By Heiko Flottau in Cairo for ISN Security Watch (7/12/2005)

Two-and-a-half years after the US invasion of Iraq, the country's oil industry is still in disarray. An official of the Oil Ministry in Baghdad told ISN Security Watch, on condition of anonymity: "We do not know the exact quantity of oil we are exporting, we do not exactly know the prices we are selling it for, and we do not know where the oil revenue is going to."

According to Baghdad press reports, export revenues are still not sufficient to cover the Iraqi state budget. The government is forced to take loans from international banks to cover its running expenses.

Although the US invested around US$1.3 billion in the rehabilitation of oil plants damaged by lack of maintenance during 13 years of UN sanctions, the daily output of approximately 1.3 million barrels remains far below Iraq’s pre-war production level of 2.5 million barrels.

The production goal for December 2004 of 3 million barrels per day, set by the US and the Iraqi government, cannot be reached in the near future, according to experts within the Iraqi Oil Ministry who talked to ISN Security Watch.

The Iraqi government looks set to lose US$8 billion a year in potential oil revenue, due to the poor current state of the oil industry.

Botched reconstruction

One of the reasons for the decline of the industry is a lack of progress in the reconstruction effort, due to serious managerial deficiencies.

For instance Halliburton subsidiary Kellogg Brown & Root (KBR) was awarded a US$225 million contract, without a tender, to rehabilitate the Qarmat Ali Water Plant in southern Iraq, according to a report in the Los Angeles Times.

The plant is used to pump water into the ground in order to build pressure that brings the oil to the surface.

However, the contract did not include the repair of the pipelines carrying the water to the oilfields. When the water was pumped into the ground, the old pipes burst, spilling large amounts of water into the desert. In addition, farmers often tap the water pipes in order to irrigate their fields.

US officials apportion some of the blame for the delay in rehabilitating the oil industry to their own Army Corps of Engineers. During the first months after the war, the Corps was given responsibility for the first phase of repairs to oil pumps and pipelines.

Members of the Corps lacked experience in handling the complicated, outdated technology that was imported by Iraq from the former Soviet Union. A member of the Corps later told a Congress hearing: "The Corps of Engineers had absolutely no abilities as far as oil production is concerned."

In Kurdistan, KBR signed a US$70 million contract to rehabilitate part of the pipeline system. According to the Los Angeles Times, KBR was only able to fulfill half of the contract. A couple of million barrels that had already been pumped could not be transported, and had to be re-injected into the ground – a practice that engineers regard as harmful to oilfields.

Insurgent attacks

Analysts identify the constant attacks by insurgents on pipelines as a further obstacle to the recovery of the oil industry. Between May 2003 and late October 2005, observers counted 282 attacks on Iraq's oil transportation system.

The first incident was an attack on 1 June 2003 against the Kirkuk-Ceyhan pipeline, which carries oil from northern Iraq to Turkey's Mediterranean coast. According to observers, the most recent attack was on 24 October 2005 in the same area near Kirkuk.

Although US forces try to protect the Kirkuk-Ceyhan pipeline and Iraq's offshore loading terminals in the northern Persian Gulf, oil exports are frequently interrupted.

In April 2004, suicide bombers attacked the Iraqi Khor al-Amaya offshore loading terminal in the Gulf from a speedboat, killing three US troops.

ISN Security Watch spoke to a journalist from Baghdad's Al-Mada newspaper, who did not wish to be identified, on this topic: "The Iraqi government pays a lot of money to tribal chiefs, who say they will protect pipelines. But nobody can completely secure the thousands of kilometers of pipelines crossing the deserts."

The Brookings Institution warned in June 2004 that the new "oil terrorism" could become a model for militant Islamists. The report said that pipelines, which carry more than 40 per cent of the world's oil production through insecure regions such as the Middle East, could easily become "attractive terrorist targets."

On 6 December, the al-Qaida leadership issued a call to jihadists in the region to attack oil installations, "in order to fight Western companies that are dispossessing Muslims of their oil".

In another study, released in 2003, the Brookings Institution warned that the sabotage campaign against Iraqi pipelines could harm the US economy. "Without the Iraqi oil," the report argues, "the US taxpayer will have to carry a heavier than anticipated burden of the reconstruction cost."

The report added that oil terrorism is contributing to high-risk premiums for the transport of oil. Every one-dollar increase per barrel is costing the US economy approximately US$4 billion a year.

Corruption

Analysts say that the third reason for the decline in Iraqi oil production is widespread corruption within the Iraqi Oil Ministry. In March of this year, the ministry sacked 450 employees for the illegal sale of oil and oil products.

In the same month, the Oil Ministry’s Director General for Drilling Mohammed al-Abudi said that "administrative corruption" was taking many forms. "The robberies and thefts are taking place on a daily basis on all levels […] committed by low-level government employees and by high officials in leadership positions of the Iraqi state," he added

Instances of fraud include the manipulation of measuring instruments at the end of pipelines and the provision of inaccurate data on tanker oil loads. The supervision of tanker loads, which is usually done through the checking of insurance papers, has ceased in many cases.

Oil industry experts say that corruption has not ended with the sacking of the 450 ministry employees.

Often, tribal chiefs and criminal gangs tap the pipelines, depriving the government of significant oil revenue. Trucks carrying gasoline to gas stations are robbed by gangsters, while gunmen frequently attack gasoline stations, even in town centers.

The oil acquired in this way is sold on the black market or transported to neighboring countries like Iran.

Responding to questions from ISN Security Watch, Oil Ministry officials in Baghdad predicted that reconstruction efforts and the fight against corruption will not produce significant results in coming years. Rather, they expect a continuous stagnation, and even a further downturn in production.

A failing strategy

Oil terrorism and corruption, if allowed to continue, will seriously harm Iraq's future. The country's economy, damaged by two Gulf wars, the 2003 invasion and 13 years of UN sanctions, urgently needs a period of peaceful reconstruction and the exploration of new oilfields. Only 15 of over 70 known fields have been developed properly. It usually takes at least five years to bring a new field into operation.

The seizure of the Iraqi oil fields and the raising of the country’s oil production were two of the most important motives for the US invasion of Iraq. When asked, in September 2002, whether the US could afford a costly military operation like the one planned in Iraq, White House economic adviser Larry Lindsay told the Wall Street Journal: "We can afford it."

Lindsay added that, after a regime change in Iraq, three to five million barrels per day could be added to the world oil supply and that Iraqi oil would bring in over US$50 billion in coming years. Lindsay said that Iraq would easily be able to pay for the reconstruction effort.

Michael T. Klare, a Professor of Peace and World Security at Hampshire College and author of the book "Blood and Oil", wrote that it is "an article of faith among America's senior policymakers – Democrats and Republicans alike – that military force is an effective tool for ensuring control over foreign sources of oil."

He predicts that the US will continue to send troops into politically fragile regions in future due to the dilemma of US dependence on oil sourced from these areas.

However, Klare concludes that "the growing Iraqi quagmire has demonstrated that the application of military force can have the very opposite effect; it can diminish – rather than enhance – America's access to foreign oil."

Heiko Flottau is ISN Security Watch's senior correspondent for Egypt. He wrote for many years for Sueddeutsche Zeitung in Belgrade, Warsaw, and Cairo. Heiko is the author of "From the Nile to the Hindukush - The Middle East and the new World Order" (German, 2004).