Petrel Resources - moderated discussion/research part II

Violence, politics muddy Iraq's oil future


By Mariam Karouny & Ghaida Ghantous
Thursday's bombing of Iraq's northern crude pipeline, less than 24 hours after it reopened, underlines Baghdad's struggle to revive its vital revenue-earning oil industry. Repeated sabotage - combined with poor project management and political instability - has hampered Iraq's aim to ramp up output to 3 million barrels per day, last seen in 1990. Production has been stuck near 2 million bpd and a significant increase is not expected soon.

Shamkhi Faraj, Director General of Economics and Oil Marketing in Baghdad, said the oil sector, Iraq's only independent source of hard currency, needed urgent help. "It is currently passing through a crisis and should be rescued," he told Reuters. "There is uncertainty, an administration that does not follow up and authorisation (problems). We have problems getting tools needed from abroad on time even though we have the money." Forecasts for higher output have been regularly missed since the 2003 US-led war due to a delay in projects to rehabilitate oil facilities following decades of economic sanctions and wars.
Iraqi officials have said they expect exports to rise about 300,000 bpd by January. Fadhil Chalabi, executive director at the Centre for Global Energy Studies, said he did not see significant recovery in the sector without foreign investment, adding that the long-term outlook was cloudy due to sectarian divisions. "The political situation is very uncertain and the performance of the government has been poor. Progress in the oil sector is very, very slow," he said. "There has not been much investment to increase recovery rates from existing wells." "I don't see much light at the end of the tunnel unless the political process is structured in a way to re-establish the unity of Iraq," he added.
Production from Iraq's south has fallen due to problems with water injection and delays in rehabilitating wells. The south, which has been more secure, has been the primary source of exports since the war. Northern exports have been virtually idle due to repeated attacks. Delays in restoring a pipeline network has also forced Iraq to inject oil back into the ground. "The general security environment is making it hard to carry out normal operations, maintenance and rehabilitation," said Kevin Rosser of the London-based consultancy Control Risks Group.
He said a permanent government, a petroleum law and strategic oil plan need to be in place to bring in multinationals and that even then it was not clear if major foreign investment would be welcomed by the Iraqi people. "It is practically inconceivable that substantive negotiations could begin until at least 2007, with any significant investment occurring after 2010," Rosser said. Oil multinationals are closely watching developments in Iraq, which has the world's third largest oil reserves after Saudi Arabia and Iran.
The head of Iraq's Energy Council, Ahmad Chalabi, has said he expects parliament to act on oil output through some form of association with international firms after elections. A new parliament is due to be voted in December after the Oct 15 referendum on a constitution backed by Iraq's new Shiite and Kurdish leaders and fiercely opposed by Arab Sunnis. The constitution is expected to be passed, raising fears of an intensified campaign of attacks waged by Saddam loyalists and militants from across the Arab world.
Analysts say that the constitution, which dilutes authority over the oil sector away from the central government and to the provinces, has raised concern that oil deals will become even more difficult to negotiate. "If what is on the constitution about oil is ratified and not amended or explained better, then I think the sector will be in a deeper crisis," Faraj said. "We need a leap and that will not happen without major investment and better technology. Authority should be given to the oil ministry." - Reuters



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