US control of Baghdad and its crude may signal new assault on OPEC-- Some see emerging ‘super-giant producer’ rivaling Saudi Arabia

Al-Jazeerah.info Ed Blanche Special to The Daily Star, 6/7/03

Reconstruction will cost billions of dollars, and temptation to step away from cartel ú and its production quotas ú will be strong

BEIRUT: The US conquest and occupation of Iraq has given the Americans control of one of the world’s major oil producers, one that many believe has untapped reserves that could rival Saudi Arabia’s and Russia’s. US control could also weaken the grip of the Organization of Petroleum Exporting Countries (OPEC) on world markets and, in particular, Saudi Arabia, the cartel’s dominant member. So as the Americans help restore Iraq’s oil industry, badly run down by two wars and 13 years of United Nations sanctions, the key question is whether the country will remain in OPEC now that it has resumed oil exports, albeit at a modest level, after the UN Security Council unshackled it from sanctions imposed in 1990. The Americans have long sought to weaken OPEC, which has been feeling growing pressure from non-cartel producers, particularly Russia, which is vying with Saudi Arabia for dominance of the world oil market. It has also been grappling with what many of its members see as an alarming excess in global oil supplies. This struggle for influence over the oil market should also be seen as part of a wider battle for political leadership in the Gulf. Former Iraqi Oil Minister Fadhil Chalabi, a cousin of Ahmed Chalabi, the Pentagon-backed leader of the main exile group, the Iraqi National Congress (INC), believes his country could double its proven reserves of 113 billion barrels through widespread exploration and become a “super-giant producer” like Saudi Arabia, putting 10 million barrels  on the market every day. That is clearly a scenario in which Iraq is outside OPEC. Iraq has a geographic advantage that cuts the cost of reaching Western markets ú pipelines that link it to Turkey’s Mediterranean coast. (There are other pipelines to the Red Sea, which the Saudis helped build during the 1980-88 Iran-Iraq war, but Riyadh is unlikely to allow Baghdad to use them if it breaks with OPEC.) With that kind of output, with low production costs attracting consumer states away from higher-cost regions like the North Sea, an Iraqi oil industry managed by US-based companies would have the capacity “to bring OPEC to its knees,” according to Chalabi. There are divisions within OPEC itself, particularly over the cartel’s quota system, designed to keep prices at or above $25 a barrel. Algeria, Nigeria and some of the other members are demanding larger shares of OPEC’s production total, which would have to be at Saudi Arabia’s expense. Iraq’s de facto oil minister, Thamir Ghadhban, said on May 26 that “we really don’t have any problem with OPEC” and that the question of withdrawing from the cartel was not currently on the agenda of the US-appointed administration running Iraq. US Energy Secretary Spencer Abraham said whether Iraq stays in OPEC is entirely up to the Iraqis. “We will support their decision, not impose a decision,” he declared on April 28. But Philip J. Carroll, the US executive chosen by the Pentagon to advise Iraq’s post-war Oil Ministry, has suggested that Iraq might be best served by disregarding OPEC quotas, the strongest indication so far that the Americans might push whatever government emerges in Iraq into breaking ranks with the cartel. It also underlines the repeated allegation that one of the imperatives that drove the Americans into invading Iraq in the first place was to control its oil resources, the better to lessen its reliance on Saudi Arabia. As it is, the return of Iraq ú which has operated outside OPEC since the 1990 invasion of Kuwait ú as a major exporter under a new government would cause considerable uncertainty. Iraq has the second-largest proven oil reserves in the world after Saudi Arabia, and its return to the market unconstrained by the cartel could further erode OPEC’s already limited ability to set prices. It might even trigger a price war that would weaken the Saudis and other cartel members. That would, of course, delight the Americans (and other consumers), who have been hoping to break OPEC’s grip on pricing for many years. Carroll, formerly Royal Dutch/Shell’s chief in the US, insists that he is not the instrument of an Iraqi oil policy that would sabotage OPEC. But as he told The Washington Post in mid-May: “In the final analysis, Iraq’s role in OPEC or in any other international organization is something that has to be left to the Iraqi government.” Already, officials in the Oil Ministry ú now supervised by US forces ú are actively considering pulling Iraq out of OPEC and exporting as much oil as possible, as soon as possible, to maximize revenue once the oil fields have returned to full capacity. Earlier this year, US-backed Iraqi exiles, including Ahmed Chalabi, whom the Pentagon wants to see in key government posts drew up a policy document which recommended that Baghdad renounce OPEC’s production restrictions, and noted that it may have to withdraw from the cartel if it sought to impose unacceptable ceilings. Before the 1990 invasion of Kuwait, Iraq was producing more than 3 million barrels per day (bpd). With the imposition of UN sanctions in 1990, it was excluded from OPEC’s production quotas. Under the UN’s “oil-for-food” agreement it was allowed to produce all that its increasingly dilapidated oil industry could manage and before the US invasion was producing around 2 million bpd. Output ground to a standstill because of the conflict but is expected to resume on a limited scale in the next few weeks. Iraqi oil officials estimate the country will be able to export around 750,000 bpd by late June, with expectations that this can be boosted quite rapidly to 1.5 million bpd, half of which would be for domestic consumption. Production is expected to hit the pre-1990 OPEC quota level of 3 million bpd within 18 months and 3.5 million bpd six months after that. Then, by opening up fields that have gone untapped because of the sanctions, it is anticipated that production could reach as high as 6 million bpd in five or six years ú almost as much as Saudi Arabia’s output level. That would amount to nearly one-quarter of OPEC’s current targeted production of 24.5 million bpd and would mean that other OPEC members would have to give up a lot of output ú and revenue ú to accommodate Iraq. With increased output pushing prices down, OPEC would be in trouble. The Saudis, as the cartel’s largest producer with nearly one-third of its output, would be under intense pressure to lower their output. As it is, OPEC’s share of the world oil market has dropped from a peak of around 90 percent in the 1970s to around 39 percent now. This is because since the OPEC-induced oil shocks of the 1970s and the recession they caused, the US and other industrialized states have sought to obtain more oil from non-OPEC producers. Current US and European efforts to open up giant new fields in West Africa, the Caspian Basin, Siberia and elsewhere will further undermine OPEC’s clout. OPEC is scheduled to meet in Qatar on June 11 to consider a new cut in production ú currently running at 25.4 million bpd ú to accommodate Iraq’s return to the market and avoid a possible price collapse. Before the US invasion, former Venezuelan Oil Minister Humberto Calderon opined: “After the war there will be a substantial increase in Iraqi oil production and I wouldn’t be surprised is schemes emerged to weaken, if not destroy, OPEC.” The US-British declaration that they are the occupying powers and will continue to run Iraq underlines their control of the country’s oil industry. The coalition’s failure to produce even a transitional government by now means that it will remain in charge for a lot longer than expected ú up to a year, according to US Defense Secretary Donald Rumsfeld. Even proposals for an Iraqi government have been downgraded to the level of an “Iraqi authority” with lesser, though still undefined powers. The Bush administration ú which Victor Poleo, professor of graduate studies in oil economics at Central University in Caracas, Venezuela, calls “an oil directorate” because of its strong links to the oil industry ú has already made clear that the lion’s share of the fat contracts worth an estimated $30 billion-$100 billion will go to US firms. That includes refurbishing and exploiting the oil fields. Russia, France and China, which had supported Baghdad in the UN Security Council in 1991-2003, are unlikely to be allowed to implement the major oil contracts they signed with Saddam Hussein’s regime, which means urgently needed investment from that quarter will not be forthcoming. The Americans are expected to urge the Iraqis to privatize what had been a state-owned industry that enriched Saddam and his henchmen on a vast scale. Privatization is anathema to most of OPEC, particularly the Saudis, but if Iraq goes that route, opening up to large amounts of outside investment, it would put the other producers under pressure to do the same since they are increasingly in need of investment to upgrade and expand their oil industries, in most cases their primary revenue-earner. Such a move would also weaken OPEC’s influence. Carroll has said that Iraq might best be served by exporting as much oil as it can and ignoring the quotas set by OPEC, giving the strongest indication so far that a future Iraqi government might quit the cartel that Baghdad helped found in 1960. He told The Los Angeles Times on May 16: “Historically, Iraq has had, let’s say, an irregular participation in OPEC quota systems. They have from time to time, because of compelling national interest, elected to opt out of the quota system and pursue their own path. They may elect to do that same thing. To me, it’s a very important national question.” Leading figures in OPEC, and elsewhere in the oil industry, do not believe the Iraqis themselves will quit the cartel, but could do so with US prodding. Saudi Oil Minister Ali al-Naimi declared in late May that he saw no reason why OPEC could not cope with Iraq’s resumption of exports and said it would be “folly’ to leave the market to determine oil prices. Maintaining oil prices, and revenues, would be a key priority for any Iraqi government, he noted. “Iraq, like other producing states, be they in or out of OPEC, is keen to realize a fair and stable income from its petroleum resources,” he said, “and more particularly for the reconstruction and rebuilding of its production capacity.” Fadhil Chalabi says he prefers staying within OPEC, but he also stressed that “Iraq is going to need a lot of money in the next five years ú up to $300 billion … Iraq must maximize revenue from its oil ú with or without OPEC.”