Oil sector to have vital role in Iraq reconstruction

In a post-Saddam era, the operative words "reconstruction, revival and resuscitation of the oil sector" will be of greater significance in the rebuilding of a new Iraq.

As of now, Baghdad is no more in the money. Eight years of war with neighbouring Iran, followed by the occupation of Kuwait and the twelve-year stifling sanctions, have left the war-ravaged country with no resources to either tap its vast oil reserves or upgrade its existing oil wells that are functioning well below their capacity due to obsolete technology.

Iraq is awash with an abundance of oil – its proven reserves are second only to Saudi Arabia – and future oil sales can churn out a significant part of the revenues needed to rebuild its infrastructure.

But that can only happen when the funds are made available to streamline its impaired oil industry.

According to a report released last December by the U.S. Council of Foreign Relations and the Baker Institute, the cost of repairing existing oil export installations alone will be around $5 billion, while restoring Iraqi oil production to pre-1990 levels will cost an additional $5 billion, plus $3 billion per year in annual operating costs.

However, in its report, the Middle East Economic Survey, believes that production can reach 4.2 million bpd within three years at a cost of $3.5 billion, and 4.5 to 6 million bpd within seven years.
Recently, the Pentagon confirmed that the Iraqis have booby-trapped its 1,685 oil wells.

In the eventuality of some of these being blown up, it will make the task of reconstruction more difficult.

It took Kuwait more than $50 billion to restore its oil output to its pre-Operation Desert Storm level. As it is, Iraq is saddled with $142 billion in enforceable debt claims, besides the $300 billion reparations outstanding from the invasion of Kuwait, and $57 billion in contracts signed by the government.

Before the invasion of Kuwait, Iraq's oil capacity was about 3.5 million barrels per day (bpd) and, at the onset of the U.S.-led war, it varied between 2.5 and 2.8 million bpd.

Oil production is concentrated mostly in northern Iraq in and around Kirkuk, and in the south in and around Basra.

The Kirkuk oilfield accounts for 700,000 bpd of northern oil production, which is mostly exported through Turkey. The second largest northern oil field is Bai Hassan, which produces about 110,000 bpd. Other northern fields make considerably smaller contributions.

The most important field after the Kirkuk field is the southern field of Rumaila. The north Rumaila field produces about 750,000 bpd, while south Rumaila adds another 500,000 bpd. Other large fields include Al Zubair, Missan and West Qurna.

Iraq's export infrastructure, too, is in bad shape.

Iraq's largest pipeline, the Kirkuk-Ceyhan pipeline, requires urgent repairs to meet its optimal capacity of 1.1 million bpd. It can now handle only around 900,000 bpd. A parallel 46-inch line is inoperable.

The Strategic Pipeline built in 1975 for the export of northern Kirkuk and southern Rumaila crude to be shipped through Turkey is disabled, after the K-3 pumping station at Haditha as well as four other additional southern pumping stations were destroyed.

A full return to the tanker terminals' capacity at Mina Al Bakr, Khor Al Amaya, and Khor az-Zubair (which mainly handles dry goods and minimal oil volumes) will require extensive infrastructure repairs.

Mina Al Bakr also is constrained by a shortage of storage and oil processing facilities, most of which were destroyed in the Gulf War.

The multi-million dollar question is who will rebuild the oil facilities. As for the overall reconstruction of infrastructure, many experts have suggested a Marshall type plan and waiving of 66 per cent of its Gulf War II repatriation debts. Even if such concessions are made, Iraq will still require billions of dollars to meet the basic needs of its people.

Herein comes the role of the oil majors – the tussle will be between those backed by the Anglo-American alliance on one side and the rest on the other.

Just before the beginning of the current war, Iraq had awarded most of the contracts under the UN auspices to countries more sympathetic to Saddam Hussain - Russia, France, China and others from the developing countries.

As of October, 2002, Iraq reportedly had signed several multi-billion dollar deals with foreign oil companies mainly from China, France, Russia and, on a lesser scale, with those from India, Malaysia, Brazil and others.

Deutsche Bank estimates $38 billion total on new fields – "greenfield" development – with potential production capacity of 4.7 million bpd if all the deals come to fruition.

Russia, which is owed billions of dollars by Iraq for past arms deliveries, has a strong interest in Iraqi oil development. This includes a $3.7 billion 23-year deal to rehabilitate Iraqi oilfields, particularly the 11-15 billion barrel West Qurna field (located west of Basra near the Rumaila field).

In October, 2001, a joint Russian-Belarus oil company, Slavneft, signed a $52 million service contract with Iraq on the 2 billion barrel Suba-Luhais field in southern Iraq. Full development of Suba-Luhais could result in production of 100,000 bpd at a cost of $300 million over three years.

As of March, 2002, Slavneft reportedly was awaiting approval from the United Nations to drill 25 wells at Luhais.

Russia's Zarubezhneft received UN approval to drill 45 wells in the Saddam field, which contains three billion barrels of oil and five trillion cubic feet (Tcf) of associated gas, plus Kirkuk and Bai Hassan.

The largest of Iraq's oilfields slated for post-sanctions development is Majnoon, with reserves of 12-30 billion barrels and located 30 miles north of Basra on the Iranian border.

French company, TotalFinaElf, has reportedly signed a deal with Iraq on development rights for Majnoon, which can lead to production of 450,000 bpd within two years or so at an estimated (according to Deutsche Bank) cost of $4 billion.

Eventually, Majnoon could produce significantly more oil than that, possibly well above one million bpd.

In February this year, TotalFinaElf said that it was confident regarding its Majnoon contract, regardless of the Iraqi government in power.

The 2.5-5 billion barrel Halfaya project is the final large field development in southern Iraq.
Several companies (BHP, CNPC, Agip) have reportedly shown interest in