stuff.co.nz 07 May 2003

SINGAPORE: Oil prices held steady last night awaiting US fuel data for signs of stocking in key gasoline supplies ahead of the peak-demand summer-holiday period, which kicks off at the end of the month.

US light crude traded down three cents to $26.46 a barrel, little changed after Monday's (yesterday, NZT) 82-cent rise in New York.

London's benchmark Brent crude jumped 77 cents to $24.29 a barrel in catch up with the US market. The International Petroleum Exchange was closed on Monday for a public holiday.

US oil prices pushed higher on Monday partly on concerns of a possible gasoline supply crunch in coming months when consumption traditionally peaks.

Gasoline demand in the United States burns up about 12 per cent of global oil supply and is used by traders as a barometer of overall oil demand between the end-May Memorial Day holiday weekend and September's Labor Day.

Data for the week ended May 2 from the government's Energy Information Administration are expected to show a three-million-barrel rise in crude inventories, with gasoline increasing by 1.75 million barrels, said six analysts, polled by Reuters.

US oil stocks have been running at sharp deficits to levels of a year ago. The EIA's report last Wednesday showed US gasoline stocks up by 4.4 million barrels but still 10.5 million barrels below levels at the same point last year.

Crude stocks rose in the week to April 25 by 1.8 million barrels to 288 million, but remained a little over 38 million barrels below a year ago, the EIA said.

"Last year we saw how susceptible the market was to a major supply disruption with the strike in Venezuela. In previous years we have seen the market rise due to stress on the refinery network in the United States," said Sydney-based oil analyst Simon Games-Thomas.

"These factors will support the oil price at, or above, current levels," he said in a daily note.

IRAQI OIL IN UN TANGLE

Oil prices have also found support from a lack of progress in restoring crude supplies from Iraq, where production ground to a halt shortly before the US-led invasion that toppled Saddam Hussein.

Before the war, Iraq was pumping up to 2.5 million barrels per day (bpd) and exporting 1.7-2.0 million bpd, or roughly four per cent of internationally traded oil.

Diplomats at the United Nations said on Monday that Iraq's exports remained stalled despite the weekend appointment of Thamir Abbad Ghadhban to run the country's oil ministry.

The UN Security Council, which oversaw the sale of Iraqi crude under the seven-year-old oil-for-food programme permitted under UN sanctions, is deadlocked over setting up a legal framework to resume sales.

Iraq has crude in storage that could be exported now, but without a competent authority to sign and certify sales oil firms are reluctant to trade the oil for fear of breaking the law.

The United States is expected to produce this week a draft resolution to lift UN sanctions on Iraq, in place since Baghdad invaded neighbouring Kuwait in 1990.

Diplomats said the US proposal would transfer Iraq's oil wealth to a new Iraqi administration with World Bank oversight.

Russia and other Security Council members want the oil sales to remain under UN control.

A UN diplomat representing one of the five permanent UN Security Council members – Britain, China, France, Russia and the United States – said it was "still too early" to say whether Washington's proposal would face resistance similar to earlier this year when it sought authorisation to invade Iraq.

news-miner.com Article Published: Sunday, May 04, 2003 - 3:00:37 AM AKST By Doug Reynolds

Now that most of the fighting is over in Iraq, the question is how will Iraq's oil industry be set up? In the U.S. we have property rights embedded in our constitution where individuals have the right to own property, including the right to own oil and gas mineral rights and exploit the minerals.

However, a number of oil producing countries, including Kazakstan, Norway, Mexico and Russia, tend toward national ownership of all oil and gas resources. This desire is so universal that Alaska itself is even trying to own a natural gas pipeline, and we already have a constitutionally embedded permanent fund derived from oil revenues.

At this point, we might sit back and think, what is the best way to maximize social welfare with Iraq's oil while still creating national pride? What Iraq really could use right now is a rallying point that will quickly create order and unify its diverse peoples. Oil can do that. If a new Iraqi court system, a new Iraqi legislative branch, and a new Iraqi leader recognize that the oil is for all people in Iraq, then those entities will defend a new constitution more diligently. And the Iraqi people will know, or at least perceive that, their oil can't be taken away by a company, another country, or another dictator.

The real question though is will the Iraqi military swear to uphold a new Iraqi constitution or not. They would be more likely to uphold it and defend it, as well as defend a court system and legislative system that counterweights a powerful executive, if they knew their constitution included some sort of national control of the oil.

Therefore, Iraq could follow a number of models, based on what other countries have done. One possibility is the Mexico model. There the constitution itself mandates that all oil or gas exploration, development and production is nationally owned, even including retail sales. While this model might create a sense of national unity if applied to Iraq, it does tend to create a lot of inefficiencies. For example, the Mexican oil company, Pemex, has more workers than necessary, and exploration and development of new reserves tends to be slow.

Another possibility is to create a national host oil company (HOC) to partner with multinational oil companies (MOC) through joint ventures or other relationships. This would work better. In fact most oil producing countries have HOCs with MOC partnerships including such diverse countries as Norway, Saudi Arabia, and Nigeria. However, it is still hard for the MOC to get its job done because too much time is spent negotiating profit-share agreements with the HOC. Once the MOC finally does invest in infrastructure, the host country could nationalize it. This often creates hesitancy for new investment in oil and gas infrastructure, and again exploration and development is slower than what happens in the U.S. Still, having an HOC is always a great way to create pride in one's country and pull a country together.

One last idea then is based on what we have in Alaska. Alaska has a constitutionally mandated permanent fund, although the earnings from the fund are not constitutionally mandated to be given to the people. Still, the Alaska model could be made workable for Iraq.

For example Iraq could constitutionally mandate that 5 percent of all Iraq's oil revenue (not profits but actual revenue) be divided up and given directly to the Iraqi people. If this is embedded in an Iraqi constitution, the people will feel a national pride in their oil and will want to defend their constitution. They may even eventually want to create more of a property right system in order to maximize their share of the revenues rather than have an Iraqi oil company manage their oil resources.

One plan right now for the current discussions on an Iraqi government might be to bring in oil and gas experts from Norway, Mexico, Venezuela, Kuwait or Kazakstan to help set up the best method for Iraq to control its oil and gas resources.

A constitution that gives control of resources to a government is foreign to American sensibilities, but it is the most typical model for countries around the world and certainly would be more appropriate for Iraq than a U.S. model. As Iraq and the U.S. set up the Iraqi government, maybe putting an Alaska type clause into their new constitution or as a new law might not be a bad idea.

Doug Reynolds is an associate professor of oil and energy economics at the University of Alaska Fairbanks. He can be contacted at ffdbr@uaf.edu.

<a href=news.independent.co.uk>news.independent.co.uk By Liz Vaughan-Adams 03 May 2003

The oil giant Royal Dutch/Shell yesterday joined its industry rivals in posting a record set of profits for the first quarter of the year after the war in Iraq sent crude prices soaring.

The Anglo-Dutch group unveiled an adjusted profit of $3.9bn (£2.4bn) for the first three months – a 96 per cent increase from the $1.9bn recorded in the same period a year before.

Crude oil prices soared in the first quarter with Brent prices averaging $31.50 a barrel, up from $21.15, although the group also benefited from strong US natural gas prices.

"It's a strong performance in an exceptional quarter," a spokesman said, noting the companyalso benefited from increased oil prices due to strikes in Venezuela and unrest in Nigeria.

Royal Dutch/Shell's profit figure, which excluded a $1.3bn gain from selling its 14.75 per cent stake in Germany's Ruhrgas to the utility E.ON, was far ahead of the $3.7bn consensus forecast.

The company is the latest in a line of oil giants to have reported bumper profits on the back of the sharp rise in oil prices. Earlier this week, BP unveiled a $3.7bn profit in the first quarter, or $41m a day, more than double the $1.6bn made for the same period last year while Exxon Mobil's profits more than tripled from a year before.

The US oil group ChevronTexaco also reported bumper first-quarter figures yesterday with record net income of $1.9bn – more than double that achieved the year before.

Royal Dutch/Shell, which last year bought Enterprise Oil, said it produced 4.2 million barrels of oil equivalent a day – a 6 per cent rise from last year.

Shares in the group closed up 3.3 per cent at 384.5p with analysts pointing to a weaker second quarter since oil prices have since fallen. Crude fell to below $25 a barrel this week.

Sir Philip Watts, Shell's chairman, described the performance as "strong and highly competitive". "These results demonstrate the ability of Shell's uniquely well-balanced portfolio to produce impressive earnings and strong cash generation. We have a clear strategic direction for what we believe is the best portfolio in the sector and we continue to deliver value for our shareholders," he said.

The company remained tight-lipped, however, on the timing of the possible restart of its share buyback programme. It has previously indicated that a share buyback programme was unlikely in the first half of the year.

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!”

April 30, 2003 By Hussain Hindawi and John R. Thomson WashingtonTimes.com-UNITED PRESS INTERNATIONAL

     Iraq is a wealthy country, with the second-largest oil reserves in the region and, unique among Arab nations, large water supplies.

     Although it may take two years to increase oil output to the 3.6 million barrels per day prior to the 1991 Gulf war, current levels of 2.5 million t o 2.8 million barrels per day are enough to keep bread on the nation's table.

     Industry professionals estimate an unproven reserve in excess of 150 billion barrels in the long term. Added to proven reserves of 112 billion barrels, Iraq's petroleum potential rivals that of the world's largest producer, Saudi Arabia.

     The importance of Iraq's water resources cannot be exaggerated.

     The Tigris River runs from the north through the center of Baghdad to the Persian Gulf. With the mighty Euphrates, the Tigris creates the rich Fertile Crescent in the southern half of the country. The area's rich marshlands, the center of the majority Shi'ite Muslim community, were drained by the regime after the Shi'ites tried to overthrow Saddam Hussein after the 1991 Gulf war.

     In the process, agricultural capacity as well as the country's most important tourist attraction were eliminated. But Iraq's agricultural potential is so great that it again may become a net exporter of food to the Middle East in three to five years.

     The political arena is where the postwar battle of Baghdad is being waged.

     In Babylonian times, 2,600 years ago, the government that replaced King Nebuchadnezzar bore some resemblance to democracy, but except for a brief period in the 1920s, modern Iraq has had no experience with democracy.

     Across the centuries, the land and people of Iraq have been conquered by invaders. Foreign-born and domestic despots have been the rule. The current challenge is whether indigenous faction leaders can lead their people to a solution that is both representative and effective, as well as democratic.

     Iraq has one advantage: Its ethnic and religious groups had a long history of peaceful coexistence before Saddam Hussein set tribe against tribe and sect against sect. That and the high education level of Iraqis may give the country a reasonable chance to achieve a workable political framework.

     A separate issue is whether the United States and its allies will strike the right balance of guidance or control during the months, or perhaps years, of peacekeeping in Baghdad and the other main population centers: Basra, Kirkuk and Mosul.

     Many observers expect the United States to dominate postwar Iraq, creating long-term consequences throughout Arab nations and the entire Muslim world. Some Iraqi analysts do not rule out an armed Iraqi national resistance that could inflict such heavy losses that Washington would withdraw, as it did 30 years ago from Vietnam.

     Saddam, apparently hoping for such a scenario, told a visiting Vietnamese delegation shortly before the war that his country was unable to stop an American attack, but could and would survive.

     Analysts reminded Washington of what happened when World War I British forces invaded that portion of the German-allied Ottoman Empire that became Iraq. Hundreds of British troops died during a June 1920 revolt, leading to Britain's withdrawal and eventual recognition of an independent Iraq.

     The newspaper Al Thawra, the leader among Iraq's government-controlled press, contended several months ago that the "Americans and British are trying, more than 80 years after the [1920 revolt], to impose a mandate on the Iraqi people under illusory and foolish pretexts."

     However, several Iraqi intellectuals, including Islamists and leftists, have refrained from prejudging U.S. intentions toward their country.

     After the April 21 arrival in Baghdad of U.S. postwar civil administrator Jay Garner, 65, a retired general, most Iraqi intellectuals remain skeptical of President Bush's commitment to help the Iraqi people create a pluralistic and democratic government that guarantees freedoms and maintains control over the country's natural resources.

     Gen. Stanley Maude, commander of the British force that occupied Baghdad in March 1917, spoke similarly to the Iraqi people on entering the capital: "I am designated to invite you, through your representatives, to participate in administering your interests; and to assist the British political representatives accompanying the army to support you, north and south, east and west, in achieving your national aspirations."

     Gen. Maude said the British aim in opposing German territorial ambitions was to "liberate the people with final and total freedom, and establish governments and national administrations chosen by the national residents."

     After recognizing Iraq's nominal independence, Britain sent a garrison of 150,000 troops. Iraq did not achieve real independence until the 1958 military overthrow of King Faisal.

     Meanwhile, U.S. ideals expressed in the Declaration of Independence won admiration among the Arab elite — until the CIA-backed coup in Iran overthrowing Mohammed Mossadegh in 1952.

     Concerns over American intentions deepened after the first Ba'athist coup in 1963, in which an estimated 5,000 leftist and democratic Iraqis perished. The role of U.S. intelligence services was well-known, prompting Ali Saleh al-Saadi, secretary-general of the Ba'ath Party, to say years later: "We came to power on an American train."

     Until Iraq's 1990 invasion of Kuwait, the Arab image of the United States was negative, particularly regarding the Palestinian issue and a perceived Washington bias toward Israel. This, combined with Washington's strong economic interest in secure sources of oil, prompted criticism of a U.S. double standard regarding democracy.

     "Iraq will burn with its oil," an Iraqi poet predicted more than 60 years ago on hearing the news of Iraq's first petroleum revenues. In subsequent decades, the country's "black gold" proved to be a curse and the cause of manifold miseries, including foreign occupations, military coups, and wars internal and external.

     It was oil that allowed Saddam to intimidate, coerce and kill his Kurdish and Shi'ite countrymen and to invade Iran and Kuwait. Earlier, oil had been the overriding reason for Britain's occupation. Oil was also the driving force behind the first Ba'athist coup in 1963 and the second in 1968, supported financially by British and U.S. oil companies.

     Are more oil fires in Iraq's future?      The paradox, or perhaps the problem, is that there appears to be no end to oil discoveries — so much so that industry analysts believe Iraq may replace Saudi Arabia as having the world's largest proven reserves and highest production.

     Just 15 of 74 proven oil fields are in production, and of the 59 that are untapped, 10 rank among the largest in the world. Moreover, of 526 known and evaluated petroleum deposits that have been classified as prospects, 125 have been drilled. It was these fields that French and Russian oil companies coveted and for which they had been vying for signed agreements with the ousted regime.

     Extraction of Iraqi oil, limited under international sanctions imposed since 1990, stood at war's end this month at 2.8 million barrels per day, down sharply from an estimated 3.6 million barrels per day in the first half of 1980, before the outbreak of the Iraq-Iran war.

     Iraq's Oil Ministry had planned last year to develop 350 wells across the country under contracts with several Russian and French oil firms. Major emphasis was to be on the huge southern oil fields, as part of an ambitious plan to increase production to 6 million barrels per day.

     Some analysts view the United States as having mixed motives for toppling Saddam's regime. The stated objective of disarming Iraq of weapons of mass destruction was considered by some convenient cover for Washington to reduce its dependence on Saudi oil, as well as to guarantee U.S. supervision of Iraq's oil wealth.

     Paradoxically, U.S. refineries continued to be the largest importer of Iraqi oil while the Bush administration mobilized its forces to oust the regime. A report by the Commerce Department revealed that Iraqi oil shipments to the United States tripled in the fourth quarter of 2002, constituting about 6.4 percent of U.S. oil imports.

     Whatever happens, oil will be a central element affecting Iraqi events. Whether an Iraqi leadership loyal to the United States is installed in Baghdad or the Americans administer the country more directly, oil will figure prominently.

     Before the outbreak of hostilities, Secretary of State Colin L. Powell said the United States would control the oil resources from the outset, "to manage them for the interest of the Iraqi people." It is widely presumed that U.S. energy companies seek long-term involvement in the rehabilitation and expansion of Iraq's oil industry.

     One scenario predicts the United States will increase Iraq's oil production to 8 million barrels per day, with the aim of breaking the power of the 11-member Organization of the Petroleum Exporting Countries (OPEC) by lowering oil prices and reducing dependency on Saudi oil.

     This would be a historical irony, since Iraq was one of OPEC's five original founders in 1960, along with Iran, Kuwait, Saudi Arabia and Venezuela.

     French analysts fear that contracts between French oil firms and Saddam's regime are moot, recalling former CIA Director James Woolsey's warning that only if the French and Russians cooperated with the United States in replacing Saddam would U.S. companies be inclined to cooperate with counterparts in these two countries.

     One Arab observer mused on an either-or situation:      "How will Iraq's oil revenues be used? To finance the coalition occupation ... without explicit U.N. authorization? Or to concentrate on improving the lives of Iraqis so they may savor the taste of change?"

     In the first case, the United States would be the primary party responsible for all of Iraq, including its oil, giving Washington a chance to weaken, if not destroy, OPEC. It would exploit Iraq's oil reserves as a means to reduce the influence of the other Gulf countries, especially Saudi Arabia, and enable more Iraqi oil to be pumped at lower prices to the American market.

     In addition, it would punish countries opposed to the U.S.-British use of force — particularly France, Germany and Russia.

     How the new Iraqi government deals with OPEC and existing production and pricing commitments will have significant impacts on the oil industry worldwide. Russia, with $7 billion to $8 billion of aging Soviet-era loans owed to it by Iraq, would have benefited significantly from exploration and production deals between Russian oil companies and Iraq as part of a larger economic agreement.

     Just last year France successfully negotiated an agreement to develop the Majnoun field, believed to contain 30 billion barrels of oil. This agreement is in jeopardy, as is France's favored commercial position with Iraq for the past 30 years in which Jacques Chirac, now its president, was a prime player.

     • Hussain Hindawi is an Iraqi historian and journalist who currently serves as editor of UPI's Arabic News Service. John R. Thomson has lived in Beirut, Cairo and Riyadh, Saudi Arabia, and reported on Israel's 1967 Six-Day War and the 1991 Gulf war.