November 17, 2005
WASHINGTON - Insurgent attacks are costing Iraq about 500,000 barrels of oil a day, almost a third of its daily output. At today's oil prices, that's costing the country at least $28 million in export earnings every day.
In the run-up to the war, the Bush administration and Iraqi exiles said oil exports would provide badly needed petrodollars to help rebuild Iraq and offset the cost of the U.S.-led occupation. "The oil revenues of that country could bring between $50 (billion) and $100 billion over the course of the next two or three years," then-Deputy Defense Secretary Paul Wolfowitz told Congress on March 27, 2003, shortly after the war began. "... We're dealing with a country that can really finance its own reconstruction, and relatively soon."
But since the March 2003 invasion, Iraqi oil production has failed to match the prewar level of 2.5 million barrels per day. Production briefly approached that level in March and April 2004, but insurgent attacks on pipelines, oil wells and other infrastructure have eroded output since then.
Statistics from the International Energy Agency, a research arm of developed nations, show that Iraq has exceeded production of 2 million barrels a day in only three of the past 18 months. From January through October, production averaged 1.8 million barrels a day.
While defining oil production in Iraq is more art than science in the absence of modern measuring equipment, American experts and Iraqi officials don't dispute the estimate of 500,000 barrels lost daily to insurgent sabotage around Kirkuk in the north and Basra in the south.
"It's a huge drag (on the economy). The export pipeline (in northern Iraq) through Turkey is a regular target. This is at least 350,000 barrels per day. You can imagine how much money we are losing," said Hussein al-Uzri, the president and chairman of the Trade Bank of Iraq, which provides credit for the nation's oil sector.
The saving grace for Iraq is that global oil prices are high, allowing the new government to earn more from today's reduced production than from prewar levels, when world prices were less than $35 a barrel.
Still, attacks on the country's refineries, pipelines, oil wells and power grids have been so disruptive that Iraq, which has the world's third-largest oil reserves at 113 billion barrels, is now a net importer of gasoline and diesel fuel.
The insurgent attacks hit American pocketbooks too.
Most Iraqi oil isn't bound for the United States, but today's global oil market is drum-tight, with little capacity anywhere to boost production. If Iraq can't export more oil, the global supply-demand balance stays tight, and fuels cost American consumers more.
It wasn't supposed to be this way.
In September 2002, Ahmad Chalabi, an Iraqi exile who's close to some Bush administration officials, famously told The Washington Post that oil exports would rebuild Iraq and promised "American companies will have a big shot at Iraqi oil."
After the invasion, Vice President Dick Cheney told the American Society of Newspaper Editors on April 9, 2003, that Iraq would produce 2.5 million to 3 million barrels of oil daily by the end of that year.
Today, Chalabi is deputy prime minister of Iraq, calling the shots for the oil sector, but it's become a soft target for insurgents.
"The reality is that those people who do the attacks began to realize they have a winning tactic here," said Gal Luft, the director of the Institute for Analysis of Global Security in Washington.
Oil experts no longer think Iraq can bank on oil earnings to rebuild its oil sector, let alone its tattered economy.
"Oil business cannot pay for reconstruction in that country, that's the fact. It can run the country, but as far as reconstruction is concerned, that's helpless," said Robert McKee III, the second of three special U.S. oil envoys to the occupation government after the invasion.
Iraq needs energy investment laws and a strong state oil company to get the sector back on its feet, he said.
Iraq trade bank chief al-Uzri was optimistic that successful parliamentary elections next month will ease sectarian violence and allow for new oil regulations to be passed that will allow production-sharing agreements with foreign oil companies. Within a year, he said, Iraq could produce 3.5 million barrels a day, matching its high point in the 1980s.
In a speech Nov. 9 in Washington, Deputy Prime Minister Chalabi was equally upbeat.
"Iraq has the potential to increase its oil production immediately and quickly," he said. "We have the means now to do it in a fast way and progressively come up to 3 million barrels a day of production."
Independent experts aren't so sure.
Fatih Birol, chief economist of the International Energy Agency, said Monday that Iraq wasn't likely to sustain oil output at 3 million barrels a day until 2010.
Phillip Carroll, a retired chief executive officer of Royal Dutch Shell's U.S. operations, was the first special American oil envoy to the occupation authority. Working with Iraqis, he developed a plan to double production capacity to 6 million barrels a day.
Oil production peaked at 2.4 million barrels a day in March and April 2004. Then insurgents started attacking the oil infrastructure.
"It's obviously a lot worse now than then," said Carroll, suggesting that even if the insurgency is quelled, it'll take five to eight years and a lot of money to double Iraq's oil production capacity.
"To get the extra 3 million (barrels) a day, it would take something in the order of $40-50 billion to develop the fields," Carroll said.
"Three million would be easier to get to than 6 million, but 3 million looks harder to get to than it did a year ago," said Antoine Halff, a former top International Energy Agency analyst who's now the director of energy for Eurasia Group, a risk consultancy.