Analysis: Town on a knife edge as the world waits for Iraq’s oil
timesonline.co.uk May 03, 2003 By James Doran
THE oilmen of Midland, who consider themselves to be among the last of their kind, were looking forward to squeezing a living over the next few years from what is left of the most lucrative onshore oilfields in America.
Now they face the prospect of Iraq upsetting their retirement plans by wreaking havoc in the oil markets with a flood of crude from perhaps the largest untapped reserves in the world.
After 80 years of boom and bust, Midland’s oilmen know that there remains only 20 or 30 years’ worth of black gold beneath the cactus, gravel and rattlesnake skins that litter the West Texas desert floor. All the good stuff was long ago drained from the Permian Basin, where production peaked at seven million barrels a day in 1973.
Today, the town’s weather-beaten prospectors must pump water or carbon dioxide down old wells to force out the last drops of Texas tea from the porous sandstone.
What these so-called roughnecks want is stability in the oil market with a steady price around $25 a barrel. But most of them fear that Iraq’s emergence as a major oil producer will result in anything but. “We live and die by the oil price here,” says Paul Page, the head of Page Petroleum, a small, independent company based in Midland.
If the price falls too low, as last happened during the Venezuelan crisis in 1998 when crude fell to about $8 a barrel, few of Midland’s independents will survive. And when those companies go down they drag most of the town’s 110,000 inhabitants with them.
Page says: “This town is dependent on the oil industry. Men working for the oil companies get laid off. Then there are the service companies and other local businesses too. The oil business makes the money that gets spent in Midland.”
In 1998 Midland became a ghost town. It is recovering today, with an oil price between $24 and $27 a barrel, but it is a far cry from the heady days of the 1950s, when former President George Bush made his fortune, or the booms of the 1970s and 1980s, which made his son, the current President, the man he is today.
“The worst-case scenario,” says Joseph O’Neill, another Midland oilman and a friend of President Bush, “would be Iraq, or whoever controls it, getting in a fight with Opec, like Venezuela did. Waiting for Opec and a country like that to blink first would cripple us all.”
The oil price dropped by about 9 per cent last month when victory in Iraq became apparent. It has continued to fall towards $23 a barrel as the market fears a postwar glut when Iraq is back on stream.
The fluctuations in price are making Midland jumpy. “If it looks like we are getting down toward $20 a barrel things will get bad here,” O’Neill says.
Opec, too, is concerned. The cartel is ready to reduce production in anticipation of an expected glut once Iraq’s capabilities are realised.
Jim Henry, chief executive of Henry Petroleum, believes that getting Iraq up to full production and securing the country within the Opec cartel is crucial to the global economy. “With Iraq not producing anywhere near capacity today, and problems in Venezuela and Nigeria, Opec is producing pretty near flat out,” he says. “The market needs Iraq to ease the burden and bring some stability. But it must be handled properly and quickly.”
He believes that as the world economy picks up over the next decade, demand for oil will far outreach supply, unless Iraq is in full production mode and producing about 2.6 million barrels a day.
But Henry has deeper fears than O’Neill and Page, who cling to the belief that Opec and President Bush will come to their aid if prices get out of hand. “Who is going to invest the billions of dollars needed to get the oil out of Iraq?” he asks. “Will the oil companies do what is needed given the political situation there? I don’t think so.
“They are only going to invest in a region if they are sure it is sound. And they will not get that surety for quite some time to come. All the while they are waiting, the oil that the global economy needs stays in the ground in Iraq.”
Iraq’s oilfields have not been updated for close to 30 years. The infrastructure is crumbling and the technology is outdated. The country has about 112 billion barrels of proven reserves of oil, second only to Saudi Arabia. Most experts agree that with modern exploration techniques Iraq could find many billions more.
If Iraq’s production is not stepped up, Henry fears, the world could face oil shortages such as those in the 1970s. Shortages lead to rising oil prices. The West Texas reserves of the Permian Basin are not big enough any more to benefit from a rocketing oil price.
“In that circumstance cashflow goes up but so do costs,” says Henry. “Sustained rises in oil prices lead to windfall taxes aimed at the majors. But we have to pay them too. And we can’t afford them. Instability from high prices can just as easily put us out of business as low prices.”
The Midlanders know that their rough and raw Texas town, dotted with nodding donkeys — or pump jacks — will live or die depending on how Iraq is reintroduced to the global oil market.
“There is no doubt,” says Henry. “This war is inextricably linked to the fortunes of Midland. We are fighting for our lives.”
Desert song for the President
The tiny desert town of Midland, Texas, owes everything it has to the discovery of oil and the political success of the Bush family. So thankful was Midland when a second son, George W. Bush, became President that the town anthem was rewritten in his honour.
“Midland, Texas, where the oil comes gushing from the ground. And the high school scamps become state champs; Where the best in Texas can be found! “Midland, Texas, ev-ry night my family and I, can clearly see to eternity and the only limit is the sky. The town where we live is neat, and a ‘Bush’ means more than just mesquite! “And when we say that Midland is o-kay We’re sayin’...
“We’re doin’ fine here in Midland, Texas! Hoo-ray!”