Smart sanctions give oil firms more leeway in Iraq

Foreign oil companies are likely to gain more freedom to invest in Iraq's oil industry from so-called smart sanctions the U.S. and Britain are pushing to introduce, UN diplomats said yesterday. Aiming to re-energize decade-old sanctions, U.S. Secretary of State Colin Powell this week said smart sanctions would target imports of weapons and military equipment while allowing more freedom for Iraq to import civilian goods.

UN diplomats said the smart sanctions would also probably change the rules governing foreign investment in Iraq's oil industry and the manner in which money gained by oil revenues are spent.
That would help lift Iraq's oil production capacity from current limits around three million barrels per day (bpd).

Iraq already expects to lift oil output to 3.4 million to 3.5 million bpd by the end of this year and believes it can one day produce as much as 6 million bpd. Smart sanctions will not have an immediate impact on supply of crude on the international market, as it will take time for the extra investment to translate into fresh output.

Divisions within the permanent five members of the Security Council on the principle of smart sanctions also mean it will take many months before they start, Western and Asian diplomats said. It will then also take time to establish the framework including staff on the ground in Iraq to monitor the effort, they said. The UN has already opened the door for other foreign oil firms to apply for similar ventures by allowing a Russian oil company to work in Iraq for the first time since 1990.

In a surprise move, the UN Iraqi sanctions committee in mid-December approved Russian oil company Zarubezhneft for an $8 million project to drill 45 oil wells in northern Iraq. Zarubezhneft, working with Tatneft, a larger Russian oil company, will send Russian workers, three rotary drilling rigs and other equipment, all of which are to return to Russia after the project is fulfilled within a year.

Iraq is allowed to spend $1.2 billion of its annual oil revenue on oil spare parts, but most of the funds to this point have been used to buy equipment, not allow foreign companies inside Iraq to do the work. Diplomats on the Iraq sanctions committee are split as to whether other companies could get similar contracts. Any new contracts would be only likely to cover developing existing oilfields and not for expanding Iraq's oil industry into new areas, diplomats and analysts said.

Western diplomats say that as of now, under smart sanctions the only limits on official Iraqi oil exports in the oil-for-food programme would would be set by Baghdad itself. Iraq's sustainable export level is around 2.4 million bpd, which includes exports to Jordan outside of the UN programme.

But Iraq officially exported just 1.3 million bpd in February, UN figures show, after crude customers balked at Baghdad's demand for an under-the-table surcharge.