VOL. XLV

No 2

14 January 2002

IRAQ

Iraqi Oil Industry In 2002: A Turning Point

Iraq’s sustained oil production capacity is scheduled to increase to 3.1mn b/d in 2002, compared to 2.8mn b/d in 2000/2001, MEES learns from authoritative sources. The rise in capacity is attributable to the arrival over the past few months of equipment and spare parts through the UN oil-for-food program that has allowed for the maintenance of some of the producing fields, the rehabilitation of surface facilities, and the putting on-stream of semi-developed fields from the pre-1990 period. MEES also understands that Iraq’s oil policy calls for the capping of crude exports through the humanitarian program at around 2.2mn b/d while allocating the remaining 800,000 – 900,000 b/d to domestic consumption and cross-border trade with Jordan, Turkey, Syria and the Gulf.

Oil Production Capacity

Iraqi Oil Minister 'Amir Rashid has reiterated several times that his country’s goal is to retain the pre-1990 production capacity level of approximately 3.5mn b/d. While this target has not yet been met, Baghdad has been able to increase its sustainable capacity from 2.4mn b/d in 1998 (MEES, 1 June 1998) rising to 2.8mn b/d in 2000 and 2001 (MEES, 22 January 2001) to the current level of 3.05mn b/d and with a programmed boost to 3.1mn b/d in the next few months. This has been made possible by national effort and the gradual importation of spare parts and equipment for specific upstream projects. Iraqi officials tell MEES that the reason the 3.5mn b/d level has not been achieved is mainly due to the fact that the US and the UK have put on hold or refused to approve major contracts that are essential for the overall development of the upstream sector.

A senior oil official told MEES: “We have received approximately $1.2bn worth of oil equipment out of contracts totaling $3.8bn under the MOU. We have had many problems with the allocation of funds, the dispersal of the equipment, as well as coping with the short time-framework of the six-month program. However, the worse handicap that we have to work under is the fact that we are merely buying equipment instead of designing projects and importing technology.” According to Director of the UN Office of the Iraq Program, Benon Sevan, there are currently 1,854 contracts on hold, worth a total of $4.956bn. They include orders for $4.28bn worth of humanitarian supplies and $676mn worth of oil industry equipment.

MEES learns that the Iraqi oil authorities have undertaken during the past two-to-three years a policy of bringing into production semi-developed fields that have been left idle since 1990. This has helped to raise capacity, as well as to substitute for the decline in ageing fields such as Kirkuk and Rumaila. The equipment for this program is ordered through the UN oil-for-food program (MEES, 2 July 2001). Fields that are being developed include:

· The production of 200,000 b/d of crude from Phase One of the giant West Qurna field which was originally developed by the Russians in the 1980s through the drilling of 200 wells (MEES, 16 July 2001).

· The maintenance of approximately 1.2mn b/d of crude oil from North and South Rumaila through the operation of two new crude treatment units with a total capacity of 290,000 b/d.

· The production of around 100,000 b/d of heavy crude oil from the Misan oilfields in the southeastern part of the country.

· The fast-track “pioneering development” of the giant Majnoon oilfield with the drilling of 24 wells to produce 20,000 b/d by year end, rising gradually to 80,000 b/d. Majnoon’s potential capacity is around 500,000 b/d.

· The development of the Ratawi oil field.

MEES also learns that despite the handful of drilling contracts awarded to Russian, Chinese, Romanian and recently Turkish companies no work has yet started; in fact, no teams have even arrived in the country. Such contracts have been awarded on a political rather than professional basis, and the companies concerned offer cut-throat low prices which they themselves cannot meet afterwards. These two factors have discouraged major international drilling firms from bidding, although they have expressed keen interest in working in Iraq through the oil-for-food program.

While Iraq boasts the second largest proven oil reserves in the world after Saudi Arabia, with the latest official figure put at 112bn barrels, the major reserves are mainly in the southern part of the country. The giant Kirkuk oilfield in the north, producing since 1927, is in decline. Nonetheless, this has not prevented the oil authorities from exporting around 900,000 b/d from the northern system. MEES is given to understand that this has been done through the transporting of an average of around 400,000 b/d of Basrah Light crude from the southern fields to the north through the strategic pipeline to maintain the overall production from the north at current levels. This explains the heavier gravity and higher sulfur content in the Kirkuk crude export system, which is also affected by the injection of surplus fuel oil into the reservoirs and the export pipeline system.

Table 1

Iraqi Oil Production

(Mn B/D)

2001 2000 1999 1998 1997

2.31 2.52 2.54 2.11 1.21

Domestic Consumption & Exports

MEES learns that Iraq has programmed the following schedule for its domestic consumption, exports under the UN humanitarian program and cross-border trade in 2002:

Table 2

Oil Supply Program

	Mn B/D
Domestic Consumption	0.350-0.400
Oil Under the UN Program	2.200
Cross-Border Trade	0.410
Of which:
Turkey	0.080
Jordan	0.110
Syria	0.180
Gulf	0.040

As can well be imagined, this program is not definite or final, but flexible. Domestic consumption is slated to increase from 350,000 b/d to 400,000 b/d this year as more cars are imported. Exports of products to the Gulf are irregular and are subject to a great extent to the cooperation extended by the Iranian Revolutionary Guards which facilitate the transit of the smuggling through Iranian territorial waters, changing policies of Gulf states, and the degree of intrusive inspection by the multinational navy which was led by the US and is now headed by Australia. Exports of petroleum products and crude oil to Turkey are also subject to fluctuations. They were suspended on 18 September but resumed on 7 January. In normal circumstances, around 1,500 trucks with special built-in 20,000-liter tanks are permitted to cross the border in each direction every day. In late 2000, Iraq trucked 140,000 b/d of crude and products to Turkey (MEES, 13 November 2000). Meanwhile, exports to Jordan have increased steadily throughout the past decade to meet local demand. Crude deliveries to Syria are scheduled to rise from the current level of around 180,000 b/d to 250,000 b/d later this year as maintenance work on the pipeline system is completed.

However, the big variable in Iraqi oil exports is the volatility associated with the oil-for-food program. Iraq has the capacity to export 1.2–1.3mn b/d from the southern terminal of al-Bakr and around 900,000 b/d from the Turkish port of Ceyhan, with plans to increase this capacity to 1.6mn b/d later this year when the repairs to the ITP-2 pumping station on the twin pipeline near Kirkuk are completed.

Both the UN and Iraq are keen to maintain oil exports, at the highest possible level, each for its own reasons. For the Iraqi regime, the oil revenue has helped to ease the dismal state of affairs that prevailed in the country during the early 1990s and has won the authorities a good deal of political credit with regional states and international firms. The oil revenue is also necessary for the work of the UN compensation commission and the international organizations operating in the country. But the program is rigid and sometimes disruptive, even after five years of operation. There are continuous export delays between the end of one phase and the start of a new one; another problem stems from the insistence of the Security Council on debating the program at the last minute and with much political uncertainty which hampers the opening of letters of credit and chartering of vessels. A new element of volatility was added in November 2000 with the introduction by the Iraqi authorities of the surcharge to be paid by international oil firms outside the UN-controlled escrow account (MEES, 20 November 2000). Major disruptions occurred during the past 12 months as a result of this confrontation between the sanctions committee and Iraq, and this is expected to continue in the coming few months (MEES, 7 January).

Table 3

Oil Exports Under the Oil-For-Food Program

(Mn B/D)

2001 2000 1999 1998 1997

1.71 1.92 1.94 1.55 0.80

(Note: This table corrects the annual figures published on page A7 in MEES, 7 January).

Iraq in 2002

The fact that Iraq has been able to increase its oil output capacity to around 3mn b/d, despite the sanctions, has been overshadowed lately by the political prospects awaiting the country in 2002. There is on the one hand Security Council resolution 1382, adopted unanimously on 29 November 2001 (MEES, 3 December 2001), which states explicitly that Iraq can – as of 1 June 2002 – import all civilian goods and services without receiving approval from the sanctions committee, other than a specific list of dual-use items that need approval before they are imported. Under the same scheme, oil funds would remain under the control of the UN through the escrow account. On the other hand, the Iraqi regime has to accept the return of the weapons inspectors before mid-2002; otherwise the Security Council, under chapter seven, can take military action to enforce the resolution if it so decides.

The fate of Iraq has become a highly significant public policy issue in the US since 11 September and the Afghanistan campaign. The debate in Washington is over whether to repeat the Afghanistan military plan (combination of aerial bombardment, local forces and elite US troops), organize a coup by the armed forces or continue the containment policy. The official US position is that no recommendation has yet been submitted to the US President concerning Iraq. Nonetheless, the US Congress, media and influential persons within the administration are talking and acting as if the decision has already been taken, or should be implemented soon. But on 8 January, Deputy Secretary of Defense Paul D Wolfowitz, one of the most hawkish members of the US administration, suggested to the New York Times that the Pentagon could opt to put off the bigger and politically more difficult targets in the war on terrorism like Iraq, “and therefore avoid conflict with some of Washington’s most important Arab and European allies, which have been leery about taking on Baghdad,” says the New York Times.

Whatever the outcome of the confrontation between the US and Iraq in 2002 – and there is no doubt that such a showdown is on the cards in the coming months, at least over the return of weapons inspectors – the political crisis will seem certain to impact again on the country’s oil industry. A crisis that would lead to a shutdown of Iraqi oil exports in the foreseeable future should not have much impact on world oil supplies since OPEC has a space capacity of around 5mn b/d. On the other hand, a military campaign that would lead to the destruction of the industry as happened in 1991 could have devastating effects since there is very little cushion left to carry out necessary repairs. Moreover, a change in regime, as is targeted by many US figures, would open up a wide spectrum of possibilities, not the least of which would be: the political map of the country, the fate of the upstream oil contracts already signed with Russian and Chinese firms, and the future political stability of the country that would allow for a speedy rehabilitation program and the ability to expand the upstream oil sector to its planned capacity of 6mn b/d within this decade. Of course, if Baghdad surprises everyone by allowing the return of the weapons inspectors, then another avenue of opportunity would be opened and international firms might develop Iraqi oilfields – most probably on a limited basis in line with ideas expressed in resolution 1284 of December 1999. Whatever the outcome of this year’s political events in Iraq, it will have important repercussions on world oil supplies in the years to come.