management and a lack of equipment and investment, says Saybolt International, a Dutch firm hired by the U.N. to assess the Iraqi oil industry.

Deutsche Bank and others say Iraq needs to spend $5 billion right away just to keep production from collapsing. If it can restore old wells, install turbines in pumping stations to restart pipelines, and rebuild loading terminals on the Gulf, it can boost its production capacity to 4 million barrels a day in two years vs. 3 million today.

Down the road, Iraq needs $38 billion of fresh investment to develop fields that are discovered but untapped and to thoroughly explore its western desert, thought to be rich in oil and gas. That investment most likely would be spread over 20 years or more. It could ultimately give Iraq the ability to pump 8 million barrels a day, about equal to what Saudi Arabia produces.

The Saudis aren't defenseless against the rise of an Iraqi rival: They could effectively choke off international investment to Baghdad by flooding world markets with cheap oil to make new development uneconomical.

One unknown is Iraq's standing in OPEC, where it is a founding member. Iraq effectively lost its voice in OPEC with the Gulf War and its production quota with the imposition of U.N. economic sanctions.

Few believe Iraq would bolt OPEC in a post-Saddam era. But Baghdad probably wouldn't agree to limit itself to the cartel's production quotas for years to come, arguing that it must pump and sell all it can to meet its massive reconstruction needs.

Even before the world discovered uses for it, oil coursed through Iraqi history. The people of ancient Iraq used to tell of flames that shot from holes in the earth near the northern city of Kirkuk. Beneath them, they thought, was the fiery furnace described in the Old Testament, a burning hell into which the king of Babylon was said to have cast Jews who refused to worship his golden image.

Western geologists saw the fires in 1927 and recognized them for what they were: gas flares rising from giant lakes of oil below the surface. Two decades later, an American scientist — name unknown — returning from Iraq felt compelled to tell the State Department what he found.

"The oil in this region," he said, "is the greatest single prize in all history."