Oil production is clouded by political, legal and martial issues

Northern fields pumping to Turkey, but no buyers

April 05, 2003|By Marego Athans | Marego Athans,SUN NATIONAL STAFF

Unscathed by U.S. bombing, Iraq's northern oil fields were still pumping crude late this week, a surprise to many analysts who expected all Iraqi oil production to cease during the war.

Ideally, the proceeds from this oil - which traveled by pipeline to the Turkish port of Ceyhan - would pay for food and medicine for Iraqis.

But yesterday, 8.3 million barrels, worth nearly $200 million, sat in a Turkish storage facility, hostage to political and legal questions about who is authorized to sell it.

"We're in a situation that is, practically speaking, without much precedent," said Amy Jaffe, energy program coordinator at the James A. Baker III Institute for Public Policy at Rice University and co-author of a report on postwar Iraq.

"Had the United States built a stronger coalition, it might be less problematic," she said.

"How do you come up with a consensus as to who, in this gray moment, is the appropriate arbiter on behalf of the Iraqi people, given the huge need for resources?"

On one level, the problem seems to be the result of a wartime communications breakdown.

Employees of the Iraq oil company stationed in Turkey have been unable to contact their counterparts in Baghdad to secure the paperwork needed for the transactions, according to the U.S. Energy Information Administration.

And potential buyers are staying away because of legal questions about who controls Iraqi oil, said Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Mass.

While coalition forces control key oil facilities in the southern part of the country, the 600-plus northern fields near Kirkuk were in Iraqi hands last night.

"The real obstacle is that the buyers have to feel comfortable buying it, that they won't wind up with financial or legal difficulties afterward," Lynch said. "It's an unusual situation, a sitting government in power and someone selling off its assets, in effect."

The Russian factor

Russian companies were among the biggest buyers of Iraqi oil under the United Nations' oil-for-food program, which allowed Iraq to export oil and use the proceeds for food and humanitarian needs.

U.S. companies also bought Iraqi oil, about 442,000 barrels a day.

But with the Russian government opposed to the war in Iraq, Russian companies are hesitant to antagonize their government by buying Iraqi oil from anyone other than the Saddam Hussein regime, Lynch said.

"They want to wait a few days or weeks," he said. "If Hussein is gone, the point is moot. Their government is not going to object to them buying oil."

With coalition troops moving in on Baghdad, the U.S. Defense Department is already preparing its strategy for Iraq's postwar oil industry. A former Shell Oil Co. president and chief executive, Philip J. Carroll, confirmed to the Houston Chronicle this week that he was asked to lead a team to restore the country's oil production and create new capacity if needed.

U.N. wants a role

The idea was not received well at the United Nations. Mark Malloch Brown, administrator of the U.N. Development Program, said the United States, as an occupying power, has no authority over Iraq's oil riches.

To use Iraqi oil revenues for reconstruction, he said, the United States needs approval from the divided U.N. Security Council, which controls the oil-for-food program.

Such a request would likely meet resistance from France and Russia, which have a number of pending oil contracts in Iraq and are vehemently opposed to the U.S.-led war.

Even though the Security Council agreed to resume the oil-for-food program, it is on hold while the bureaucratic and legal questions are worked out.

So, with no tankers showing up to take oil to market, the storage tanks in Ceyhan were nearly full yesterday. As a result, the flow of oil through the pipeline from the northern fields had slowed to a drip, if any was coming through at all, according to the Energy Information Administration.

No tankers have loaded Iraqi oil at Ceyhan since March 20.

Production halted

In the southern fields near Basra, production was halted after seven wells were set ablaze in the opening days of the war. Kuwaiti and American firefighting teams are working to extinguish those still burning and repair the damage.

Coalition forces now control 600 of the 1,000 southern wells and an export terminal on the Persian Gulf.

Under normal conditions, the southern fields could be up and running in a few weeks, though the long-neglected facilities will need upgrading over time, said Lowell Feld, an oil market analyst with the Energy Information Administration. But these are not normal times.

For one thing, many of the oil workers live in Basra, which is under siege by British forces.

"There's no technical reason why within a couple of weeks you can't have oil flowing," he said.

"But you have all these legal and political questions, and the security situation - even the fact that some of the workers from these fields live in Basra and can't get out."

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