By Gerald Butt

03-08-04

Iraq has taken the first steps toward reopening and expanding its regional oil exporting network. But for a combination of reasons, the day when significant volumes of Iraqi crude begin traversing the country's neighbours is still far off.

Future energy cooperation was one of the topics raised during the recent two-week tour of Arab states (Egypt, Jordan, Syria, Lebanon, Saudi Arabia, the UAE and Kuwait) undertaken by Iraq's Interim Prime Minister Ayad Allawi. Of all the countries he visited, Jordan is probably the most keen to see a new oil deal concluded. Before the US-led invasion of Iraq, the kingdom relied on that country for its oil supplies. Under a special deal with the Saddam Hussein regime, it received, by overland tankers, large volumes of oil at concessionary terms. The war in Iraq put an end to that arrangement.

But the Jordanian authorities are hopeful that a new deal can be reached with Allawi. Foreign Minister Marwan Muashir said that the possibility of reviving a plan for a crude oil pipeline to link his country with Iraq was discussed during Allawi's talks in Amman. A senior source in Jordan's Ministry of Energy and Mineral Resources was quoted as saying that an Iraqi technical team was scheduled to visit the kingdom in late-August to examine the pipeline scheme.

Syria also received Iraqi crude oil before the 2003 war, freeing up extra quantities of its own crude for export from Baniyas. But in the aftermath of the invasion, a major pumping station on the Iraqi side of the border was ransacked, putting the pipeline out of service as an export route.

Studies for a new pipeline linking Iraq with Syria's Mediterranean coast, which has been under consideration for some time, are nearing completion. At present, Syria imports only a small quantity of Iraqi heavy crude via a pipeline that runs from Ain Zalah to Rumaila, in exchange for gasoline. Also, under a barter agreement, Syrian petroleum products and electricity are being supplied to Mosul and Baghdad.

Energy cooperation was on the agenda again during Allawi's talks in Beirut. A joint statement said the two sides had agreed to "hold urgent discussions to review ways for Lebanon to buy oil from Iraq and to reach agreement on reactivating oil pipelines from Iraq to Lebanon and exporting Iraqi oil via Lebanese ports." Both parties also agreed to "study the possibility of establishing a modern refining facility in Lebanon for Iraqi crude, and reactivating the oil pipeline to Tripoli, with Syria's cooperation."

The pipeline to Tripoli is a spur, from Homs, on the Iraq-Syria (Kirkuk-Baniyas) pipeline, that has not been operational since 1982 -- the year that exports from Iraq to Syria were stopped as a result of a political dispute between Baghdad and Damascus over the latter's support for Iran in the 1980-88 Gulf war.

While energy cooperation was not a major topic discussed during Allawi's talks in Saudi Arabia, the oil authorities in Baghdad have said they would like to see the reopening of the Iraqi Pipeline Trans-Saudi Arabia (IPSA). This is the export facility to the Red Sea terminal of Al-Muajjiz that was financed by Iraq and seized by Saudi Arabia in 2001. But the issue is a delicate one that is unlikely to be resolved quickly, for Saudi Arabia has said the section of the pipeline within the kingdom is now being used to transport natural gas and has ruled out its re-use as a crude conduit from Iraq.

But leaving aside the IPSA question, progress on future oil link-up projects with Jordan, Syria and Lebanon will have been a cause for satisfaction in the capitals of those three states.

The big question now is: when will the oil start to flow across Iraq's borders? The answer: not any time soon.

For a start it is difficult under current circumstances to imagine investors coming forward for the crude export projects envisaged for supplies to Jordan, Syria and Lebanon. In the absence of nationwide security in Iraq, sabotage of oil installations and of the existing northern export pipeline continues -- demonstrating the vulnerability of transporting oil this way.

Even laying a pipeline would be difficult. For example, the planned Iraq-Jordan scheme would involve constructing 150 km of pipe in western Iraq -- an area of extreme lawlessness. The Iraqi oil authorities are also hampered by financial constraints. Minister of State Adnan al-Janabi said recently that the oil sector's budget allocation was "barely enough to cover some maintenance and operational works," adding that the sector needed $ 4 bn in next year's budget -- an unrealistic figure, given that the government's revenues are not expected to exceed $ 20 bn.

In other words, there is little prospect of Iraq embarking on production expansion schemes that would provide significant and secure volumes of crude for export in the near future.

A further factor constraining potential Iraqi cross-border export schemes is political. Until solid bilateral relations covering security and other matters of mutual concern are established between Baghdad and the neighbouring capitals, it is premature to talk about long-term strategic economic cooperation deals, of the kind required for such pipeline networks.

Even when security is re-established in Iraq and neighbourly relations are put on a strong footing, there will still be the need to agree on the structure of the country's oil sector. The assumption of the oil professionals is that the industry will remain centralized, with revenue collected and distributed by the Baghdad government.

But not all Iraqis agree with this arrangement. Prime Minister of the Kurdistan Regional Government, Nechirvan Barzani, said while Kurds were prepared to negotiate with the central authorities over the sharing of all revenues from existing oil fields in the Kirkuk area, "all income from future oil finds there should belong to the Kurds themselves... The problem is that the people in Baghdad don't understand the reality on the ground here."

This statement, along with the news that a Norwegian oil company had entered into an agreement with the Kurds to search for oil and gas in northern Iraq, prompted the Allawi government to issue a stern warning to foreign firms.

The Ministry of Oil said "companies that wish to be welcomed here in the future should not enter into or try to pursue the implementation of agreements with persons who are not empowered to represent the sovereign Government of Iraq."

So there are formidable political as well as security battles to be won before the agreements reached during Allawi's regional tour can be implemented.

Gerald Butt, Gulf Editor of the Cyprus-based Middle East Economic Survey, writes a regular economic analysis for The Daily Star.

Source: The Daily Star