Iraq war might not be about oil, but aftermath probably would

Length, success of action could affect prices and world economies for years

February 09, 2003|By Marego Athans | Marego Athans,SUN NATIONAL STAFF

President Bush says the conflict with Iraq is not about oil. The aftermath of a war, however, could be all about oil.

The duration and success of any military action - and whether Saddam Hussein sabotages his oil fields as he did a decade ago in Kuwait - could determine oil prices for months or years and, in turn, affect the health of economies around the world, analysts say.

As oil prices spiked to a two-year high of $35 a barrel on Friday, reflecting war jitters, interests from France to Russia to Australia to the United States were poised for a reawakening of Iraq's slumbering oil industry, which is sitting on the world's second-largest pool of proven oil reserves after Saudi Arabia's.

Under United Nations sanctions imposed after the gulf war a decade ago, Iraqi production has slumped to less than 2 million barrels a day, and the infrastructure has deteriorated. But the Bush administration is banking on substantially increasing oil output to produce billions in new revenues to lubricate an economic revival in Iraq after the ouster of Hussein.

That's the rosy version of postwar Iraq.

But even in the best-case scenario - a relatively short, bloodless war that leaves Iraq's 1,500 oil wells intact and replaces Hussein with a friendlier leader - Iraq's oil industry would be fraught with economic and political uncertainties that could even discourage investment, analysts say.

Foremost is the hurdle of rebuilding the country, estimated to cost from $200 billion to $400 billion, and the risk of doing so amid potential civil wars among ethnic groups. Rehabilitating Iraq's oil operations to bring production up to its projected potential of 6 million barrels a day - more than triple what it exported last year under a United Nations-sponsored "oil-for-food" program - would take about a decade and cost an additional $40 billion to $50 billion, analysts say.

In the short term, Iraq's wells are capable of pumping about 3 million barrels a day, which would generate from $12 billion to $15 billion in annual revenues, assuming oil prices remain strong. That is far short of the revenue needed to rebuild the country.

"You get the sense some people in Washington, particularly hawkish members of the administration, have spent Iraqi oil revenue 10 times over before they've even gotten in there," said Raad Alkadiri, an analyst at PFC Energy, an oil and gas consulting firm in Washington.

"There isn't that much Iraqi revenue to spend. To say you can rehabilitate the country, pay for an occupation and revive the economy all at the same time is ludicrous."

Iraq is virtually sitting on a sea of oil, with 112 billion barrels in proven reserves, and has probable reserves of an additional 220 billion barrels, experts say.

But only 15 of its 74 discovered oil fields have been developed. Its wells, pumping stations and export terminals are deteriorating so fast that output is dropping by 100,000 barrels a year.

Outside investment

To rescue and modernize these operations, large outside investment would be needed. American companies are banned from doing business with Iraq. But plenty of other companies - particularly Russian and French ones with longstanding ties to Iraq - are lined up to take advantage of lucrative deals when Iraq opens its oil taps.

The contracts and negotiations they have been conducting are in a precarious state, with the United States threatening to attack Iraq imminently if Hussein does not divulge evidence of his nuclear, chemical and biological weapons programs.

In 1997, the Russian oil giant Lukoil signed a $3.5 billion, 23-year contract to rehabilitate the al-Qurnah field, which has 7.8 billion barrels of proven reserves. Iraq put the deal on hold after Russian President Vladimir V. Putin supported the United States-led sanctions effort. Lukoil is trying to revive the deal, and industry experts believe that Washington has made an informal agreement to honor the contract in postwar Iraq.

The French oil company TotalFinaElf is also negotiating contracts. But any deal could be jeopardized by the French government's opposition to American use of force in Iraq.

"I do think the U.S. government will be willing to trade oil for participation - with anyone," said Fareed Mohamedi, PFC Energy's chief economist.

But, he said, "oil is not the prize in and of itself - there are bigger prizes," maintaining that the United States was more interested in stopping the proliferation of weapons of mass destruction and demonstrating its leadership in the world.

Secretary of State Colin L. Powell has forcefully rejected charges, arising from Bush's and Vice President Cheney's background in the oil business, that the United States is after Iraq's oil.

"The oil fields are the property of the Iraqi people," he said recently, and any production revenues will be held "in trust" for the Iraqis.

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