VOL. XLVI
No 18
IRAQ
Iraqi Oil Industry Sets Out
On Long Road To Recovery
The conclusions of the US State Department-sponsored Oil and Energy Working Group on the shape of the Iraqi oil industry in the years to come demonstrate a clear preference for the wholesale privatization of the industry as the best means of maximizing the benefits to the Iraqi people. In Baghdad, efforts to jump start a political process got off to a hesitant start on 28 April, with sporadic violence and limited basic services in the city emphasizing the difficult task that still lies ahead of the US-led administration. In Washington, the announcement of an advisory board to formulate oil policy and a management team to oversee day-to-day oil operations is imminent, even as Security Council deliberations on how to handle sanctions and the oil-for-food program continue. Meanwhile, some oil production from the northern Kirkuk field has restarted with the initial aim of supplying local refineries and work is ongoing in the south to boost oil production and throughput at the Basrah refinery. The amount of damage to surface facilities and looting of spare parts indicates that Baghdad will not be able to resume production immediately at the pre-war capacity level of 2.5mn b/d.
US State Department Group Calls For Radical Restructuring Of Iraqi Oil Sector
Iraq’s oil sector needs to be radically restructured in order to deliver the maximum benefits for the Iraqi people, according to the Oil and Energy Working Group established under the auspices of the US State Department. The report of the oil policy subgroup, obtained by MEES and published in full in the D section of this week’s issue, concludes that Iraq’s oil industry will be best served by “due consideration of recent trends in the international oil industry.” The report makes a clear case for the privatization of the Iraqi oil sector by noting that low oil production yield is symptomatic of centralized national oil companies and that “denationalization and de-monopolization of oil companies is a well-established trend.” The report makes additional somewhat tendentious claims: that throughout OPEC and Middle East producing countries, governments are turning to private international oil companies (IOCs) rather than national oil companies (NOCs) to implement oil developments.
The report stresses that regime change has provided the opportunity to liberate the economy as well as the country. “If, as appears to be the case, the monopoly status of the NOC constrains the return on the people's wealth by, as monopolies do, constraining output, which in turn limits the urgently needed capital investment, we have an obligation in formulating our policy recommendations to address the future status of such monopoly and to define the terms, conditions and ramifications of alternative industry structures that will urgently induce substantial direct investment into Iraq’s oil industry and hence invigorate Iraq’s economy and lift the Iraqi people out of a future of impoverishment,” it concludes, adding that Iraq “needs the advisory input of several oil companies, of other producing countries and of top law firms, investment banks and consultants that have or have had direct and influential involvement in the induction of foreign direct investment into the oil industry.”
The paper draws these conclusions from a comparative assessment of Iraq’s oil production yield, compared to other oil producing countries, while rejecting the argument that sanctions are the primary issue restraining output growth. “Firstly, we can reject any suggestion that Iraq’s low level of oil production is due primarily to war and sanctions,” the report says. Despite evidence to the contrary, the report repeats on several occasions the notion that NOCs are universally unsuccessful and uncompetitive in the modern era so that they “no longer serve the best interests of their countries.” While arguing that Iraq should be opened up for investment to allow oil production growth, the paper steers clear of criticizing OPEC production constraints by arguing that OPEC countries have increased production capacity, at the same time “eying projections of significantly increased demand for their oil over the next twenty years.”
Law And Order Still Absent From Baghdad; Road To Democracy Will Be Long
MEES learns that US forces still have much work to do to establish law and order in Baghdad. The sound of sporadic shooting can be heard by day and night. In the absence of normal power and water supplies, and with no government, life feels nothing approaching normal for the residents of the capital – with little indication as to when conditions might improve. Furthermore, many Iraqis have ambivalent feelings about the US’s role in recent events and their possible plans for the future, while others are becoming increasingly hostile towards the foreign presence. As a result, Baghdad is still a frightening place for many of the US troops there – a factor, MEES learns, that is causing concern among some coalition officials.
It was against this background that a conference to discuss Iraq’s political future was held in Baghdad, under the auspices of the coalition forces, on 28 April. Around 300 leading figures from the Iraqi opposition and from inside the country attended it. Nevertheless, not all those Iraqis from inside showed up, and many of those who did remained reluctant – at least in the early stages of the meeting – to speak up, out of fear of retribution at some later stage by Saddam supporters. Many exiles, by contrast, were keen to speak. Very few women accepted invitations to the conference.
MEES further learns that once the opening ceremonies of the Baghdad meeting had ended and the press had left, the atmosphere became very heated. Delegates talked less about the need for democracy in Iraq and more about their claims, or those of the groups they represented, for a share of political power. There was, one observer told MEES, “a lot of pent-up frustration and anger.” Attempts by US and UK officials to focus the meeting the way they wanted were thwarted by the insistence of Iraqi delegates that an interim authority or a provisional government should be set up in early June. Nevertheless, it remains unclear how this is to be achieved (especially in such a short time), and the view of officials from the coalition states is that much more discussion of the issue will be needed. “Iraqis still have a long way to go to achieve democracy, and the task is going to be much harder than most people had imagined,” said one.
Reaching consensus with so many competing interests will not be easy. Even shutting the door on the past cannot be taken for granted. While the biggest cheer during the Baghdad meeting was in response to a call for all Ba’thists to be removed from official positions, about a quarter of the delegates remained silent at this point. And one speaker towards the end, wearing civilian clothes but identifying himself as a colonel in the army, said that what the country needed immediately was an Iraqi military government, not an American one – adding that the US forces should leave without delay.
Oil Structure Announcement Imminent; UN Resolution Draft Still Pending
MEES learns that Washington is scheduled to announce any day now, perhaps on 3 May, the establishment of the advisory board which will oversee the policy planning for Iraq’s oil industry as well as the establishment of a management committee at the ministry of oil which will run the day-to-day operations of the industry. The names of the senior executives of these two bodies are already well known, Philip Carroll (CEO) and Fadhil Othman (Deputy CEO) for the advisory board and Thamir Ghadhban of the ministry of oil (CEO of management committee). The advisory board will include both Iraqis and international oil experts and economists, while the senior executives at the ministry of oil and the State Oil Marketing Organization (SOMO) will be appointed from present staff. It is expected that Ali Hassan will be the acting head at SOMO.
Meanwhile, consultations are still underway in Washington and among the permanent five members of the Security Council on how to handle the Iraqi sanctions and the oil-for-food program. One idea that was mooted by Washington – to lift the sanctions but modify the oil-for-food program with the purpose of gradually phasing it out – was shot down by Russian President Vladimir Putin who demanded that the Security Council confirm officially the elimination of weapons of mass destruction in Iraq before sanctions are lifted. There are some groups in Washington who are advocating the selling of Iraqi oil outside the UN system, but such ideas are not expected to carry the day. It is understood that Washington is working on a draft resolution to be tabled at the Security Council this week, thereby opening what is expected to be a lengthy debate on the subject which could take the whole month of May. It is understood that the latest version of the US resolution calls for the transfer of oil revenue to an Iraqi administration, with World Bank auditing, and a UN appointed envoy playing an advisory role. Washington still insists that the coalition, and not the Security Council, is responsible for verification of weapons of mass destruction.
The end-May/early-June deadline coincides with the end of the current oil-for-food program on 3 June and the national congress to be held in Baghdad to select either an interim authority or a provisional government, depending on the political consultations currently underway between political groups in Baghdad and the US. All these steps, particularly the UN resolution and the establishment of a legitimate authority in Baghdad, would provide the legal background for the resumption of oil exports in early June, albeit at less than capacity because of the need to assess the damage and looting of facilities..
Kirkuk Production Restarted As Northern Facilities Found To Be Undamaged
Oil production in northern Iraq’s Kirkuk field was restarted on 27 April. Initially three wells were brought on stream to produce a combined 25,000 b/d, and a further three wells were added the following day to take combined output to 60,000 b/d. A US Army Corps of Engineers spokesman told reporters on 28 April that Kirkuk crude was being piped to an oil and gas separation plant and on to the local refinery. The official added: “Our goal in the north is the same as in the south, which is to provide domestic fuel and products for local consumption and to help the situation in Baghdad and other areas.”
US Army and Iraqi engineers restarted production in South Rumaila field on 23 April (MEES, 28 April). Military and Kellogg Brown and Root engineers are continuing to repair production facilities and pipelines in South Rumaila, where output was last week raised further to 50,000 b/d. One 70,000 b/d capacity processing train at the 140,000 b/d Basra refinery was restarted on 28 April, running Rumaila crude, after being shut down for a month. Restarting the refinery was a priority to provide fuel oil for local power generation capacity, which in turn was vital for restarting water treatment plants.
The oilfield work is going ahead at the same time as military clear-up work progresses. Bomb disposal teams were last week clearing unexploded ordnance in Rumaila and nearby fields and along their associated pipeline routes. There was also still some threat to oilfield workers due to anti-coalition resistance from Iraqis. On 30 April US Central Command issued a press statement which said: “Coalition civil engineers were shot at today while working in a gas/oil separation plant in the Rumaila oilfields. Three occupants in a white pickup truck drove by and reportedly opened fire on the engineers. There were no injuries.”