Iraqis set to take back control of oil wealth from July

When the US-led Coalition Provisional Authority (CPA) transfers limited power back to an Iraqi interim government on June 30 after more than a year of occupation, oil revenue is expected to flow directly into Iraqi coffers for the first time since the Gulf War of 1991.

But with only limited investment made in Iraq's oil infrastructure under US control as a result of sabotage and violence that have scared off foreign investors, Iraq's oil industry has all but stood still since the fall of Saddam Hussein, and the condition of some of its installations is now even below pre-war capabilities.

All that interim Iraqi authorities can hope for in the immediate future is a restoration of oil production to a pre-war level of 3-mil b/d by the end of 2004 with the work that has been done so far by Halliburton subsidiary Kellogg Brown and Root (KBR) and the US Army Corps of Engineers.

Iraqi oil minister Ibrahim Bahr al-Ulum said May 11 that current oil production was running at between 2.3- and 2.4-mil b/d, and he forecast that output would rise to 2.8-mil b/d in the next few months and then to 3-mil b/d by yearend. Iraqi oil production reached a peak capacity of 3.7-mil b/d in 1979 and 3.5-mil b/d in 1990, just before the Iraqi invasion of Kuwait.

Click on the map above for a larger view showing the country's oil resources.

Outside oil experts do not think a level of 3-mil b/d is sustainable now given that Iraq's industry has, since 1980, survived three major wars and suffered the effects of 13 years of UN sanctions which ended with the US-led invasion in March 2003.

When Thamer Ghadhban was acting oil minister in the aftermath of Saddam’s ouster, production was set to hit 2.8-mil b/d by March 2004 and 3-mil b/d by April 2004. A year later, the targets have not moved as US officials and advisers who have been assisting the ministries get ready to pack up and leave.

Production from the northern Kirkuk oilfield, discovered in 1927 and containing an estimated 10-bil bbl in reserves, is running at about 450,000 b/d, or roughly half pre-war levels, while output from the giant Rumaila field in the south has been put by Ulum at 1.8-mil b/d.

Currently, Iraq’s oil export revenue is deposited in the Development Fund of Iraq and managed by the US-led coalition under UN Security Council Resolution 1483 of May 2003.

That resolution ended years of UN sanctions against Iraq and empowered the US-led coalition with full control over Iraq’s oil-related financial assets, including money held in escrow accounts abroad and under the UN’s now defunct oil-for-food program, which allowed Iraq to sell oil to buy food and medicines under UN supervision from 1996 to 2003. The oil-for-food program, along with the funds it generated, is under investigation by the UN following allegations of fraud.

The transitional constitution, known as the Transitional Authority Law, gives the new interim government authority over the country’s natural resources, which include an estimated 115-bil bbl of crude oil reserves.

The US Treasury Department said in February that Iraqi oil export revenue should reach $13.5-bil this year. Revenues are likely to go higher given the recent rise in world oil prices to their highest level since after the invasion of Kuwait in August 1990. In January, the US Congressional Budget Office forecast that Iraqi oil exports would earn $12-bil in 2004, and total $69-bil over 2004-2007 as the country's infrastructure was patched up.

"The Iraqi people and the Iraqi interim government will control Iraq's oil revenue on July 1," a CPA official told Platts. "What part of the interim government will do so is up to the Iraqis."

Iraqi political leaders, such as Governing Council member Adnan Pachachi, have also said they expect the country to assume full control over its natural resources but the final word rests with the UN Security Council, which needs to pass a new resolution. In late 2003, the CPA put the cost of rehabilitating Iraq's oil sector to its pre-war state at $1.144-bil, and the time frame to do so at nine months.

Since January, two major contracts have been awarded for upstream reconstruction work. A $1.2-bil contract was awarded to KBR for work on the southern fields and the other, worth $800-mil, to a partnership of Parsons and Australia's Worley in the north.

In the Kirkuk field, oil output has been constrained by sabotage, reservoir damage, the theft of spare parts and repeated attacks against the 1.1-mil b/d capacity pipeline to the Turkish Mediterranean port of Ceyhan.

Since May 2003, there have been more than 100 attacks against the country's 4,350-mile-long pipeline system and 11,000-mile-long power grid. In early April, insurgents hit the oil pipeline from Kirkuk to the 110,000 b/d Daura refinery on the outskirts of Baghdad.

With limited storage in the north, crude production levels depend on how much can be exported. Iraq has failed to gain Saudi Arabian approval to take back a 1.5-mil b/d pipeline across the kingdom to the Red Sea, while an old pipeline to Syria remains idle after a pumping station was bombed in the early days of the war.

Since last year, Iraq has issued only four tenders for Kirkuk crude. In March and April 2004, SOMO exported 13.6-mil bbl of Kirkuk through two tenders. SOMO officials have said they will continue to issue short-term tenders until security is guaranteed.

The southern oil fields have fared slightly better. South Oil Co director general Jabar al-Lueibi said in early May that crude production from the south stands at 2-mil b/d, which is considered its pre-war level. "We expect to maintain production at its current level," al-Lueibi said, declining to comment on any production increases. He said the South Rumaila oilfield has a current output of 750,000 b/d, without providing a figure on the North Rumaila oilfield or the other major oilfields in the south.

Post-war Iraq has relied mainly on its Persian Gulf export outlets, the Basra Oil Terminal, formerly Mina al-Bakr, and the Khor Al-Amaya facility. Latest figures from the oil ministry put exports at 1.6-1.65-mil b/d of a total of 1.8-mil b/d average in April. The ministry said Iraq exported 370-mil bbl from July 2003 to late-April 2004, mainly from Basra. But even the southern export route is susceptible to sabotage.

In early May, there were three unprecedented and simultaneous suicide boat attacks that hit the southern terminals, causing the suspension of loading and the death of three US crewmen. Although exports resumed the following day, the attacks raised broader concerns about the stability of Iraqi oil exports.

More recently, an attack on a main pipeline in the Faw Peninsula at the mouth of the Persian Gulf forced exports to be halted for a day. Despite the setbacks to production and the ongoing sabotage, there have been positive developments. Iraq has been able to increase its export capacity in the south to 2.4-mil b/d over the last year by bringing the Khor Al-Amaya loading terminal back on line and repairing key infrastructure.

Al-Lueibi said Khor Al-Amaya had a current crude export capacity of 500-000-750,000 b/d, higher than the 400,000 b/d capacity previously announced by the Iraqi oil ministry. He added that additional work could bring the capacity up to 1.2-mil b/d, the level seen when fully operational.

The Qarmat Ali water plant in southern Iraq is operating close to full capacity, a US Army Corps of Engineers spokesman said. The spokesman, Steve Wright, told Platts that the strategic water treatment plant, located outside Basra, was operating at around 75% of capacity and capable of processing 52,000 gallons per minute of water, mainly to be used for oil production.

Qarmat Ali is expected to be turned over to the South Oil Co later this month, nearly a year after Kellogg Brown Root and USACE spent $280-mil to restore it.

Wright said two 28 megawatt turbines were installed to develop water pressure, while eight cluster pump stations were restored each with its own 28 megawatt generator. The plant provides water necessary for maintaining oil wells in the south.

The delay in hitting full capacity at Qarmat Ali was due mainly to the need for complicated spare parts after extensive looting.

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