Chevron cuts off Iraqi oil spigots - Policy reversal tied to reliability of supply

www.sfgate.com Verne Kopytoff, Chronicle Staff Writer Tuesday, March 11, 2003

Facing a possible war in the Persian Gulf, ChevronTexaco said it has stopped loading oil directly from Iraqi ports in favor of more-reliable sources.

The decision marks a big U-turn for the San Ramon petroleum giant. Until recently, Iraq was an important spigot for the company, despite the escalating tensions there and condemnations by some politicians. ChevronTexaco buys Iraqi oil from third-party suppliers, but does not have its own pumping operations there.

Chris Gidez, a spokesman for ChevronTexaco, said the reversal in company policy "has everything to do with reliability of supply," not public relations.

He insisted that "it's strictly an economic, business-driven issue."

Despite the change, ChevronTexaco left open the possibility of buying Iraqi oil exported by others in the future. Just last week, the company bought part of a shipment of Iraqi crude that was sitting in the Gulf of Mexico.

ChevronTexaco stopped loading oil in Iraq in mid-February, according to Gidez. During the month prior, the company had taken two shipments of Iraqi oil to its Bay Area refinery in Richmond and three more shipments to its refinery in El Segundo, near Los Angeles, according to the Energy Information Agency, an arm of the Energy Department.

ChevronTexaco's California refineries are specially configured for high- sulfur oil, the kind found in Iraq.

Other oil companies, including Valero, ConocoPhillips, Marathon-Ashland and CITGO Petroleum, also bought Iraqi oil recently. They did not return telephone calls Monday seeking comment.

Analysts said ChevronTexaco switched strategies regarding Iraq because it was trying to avoid taking a financial hit in the event of a U.S.-led war in the region. The company would have to pay for tanker ships already en route and be left scrambling for alternate supplies to keep its refineries functioning.

Any disruption could send gasoline prices even higher than their current record levels. The average cost in California for a gallon of unleaded is at an all-time high of $2.08, according to the Energy Information Agency.

Importing Iraqi oil is legal under the United Nation's oil-for-food humanitarian program. Implemented in 1996, the program allows Iraq to sell oil and use the money for items such as food, medicine, irrigation and housing. A portion of the proceeds must also go toward war reparations for Kuwait.

Oil companies such as ChevronTexaco aren't allowed to buy oil directly from Iraq. Rather, they must deal with trading firms that first buy the oil from Baghdad under U.N supervision.

In the past, some politicians have called for prohibiting U.S. companies from importing what they call Iraqi "rogue oil." They said the proceeds support terrorism and contradict the U.S. goal of becoming more energy self- reliant.

Since last year, U.S. oil companies have gradually reduced their dependence on Iraq, mostly because of the tensions there. Average daily imports declined from nearly 800,000 barrels in 2001 to around 200,000 in the fall of 2002, according to IHS Energy Group, a consulting firm in Engelwood, Colo.

A strike in Venezuela's oil fields that started in December renewed demand for Iraqi oil. But production in Venezuela has recovered somewhat since then, providing ChevronTexaco with an alternative, analysts said.

Iraq supplied 4.2 percent of all U.S. crude imports in December, according to IHS Energy. "The loss of Iraq represents a potential pinch, but OPEC, as a whole, will make up for any shortfall of Iraqi exports," said Pete Stark, vice president of industry relations for IHS Energy.

The Organization of Petroleum Exporting Countries is meeting this week in Vienna, partly to discuss increasing oil production in the event of a war in Iraq.

Gidez, from ChevronTexaco, said his company may indeed return to Iraq when the situation there is more stable. In the meantime, he said, the firm will rely on other sources, which he declined to identify.

"If we can ensure alternative sources, that's fine," he said. "In the future, if Iraq offers a reliable economical supply, that's fine too."

E-mail Verne Kopytoff at vkopytoff@sfchronicle.com.