Diplomacy key to reviving Iraqi oil . Firms around world all want piece of 'huge prize'
<a href=www.sfgate.com>SFGate.com Verne Kopytoff, Chronicle Staff Writer Sunday, April 13, 2003
WHO HAS THE OIL?
PRODUCTION Average daily oil production for 2002 in millions of barrels:
- Saudi Arabia 7.62
- Russia 7.41
- United States 5.82
- Iran 3.44
- China 3.39
- Mexico 3.17
- Norway 2.99
- Venezuela 2.60
- United Kingdom 2.29
- Canada 2.17
- Nigeria 2.12
- United Arab Emirates 2.08
- Iraq 2.02
RESERVES Known crude oil reserves in 2002 in billions of barrels:
- Saudi Arabia 259.2
- Iraq 112.5
- United Arab Emirates 97.8
- Kuwait 94.0
- Iran 89.7
- Venezuela 77.7
- Former Soviet Union 57.0
- Libya 29.5
- Mexico 26.9
- China 24.0
- Nigeria 24.0
- United States 22.0
Source: U.S. Energy Information Administration / Source: American Petroleum Institute
Iraq's oil fields have emerged relatively unscathed after nearly a month of warfare, but the plan to revive the nation's most lucrative industry faces minor logistical problems and major diplomatic pressure.
U.S. leaders are confident they can get the fields up and running soon. The largest impediment to that effort is not in the desert, but in the theater of diplomacy where international leaders are expressing concerns over how the Iraqi riches will be managed, and by whom.
"Iraq's oil is a huge prize," said James Paul, executive director for Global Policy Forum, a New York organization that monitors the United Nations. "There's a tremendous interest from foreign oil companies to lay their hands on it."
At week's end, U.S.-led forces were occupying all of Iraq's major oil fields after capturing the important northern city of Kirkuk.
Iraq's oil industry has escaped the doomsday scenario many had feared before the invasion. U.S. officials worried about a repeat of the first Persian Gulf War in 1991, when Iraqis sabotaged nearly 750 wells in Kuwait.
"The situation is a lot better than had been expected," said John Lichtblau,
chairman of the Petroleum Industry Research Foundation in New York. "I think there's going to be every effort made to begin production and exports as soon as possible."
Before the war, fears that Iraq might set its oil fields ablaze -- in addition to an oil-worker strike in Venezuela -- sent crude prices skyrocketing to nearly $40 a barrel. Now the price for a barrel of oil has declined from $37.42 in mid-March to $28.25 on Friday.
Instead of an oil shortage, traders are now talking about a glut. Fears that Iraqi oil will soon flood the market has prompted members of the Organization of Petroleum Exporting Countries to discuss cutting their production -- after they had raised it in response to the war.
POST-WAR PRODUCTION
Vice President Dick Cheney said Wednesday that Iraq's oil production could surpass prewar levels of 2 million barrels a day and reach 3 million barrels a day within a year if given enough investment. Annual revenue could total as much as $20 billion, he said, which would go to rebuilding the war-damaged nation.
"The oil revenue is not to be diverted to any purpose other than specifically to service the immediate and, hopefully, long-term needs of the people of Iraq," Cheney said.
Iraq's oil is critical because it is expected to bankroll the nation's rebuilding. Plans to revive the industry are being watched closely, with many people suspicious that the United States is trying to gain undue control of Iraq's vast natural wealth.
Potentially, Iraq could become an oil powerhouse. It has the world's second- largest petroleum reserve, which was only modestly tapped under Saddam Hussein because of technological neglect and U.N. sanctions.
U.S. and British forces now control Iraq's southern oil fields, where 60 percent of the nation's crude is produced. In the north, soldiers are in the process of securing the other 40 percent.
The wells and pumping stations in the northern fields are largely intact. But Defense Secretary Donald Rumsfeld said that Iraqis may have rigged some of the equipment with explosives, as was the case in the southern part of the country.
During the initial days of the invasion, Iraqis sabotaged about a dozen wells in the southern Rumailah field. Only one of the resulting nine fires is still burning.
BUSH'S OIL PLAN
The Bush administration's plan for restarting the country's oil industry calls for setting up an interim authority to oversee production. The team will be made up primarily of Iraqis, Cheney emphasized, but will also include international advisers.
Philip Carroll, a former chief executive of Shell Oil Co. who went on to lead the construction giant Flour, will reportedly lead the interim oil authority.
Iraq's citizens are expected to regain control of its oil industry after a government is formed. Analysts believe that could take up to a year.
The Iraqi oil ministry will be advised by a group of Iraqis who are sponsored by the State Department. The members have met several times, most recently in London last weekend.
Dara Attar, an oil consultant from London who represents the Kurds in the advisory group, said members already agree on several key points. One is that foreign oil companies should be allowed into Iraq.
The firms could begin drilling new fields in perhaps three or four years, Attar said. They would share their proceeds with the Iraqi government in deals similar to those signed by other nations and foreign firms, he said.
"Our oil industry is ruined," Attar said. "We are going to try to raise our production, and for this purpose we need foreign help."
Chris Gidez, a spokesman for ChevronTexaco, the oil giant headquartered in San Ramon, said his company is always considering future opportunities, including Iraq. But he added that it's too soon to speculate about specific opportunities there.
One fear is that U.S. oil companies such as ChevronTexaco and ExxonMobil will have an advantage getting contracts because of the wartime role of the U. S. military. The French and Russians worry about being frozen out, though Attar said that will not be the case.
"It will be a fair process," he said.
Oil companies from France, Russia and China already hold contracts signed years ago under Saddam Hussein to open new fields in Iraq, but they have yet to begin pumping because of the U.N. sanctions. It's unclear whether the contracts will be honored by a new Iraqi government.
'POLITICAL FAVORS'
Attar said many of the contracts were granted "as political favors" and should be reviewed. However, the Russians in particular have said they will file suit if their deals are thrown out.
Another issue agreed on by the advisory group is that money from oil should be spent evenly throughout Iraq. Under Saddam Hussein, the money was handed out to favored regions and cities.
Currently, Iraq's southern oil field is being maintained by Halliburton, an oil services company from Texas formerly led by Vice President Cheney. The deal could be worth up to $7 billion over two years.
The contract has raised questions from some members of Congress, who criticize the fact that it was awarded without competitive bidding. The U.S. Army Corps of Engineers, which gave Halliburton the contract, said it did so for the sake of speed and because the firm had a previous contract to plan the rebuilding of Iraq's oil industry.
Analysts expect Iraq to begin exporting oil again within the next few months. But damage and outdated equipment is just one of the problems facing the nation's oil industry.
A diplomatic rift between the United States and other U.N. members has emerged over who can sell Iraq's oil in the near term.
QUEST FOR AUTHORITY
The United States clearly wants the authority. However, some of the other permanent members of the Security Council -- France, Russia, China and Britain -- may think otherwise.
The Security Council has oversight of Iraqi oil as part of its oil-for-food program. Proceeds from oil sales go into an escrow account controlled by the United Nations.
The system was imposed on Iraq in 1995, as a way to pay for that nation's food and medicine without it being diverted to buy weapons. It's still in place, even though Hussein's regime has fallen.
"The legalities will be addressed," White House spokesman Ari Fleischer said Friday. "It doesn't require necessarily an international stamp to engage in commercial transactions legally. The United States provides products around the world that the United Nations doesn't have to say we can do."
Paul, from the Global Policy Forum, said sanctions against Iraq will be lifted at some point. But he added that there would be opposition to oil money then flowing directly "into the pockets of the occupation authority."
Iraq already has 9.2 million barrels of oil in storage at Ceyhan, a Mediterranean port in Turkey. Loadings of Iraqi oil there stopped just before the war began.
Buyers were confused about the oil's ownership. Moreover, no one was answering the phone at Iraq's oil marketing company to consummate the deal.
If not for diplomatic issues, loadings could begin at Ceyhan at any time.
The United Nations has agreed to adjust orders of goods yet to be delivered through the oil-for-food program to better address the immediate needs of Iraq.
About $2.8 billion in cash remains in the program's escrow accounts.
E-mail Verne Kopytoff at vkopytoff@sfchronicle.com.