Source By Antoaneta Bezlova

BEIJING - A less vociferous than expected response to the war on Iraq from Beijing reveals that in weighing the consequences of the conflict, China is torn between its fundamental strategic policies and economic benefits.

As part of a permanent strategy to oppose "US hegemonism", Beijing consistently sides with any country punished by Washington and time and again has tried to thwart any US efforts to pull together a coalition in the United Nations against any other state.

As much as China fears it could easily become a future victim of such punishment, for more than 20 years it has also sought a peaceful international environment to pursue its economic reforms. Ironically, China stands to be among the economic winners from the current conflict.

"There is a silver lining to the war," admitted He Maochun, professor of foreign trade relations at the People's University in Beijing. "We should set our sights on winning contracts for Iraqi reconstruction after the war. Our model is South Korea in the 1980s - they built a highway from Baghdad to Amman and after the Gulf War in 1991. They undertook its reconstruction."

He said the 1991 Gulf War resulted in a loss of 33 percent of China's labor and engineering contracts in Iraq. But the years since the partial lifting of UN sanctions in 1996 have boosted the resumption of bilateral trade and commerce.

"This time, we need to be even more proactive and seize the business opportunities that will arise after the war," He said. Hopes to win handsome deals when the oil-rich country begins to rebuild its civilian infrastructure are just part of many gains China could get from the war in Iraq. Acceleration and concentration of foreign investment is another one.

"As the Iraq situation may have a bigger impact over a relatively longer period than most people expect, international investors are likely to transfer more of their money to safe investment destinations such as China," said Wang Jian, an economist from the Institute of Macroeconomy under the State Development and Reform Commission.

The trend is already visible from the official figures released by the Chinese government this year. Foreign direct investment jumped nearly 54 percent in the first two months of 2003. Pledged foreign investment rose 59 percent during the same period. This marked increase comes on the heels of a record US$52 billion of foreign investment China attracted in 2002.

More than anything else in the aftermath of the war, China is concerned with securing low oil prices when or if Iraq's oil exports come under US control.

Since China became a net oil importer in 1993, its imports have risen steeply and are now essential to sustaining its high economic growth rate. In 2002, imports rose 15 percent on the year. Last year China imported 71 million tonnes of oil, half of which came from the Middle East.

To avoid becoming over-reliant on Persian Gulf oil, it is pushing ahead with long-term plans to contract oil and gas from Russia, Indonesia, Central Asia and Australia. Meanwhile, Beijing has taken a series of measures to guarantee that the war does not disrupt the steady supply of oil and does not cause huge price fluctuations in the market.

China's three leading oil companies will import oil from Indonesia, Sudan and Venezuela, Yang Wencai, deputy secretary general of the China Petroleum and Chemical Industry Association, told the People's Daily. China is also reopening oil wells sealed previously because of their relatively high production cost.

Economic worries and calculations have dominated the state-controlled Chinese media ever since the first bombs began falling over Baghdad last week. But nothing of the climate of indignation whipped up after the US-led bombings of Iraq in 1998 is visible nowadays.

Beijing's official reaction - one of opposition to the war and the violation of the UN charter - was featured prominently on the front pages of many newspapers, but somewhat dwarfed by the amount of information provided on the scope and speed of US-led military action.

"War-related special publications have become hot commodity," read the headline in the Beijing Youth Daily on Saturday, noting the unusual interest with which Chinese readers have taken to the news of a war being fought far away from the country's borders.

One reason for this brisk newspaper business is the unusual lack of restrictions on the war coverage. Instead of trying to censor media reporting that might inadvertently commend the US military might, Chinese propaganda officials have opted for sending an unprecedented number of correspondents to the conflict region to provide a Chinese perspective on the issue. Some media have openly carried reports on what Chinese military could learn from the US war in Iraq.

Indeed, the first Gulf War helped Chinese military discover a lot about the US way of fighting a modern, high-tech war, said Liu Dingping, a researcher with the Strategic Research Center of the People's Liberation Army Military Affairs Statistical Institute.

"This is the fourth war the United States has waged since the end of the Cold War, but there is no reason for the Chinese military to feel ... inferior," Liu said in an interview with Guangzhou-based newspaper Southern Weekend. "With each new conflict, we draw our lessons. The bigger the number of military actions with US involvement, the smaller the gap between the US and China military."

<a href=www.nytimes.com>The war in Iraq is not all bad By CLAUDIA H. DEUTSCH

No one in the chemical industry will come out and say it. But the truth is, for chemical companies, the war in Iraq is not all bad.

Executives know that in times of war, people harbor nagging fears that burning Iraqi oil fields and rampant unrest in neighboring countries could quench the flow of oil and send prices up sharply, inevitably pushing gas prices up as well. And that, they think, makes the timing right to push Washington for energy policies that will at least curb the volatility of gas and oil prices.

"The fact that we are having a war reminds us again of the fact that we have to come to grips with a U.S. energy policy," said Greg Lebedev, president of the American Chemistry Council, the industry's main trade association.

To be sure, the industry has a lot to worry about. Its major input, oil, is expensive, and its outputs go to many cyclical industries that will weaken as a war wears on.

Even so, few industry experts think that war will drive oil or gas prices significantly higher. The severe winter, coupled with the long run-up to war, did that months ago. "The rise in natural gas prices was extraordinary over the last three months," said Klaus Peter Löbbe, chairman of BASF. "Some of that was the severe winter, but without the threat of war, prices would never have been this volatile."

Now, the weather is warming up, and there is no longer uncertainty about war. For two weeks, oil and natural gas prices crept down, until yesterday, when oil prices surged 6.50 percent and natural gas 2.44 percent.

"A week ago, I'd have said that as soon as planes start flying, energy prices would go through the roof," said William S. Stavropoulos, chairman of the Dow Chemical Company. "But Saudi Arabia is producing full out, Venezuela is coming back slowly, and it doesn't look like there will be huge damage to Iraqi oil fields."

The chemical industry has a lot at stake in whether the oil keeps flowing. It uses oil and gas as raw materials as well as fuel.

Thus, the council did not wait for war to break out to use it as a platform for seeking help. On March 11, the council led a campaign to press the government to work with Canada and Mexico to increase the supply of natural gas in North America, to cut consumption by governmental agencies and to encourage conservation among consumers and companies. It also asked that the president not support either environmental regulations that discourage drilling in new areas or those that offer incentives to switch from coal to natural gas, thus causing a run on already tight supplies of natural gas.

Natural gas now sells for $5 to $6 per million British thermal units, a sharp drop from the $19 price of late February, but more than twice the $2.50 per million B.T.U.'s the industry had grown accustomed to. Similarly, oil prices have dropped more than $10, to less than $30, but that is still well above the $20 the industry considers acceptable.

"After the last few months, $5 for natural gas may not look so bad, but it still is not cheap," said Frank J. Mitsch, a chemical industry analyst at Bear, Stearns, who said that when all the chemical companies have reported first-quarter results, "we will see a lot of red ink."

The immediate effect is not the same across the industry. The DuPont Company, which derives a large part of its revenue from pharmaceuticals or other products that are not based on hydrocarbons, has kept earnings up. Dow, which makes basic chemicals that are dependent on hydrocarbons, is in the red.

DuPont spent about $2 billion on hydrocarbon fuels and raw materials last year. Dow, a similarly sized company, spent $8 billion. Dow's hydrocarbon costs rose $400 million in the last quarter alone.

"No question," Mr. Stavropoulos said, "the impact of high energy prices has been dramatic for Dow."

But DuPont and companies like it are not home free. They may not buy a lot of hydrocarbons, but their suppliers do. DuPont uses butadiene methanol and cyclohexane ammonia, oil derivatives, to make nylon, while it uses ethane, made from natural gas, in its ethylene polymers.

"There's a four-to-six month lag between the rise of energy prices and its impact on our income statements," said Raymond G. Anderson, DuPont's director for investor relations.

Thus, if the war drags on, or if it spurs terrorist attacks, all bets are off.

"If the war drags on, energy prices really could rise again even as global economies drop," said Mr. Mitsch of Bear, Stearns. "And that could be a real double whammy for the chemical industry."

A Roar, an Explosion, and First Thoughts Are of Terrorism  (April 26, 2002)

Read on.. By TOM WALKER The Atlanta Journal-Constitution

Wall Street's rose-colored glasses, which last week envisioned a quick victory in Iraq, were shattered over the weekend by televised images of death and other troubling signs that the war might take time.

That realization translated on Monday into a steep stock market sell-off, with the Dow Jones industrial average plunging more than 300 points.

Each of the major stock indexes lost 3.5 percent or more in their worst session since last September. Airline, hotel and entertainment stocks took big hits on investor concern that travel and leisure industries would be big victims of an extended war.

Last week, investors were buoyed by hopes that the war's initial successes against Iraq would lead to a repeat of the relatively short and successful 1991 Gulf War against the same country.

But the U.S.-led coalition encountered stiffer resistance over the weekend, resulting in casualties and the first U.S. prisoners of war. Iraqi President Saddam Hussein vowed to make the war painful, and President Bush on Saturday repeated a statement he had made in announcing the start of hostilities -- that the war would last longer than some had predicted.

"Over the weekend, it was clear that those hopes were misguided, and that the road to Baghdad would be difficult," Prudential Securities strategist Larry Wachtel said Monday.

A sidelight to Monday's session was the fact it was also the third anniversary of the all-time closing highs for two major stock market indexes: the Standard & Poor's 500-stock index and the Wilshire 5000 index of market value.

That's the date most Wall Street analysts use as the beginning of the current bear market. Since that date, the S&P 500 has fallen 43.4 percent, and the Wilshire 5000 shows that investors have lost $7.56 trillion in market value.

The market's closing prices last Oct. 9 are the lows for this bear market. But before the war started, some strategists had begun to speculate that stocks could drop to new lows, given the economy's weakness and the slow recovery of corporate profits.

Optimists argued, on the other hand, that once the war against Iraq was over, consumers would feel free to spend, business firms would be confident enough to make investments, and the stock market would rally on a wave of improving profits.

That's still the big question, since the end of the war will not mean the end of the U.S. presence in Iraq.

And other global trouble spots won't go away either, said Salomon Smith Barney strategist Tobias Levkovich, "including North Korea, Venezuela and Nigeria."

But if investors were overly exuberant in expecting a quick war, there's no reason to be overly bearish on the downside because it will be difficult to predict, some analysts insist.

Balentine & Co. market analyst Dorsey Farr still anticipates a boost to the economy once the war is over.

"My argument is that the two missing ingredients in our economy -- capital spending and job growth -- are being hampered by the uncertainty of war. The successful resolution of the war eliminates that uncertainty," he said.

The risk, he said, is that a prolonged war would have a sustained negative impact on oil prices, which would indeed hurt the economy.

On Monday, crude oil prices posted the biggest gain in 15 months on the same concerns of a longer war than originally anticipated, while the dollar fell against the euro.

The Dow, which had experienced eight straight days of gains before Monday, closed at 8,214.68 with a loss of 307.29 points, or 3.6 percent. It was the biggest loss since Sept. 3, when it fell 355.45 points, or 4.1 percent.

The S&P 500 index fell 31.56 points, or 3.5 percent, to 864.23, also its worst day since Sept. 3, when it dropped 3.5 percent.

The Nasdaq composite index of mostly tech stocks fell 52.06 points, or 3.7 percent, to 1,369.78, its biggest drop since a 3.9 percent loss on Dec. 9.

Read From the March 21, 2003 print edition

Texas oil and gas companies are well-positioned to benefit from the rebuilding of Iraq's multibillion-dollar oil industry, experts say William Hoffman   Staff Writer

GREATER METROPLEX — The Texas oil industry will be a big winner of a quick end to the regime of Saddam Hussein, industry observers agree.

"Texas is probably in the best position of any area, probably in the world, that can benefit from this," said Mark Baxter, director of the Maguire Energy Institute of the Cox School of Business at Southern Methodist University in Dallas.

John Gerdes, senior vice president and director of energy research at Dallas-based Southwest Securities Inc., said Texas oil and gas companies are already lining up for hundreds of millions of dollars in contracts to put out Iraqi oil well fires and rebuild the country's oil industry.

Baxter said he tried to arrange a visit to Iraq about three weeks ago with a group from Dallas and, "even with my contacts, 'mum' was the word of the day" on contract bids and negotiations.

Baxter said he's read that Houston-based Halliburton, Aliso Viejo, Calif.-based Fluor Corp. and San Francisco-based Bechtel Group Inc. have been asked by the U.S. government to bid on reconstruction of Iraq's oil industry.

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He suspects that non-disclosure agreements contractors signed with the government and uncertainty over the scale of work — war damage could be near zero or near total — helps keep speculation about business deals to a minimum.

It's safe to say, however, that reconstruction of Iraq's oil industry will be a massive undertaking.

Iraq is home to the world's second-largest proven oil reserves, with 112.5 billion barrels, Baxter noted. Saudi Arabia ranks first with 261.7 billion barrels.

The job will require billions of dollars in capital and technology, not only to repair war damage but to modernize an industry barred from new technologies for a generation.

Baxter said that while other countries can provide some capital, U.S. companies hold important licenses on technologies needed to modernize Iraq's oil industry.

A March 18 New York Times article said the Bush administration planned to let the lion's share of reconstruction contracts to American corporations, with foreign companies participating only as subcontractors.

Baxter doubted that was possible. "It's so big, I can't sit here and tell you that American companies can fully develop (Iraq's oil industry) the way it needs to be developed," he said. "It's going to take a lot of players."

Baxter and Gerdes both noted that a post-Saddam Hussein Iraq would likely end its state monopoly on the oil industry and begin granting concessions to foreign operators for a more direct and profitable role in the business.

While behind-the-scenes activity may be intense, Metroplex oil and gas companies seem to be putting a business-as-usual face on their response to the crisis.

"We're always producing all-out," said Exxon Mobil Corp. spokesman Tom Cirigliano in Irving, "so there isn't much of a need for making adjustments there."

He said the company takes no position on the Iraq situation, but has beefed up security to deal with potential terrorist activity.

Exxon Mobil is active in oil and gas development in practically every country in the world, according to Baxter.

Cirigliano said Exxon Mobil is confident it can meet customer demand for its gasoline, oil and petrochemical products during the crisis.

Governments in the Persian Gulf have pledged to keep shipping lanes clear, he noted, and Saudi Arabia has said it can ship product by way of the Red Sea if necessary.

Dallas-based Hunt Oil Co.'s Jim Oberwetter, vice president for public affairs, acknowledged the company had suspended drilling in Yemen after a March 18 shooting aboard a drilling rig there killed a Hunt supervisor.

However, Oberwetter added, "production from Yemen continues in an uninterrupted manner. It is performing normally. We are producing as we have in the past."

Drilling operations will resume in the near future, he said.

Oberwetter declined to discuss Hunt Oil security, personnel movements or the company's future in Iraq.

In the pipeline

Halliburton, which employs 1,500 people in the Metroplex, including 1,100 at an oil-field products facility in Carrollton, was also mum on its participation in post-war Iraq.

The Times' March 18 article reported Halliburton subsidiary Kellogg Brown & Root had been asked to bid on contracts. Halliburton spokeswoman Wendy Hall, in Houston, directed contract inquiries to the U.S. Agency for International Development in Washington, D.C.

Ellen Yount, press director at U.S. AID, said no contracts had yet been awarded to Metroplex-area companies for reconstruction in Iraq.

Phillip Feiner, general counsel at BDS International L.L.C. in Dallas, said since the natural-gas drilling and exploration company had most of its assets in Colorado, and none outside the United States, it expected no direct impact from a war.

Nevertheless, Feiner said BDS has increased security in response to the crisis. "We want to see as minimal impact from a potential war as possible," he said, "because we all suffer as a society."

Gerdes said, "There's not much these companies can do," to manage the impact of the Iraq crisis on their businesses.

Iraq is a significant contributor to the rising price of crude, he said, but an oil strike in Venezuela, frigid winter weather and the industry's low excess production capacity to deal with demand spikes all help create a bullish oil market.

Gerdes said he expected oil prices to surge at the start of hostilities. But if the conflict ends quickly, he said, crude could drop from its March 19 price of $29.88 to $29 a barrel in the second quarter, before settling at an average $26 a barrel by the third quarter.

Baxter estimated Iraq would be able to deliver 3 million to 4 million barrels of oil a day to world markets if war damage to the industry is light. Current production is about 2.8 million barrels a day, he said.

Gerdes estimated the recovered industry could generate $10 billion to $20 billion a year for a new government.

"We are not going to war to pilfer the resources of a sovereign nation," Baxter said. "That's not in the cards. I don't even think that can happen. ... I still like to believe we're the good guys in this."

Contact DBJ writer William Hoffman at bhoffman@bizjournals.com or (214) 706-7123.

Source By NICOLE GELINAS

March 24, 2003 -- FOUR nations absent from our long list of allies in Operation Iraqi Freedom are also those whose leaders stand to lose the most when Iraq's oil fields are liberated along with its citizens.

Saudi Arabia, Russia, Venezuela, Mexico - each thrives on the permanent chaos of the crude oil market. Competition from a democratic Iraq will force the oil-exporting governments of these nations to find new ways to make money.

Saddam Hussein and 24 years of tyranny in Iraq have served as a buffer between stagnant oil states and the fluid free markets. Since Saddam came to power, new discoveries have increased the estimate of Iraq's untapped oil fourfold to represent 11 percent of world crude reserves, second only to Saudi Arabia.

But Saddam's Iraq has done little to increase oil production. The government hasn't even performed much routine maintenance on its oil wells since 1979.

A free Iraq infused with new dollars and pounds could double its oil production in less than five years to rival the export capacity of Saudi Arabia and Russia.

The prospect of regime change in Iraq, now nearly realized, will be a shock to the energy world that will rival the shock caused by the original formation of OPEC, Cambridge Energy Research Associates analysts said two weeks before the war began. Other energy analysts are now slashing the average crude price outlook for 2003 from $30 a barrel to below $20 and falling.

Stable, moderate oil prices fostered by an OPEC-weaned, free-market Iraq with economic interests aligned with those of the western world will force the world's oil exporters to implement massive political and economic reforms at home.

Saudi Arabia stands to lose the most from a freed Iraq. OPEC aside, Saudi Arabia has always belonged to a club of one - the nation owns a full quarter of the world's discovered oil reserves. The Saudis rely almost exclusively on $55 billion in annual crude oil exports to maintain their welfare state, but still come up short - the country's budget deficit is equal to its annual GDP.

Saudi Arabia must export eight million barrels a day at a price of $22 per barrel to fund its bloated budget. With an efficient Iraq producing more oil, Saudi Arabia could no longer cut its own production to keep prices high. The Saudis would have to cut back severely to keep prices in line - and they can't do that because they need the money.

Lower prices would force the Saudi royals to look for the first time to their own repressed people as a potential wealth-producing natural resource.

Russian president Vladimir Putin morphed into an instant pacifist when President Bush asked him to support the war against Saddam. The reason why is no great mystery - a free Iraq vying for international investment will pose a direct threat to Russia's economy.

Russia still derives 40 percent of its export revenues from oil sales, but Russian oil production is just two-thirds what it was during the Soviet days. Russia is depleting its reserves faster than it can bring new wells on line.

Russia has implemented cosmetic political and economic reforms to attract global capital. But its oil industry is still crippled by an ever-changing corporate tax structure and persistent financial opacity.

Russia attracts foreign investment only because the U.S. government's Export-Import Bank has been willing to guarantee commercial bank lending to Russia's oil industry as part of our mandate to diversify our oil supplies.

But with the support of a democratic Iraq, the U.S. would have little incentive to back risky investment in Russia. Without a government guarantee to back capital, "anyone who does business in Russia is insane," the head of one oil investment team at a U.S. bank told me recently.

Rational oil prices will also jump-start stagnant economies in the Americas. The governments of Venezuela and Mexico derive one-half and one-third of tax revenues respectively from oil exports; neither will lend its name to the Coalition of the Willing.

Like Saudi Arabia, Venezuela and Mexico depend on persistently high oil prices to fund their federal budgets. Low prices would force governments in both nations to invest in the talents of their citizens to diversify the tax base.

With a freed Iraq competing against it for investment, Venezuela, especially, will be forced to evolve. Oil companies and banks invested more than $5 billion over the past five years in Venezuelan crude projects only to lose 30 cents on the dollar to political crises.

Asset values in Venezuela have plummeted as President Hugo Chavez re-wrote Venezuela's constitution and imposed new limits on the ownership rights of foreign oil companies. International oil companies in Venezuela could only watch this year as striking oilworkers cut crude exports to nil.

Banks and oil companies with a new venue for their investment dollars will leave Venezuela if Chavez won't.

When the war is over, the U.S. and Britain will surely face pressure from the Saudis and others with a vested interest in the status quo to leave Iraq something short of a true democracy. Sensitive to the charge that we fought a war for oil, we may be tempted to allow Iraq to remain an enabler to the black box of the current crude market.

But stunted governments who use oil as a crutch go beyond using their exports to keep their own people facing backward. Their dysfunction stalls the global economy.

Oil hasn't changed in 150 years. Yet price controls imposed by colluding oil producers keep the economies of forward-looking nations like the U.S. and Britain in a state of co-dependency on the budgetary needs of oppressive leaders who are accountable to no one, least of all their own citizens.

A $10-per-barrel price drop is the equivalent of an immediate $40-50 billion tax cut to the U.S. economy, oil historian Daniel Yergin said recently. That level of economic stimulus would benefit all the world's citizens - including those who have been held down by their oil-rich governments long enough.

Nicole Gelinas covers the oil and gas industry for a British magazine.