January 10, 2006

Iraq has vast hydrocarbon potential that could rival major producers such as Saudi Arabia and Russia, but United States government analysts are predicting that Iraqi oil production development will remain thwarted for years to come.

Its enormous reserves of an estimated 115-billion barrels of proven crude are the world's third largest after those of the Saudi Kingdom and Canada.

As of December 2005, Iraqi net oil production was averaging a modest 1,9-million barrels per day (bpd) according to the latest country report on Iraq compiled by the US government's Energy Information Agency (EIA).

This is well below production levels of an estimated 2,3-million bpd in January 2003 just before the US-led military operation to bring down the Saddam Hussein regime.

The December number is also well below the near 3,5-million-bpd production level prior to Iraq's 1990 invasion and seven-month occupation of Kuwait that led to the 1991 Gulf War.

"Most analysts believe that there will be no major additions to Iraqi production capacity for at least two-three years, with Shell's vice-president recently stating that any auction of Iraqi's oilfields was unlikely before 2007," said the EIA report released late in December 2005 and carried on its website.

Despite its attractive potential for development -- only 17 of the 80 fields discovered in Iraq have been developed -- a number of reasons have been behind Iraq's slowness to turn around its post-war oil industry.

Political instability, violence, and the sabotage of oil industry pipelines and infrastructure have been main factors. The 2003 war itself did little damage to the infrastructure, but looting and sabotage in the aftermath accounted for 80% of the destruction.

Between April 2003 and January 5, 2006 there were 290 recorded attacks on Iraq's hydrocarbon and energy infrastructure including the nation's 6 960km-long pipeline system and 17 600km11,000km-long power grid according to the US-based Institute for the Analysis of Global Security (IAGS), an independent organisation that monitors energy and security issues.

Sabotage, bombings, and looting along Iraq's biggest export line, the duel 960km Kirkuk-Ceyhan pipes which can optimally transport 1,6-million bpd of two kinds of crude, have forced it to operate only sporadically. Most Iraqi oil exports are now shipped through the southern Basra terminal.

Shutdowns and property damage resulting from the attacks have cost Iraq billions of dollars in lost oil export revenues and repair costs. Under Saddam's rule local tribesmen and two divisions of Iraqi army patrolled the pipelines and infrastructure.

The US military continues to guard the energy infrastructure, and under a $100-million joint contract with South African security firm Erinys International, about 14 000 mainly Iraqi personnel have also been trained to guard the sector, the EIA report said. In addition, Florida-based AirScan conducts air surveillance of the pipelines.

"One major challenge in maintaining, let alone increasing, oil production capacity was Iraq's battle with water cut, especially in the south," said the EIA report referring to the excess effluent water produced with each barrel of crude.

Although Iraq was able to increase northern production by employing the unorthodox practice of re-injecting refined products back into ground reservoirs, it is the south where the vast majority of Iraq's proven oil wealth lies, but where production is lagging.

United Nations reports have said that badly managed production practices in the south have likely permanently damaged reservoirs forcing them to produce quantities of crude far below their potential.

Damage done to the facilities during the 1991 Gulf War remains, and about seven major fields in the south are either partially damaged from substandard drilling operations, or have been mothballed, the EIA said.

Iraq's Southern Oil Company is now tendering a project for the development of the southern fields, but what remains perhaps the most controversial issue for Iraqi oil development are the dozens of multibillion-dollar contracts which Iraq has signed with multinational companies to develop its oil, both before and after Saddam Hussein's fall.

"Iraqi public opinion is strongly opposed to handing control over oil development to foreign companies," said a November report entitled "Crude Designs: the rip-off of Iraq's oil wealth" from the independent British-based social activist organisation Platform.

"But," the reports continues, "with the active involvement of the US and British governments, a group of powerful Iraqi politicians and technocrats is pushing for a system of long-term contracts with foreign oil companies which will be beyond the reach of Iraqi courts, public scrutiny, or democratic control".

Platform's economic projections show that the oil development model currently being proposed by those in power would "cost Iraq hundreds of billions of dollars in lost revenues, while providing foreign companies with enormous profit", and would leave the Iraqi government to control only the 17 fields already in production, out of the estimated 80 known fields in the country.

The so-called production sharing agreements (PSAs) being promoted under this model would represent a radical change and redesign of Iraq's oil industry -- shifting it from public into private ownership.

"The strategic drivers for this are the US/UK push for 'energy security' in a constrained market and the multinational oil companies' need to 'book' new reserves to secure future growth," the Platform report said. - Sapa-DPA