Experts give dim prognosis on Iraqi oil industry

Sabotage, poor facilities leave U.S. goals unlikely

October 31, 2004|By Mark Matthews | Mark Matthews,SUN NATIONAL STAFF

WASHINGTON - Defying optimistic Bush administration projections, Iraq's hobbled oil industry might be unable to beat the production capacity of Saddam Hussein's era until sometime next year - if then, according to industry analysts.

Iraq's oilfields and pipelines have been targeted since last year's U.S. invasion by bombings and sabotage that have restricted production, slowed exports and hindered reconstruction despite hundreds of millions of dollars set aside for those purposes, analysts say.

Meanwhile, Iraq is in the strange position for a nation with the world's second-largest oil reserves of having to import gasoline from its neighbor, Kuwait, because it lacks the refining capacity to meet domestic demand.

The continuing weakness of the oil industry is seldom highlighted, but it is a byproduct of the same insurgency that exacts a daily death toll among American service personnel and Iraqis - security workers as well as civilians - who are considered to be cooperating with the U.S.-led coalition.

Iraqi officials have reported 250 guerrilla attacks on pipelines and other oil facilities since the invasion, costing the country billions of dollars in lost exports and causing dozens of deaths and injuries. Although attacks have subsided in recent weeks, saboteurs recently bombed two pipelines transporting crude oil to a refinery in Baghdad.

As a result of the attacks, Iraq has been unable to either profit from or contribute to easing the tight worldwide oil market that has pushed prices above $50 a barrel, and it will continue to need American aid to rebuild its economy and ease a high unemployment rate.

"They're absolutely missing an opportunity to grab revenue," said Amy Myers Jaffe, an energy specialist at Rice University's Baker Institute. "I don't think there's a chance of security rapidly improving to allow them to make huge gains in the next year."

Before and during last year's invasion, Pentagon officials cited Iraq's underground oil wealth to justify their claims that postwar Iraq would not be a drain on U.S. tax dollars.

Deputy Defense Secretary Paul Wolfowitz told Congress a week after the invasion in March last year that "we are dealing with a country that can really finance its own reconstruction, and relatively soon."

And toward the end of major combat, Vice President Dick Cheney told newspaper editors that Iraq "hopefully" would be producing 2.5 million to 3 million barrels of oil a day by the end of 2003. Iraqi exiles suggested that this figure could double by 2010.

"I vividly recall my Saudi friends being intensely worried" about sharp increases in oil from Iraq, said Nathaniel Kern, a Washington-based industry consultant.

The postwar insurgency forced Washington to scale back its projections. In February, then-Director of Central Intelligence George J. Tenet said Iraq was "on track" to produce close to 3 million barrels of oil a day by the end of this year. Now U.S. officials say this goal won't be met until sometime next year.

Iraq produces about 2.3 million barrels a day, according to the U.S. Energy Information Administration, which put the country's prewar capacity at 2.8 million to 3 million barrels a day.

The U.S. Army, which is financing two major repair contracts worth more than $800 million, insists that Iraq is matching the production levels that Hussein's regime reached in the period just before the war.

"We are at prewar levels," said Amy Burns, spokeswoman for the Army's Project and Contracting Office. "We're quietly getting on with succeeding in the country."

The reconstruction team's daily target is 2.5 million barrels a day - the output Iraq reached in January last year, just before the war, Burns said, and "we're hitting that quite frequently."

Precise measurements are hard to come by, however. "The lack of sufficient metering means that production estimates from Iraq are not true measures of production, but educated guesses," the EIA says.

Just hitting Iraq's prewar production is hardly a sign of a robust energy industry, analysts point out, given the destruction and decline from two major wars and 12 years of sanctions.

Reporting to the United Nations in 2000, the Dutch firm Saybolt International found Iraq's industry to be in "lamentable" shape.

A combination of spare-parts shortages, overproduction from existing wells, absence of new technology and water encroachment caused a steady decline in production capacity, according to congressional testimony last year by Robert E. Ebel, energy program chairman at the Center for Strategic and International Studies.

Now "everything - exports, domestic markets consumption and production - depends on security," said Leila Benali, a Middle East analyst for Cambridge Energy Research Associates. She doubts that Tenet's goal of 3 million barrels a day can be met even next year.

"If security is restored, the best-case scenario for next year would be 2.65 million barrels a day," Benali said. Ebel said January's scheduled National Assembly elections were unlikely to bring an end to looting and sabotage and "might even exacerbate it."

In addition to the attacks, smuggling might be limiting Iraq's output, said Mike Amitay, director of the Washington Kurdish Institute, a nonprofit research and aid organization. Local officials and bandits are tapping into oil pipelines, he said, exercising a form of "fuel patronage" that is winked at by Iraqi authorities.

Experts' long-term projections are cautious. The question now is "will Iraq be able to go beyond 2.5 [million barrels a day] in the next three years?" said Jaffe of the Baker Institute. She doubts that Iraq will be able to exceed 4.5 million barrels a day by the end of the decade.

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