Maureen Lorenzetti
Washington Editor
The White House is still analyzing the role it would play in rebuilding the oil sector in a postconflict Iraq, according to government and industry sources.
Over the past 2 months, the US Department of State (DOS) has hosted informal talks involving Iraqi dissidents with extensive oil industry knowledge. But the discussions have not yielded a clear blueprint for the US to follow after the anticipated hostilities stop and rebuilding begins, say oil industry experts and US officials. US officials have repeatedly stressed that the Iraqi energy sector will "continue to be managed by Iraqis for the benefit of the Iraqi people."
But some US officials acknowledge that in the months immediately following any conflict, they expect at a minimum to provide some kind of caretaker role in order to protect the fields and keep oil flowing. How long and to what extent the US exerts its influence over the oil sector is a question that could remain unanswered until a possible military campaign is over.
Conflict expectations
Most military experts anticipate any armed conflict would be over within weeks, if not days. But if a large-scale and protracted US occupation of Iraq is needed, or if the US appears to be taking over Iraq's oil sector, guerilla attacks against US military personnel guarding oil installations are likely, energy analysts warn.
"Nobody really will know what to do until the day after the smoke clears," noted an oil expert familiar with the talks.
In remarks made in New York City on Feb. 14, Sec. of Defense Donald Rumsfeld tried to blunt accusations by some European and Middle Eastern allies that oil is motivating US interest in a regime change.
"The goal would not be to impose an American-style template on Iraq, but rather to create conditions where Iraqis can form a government in their own unique way," he said.
"We would work with our partners as we are doing in Afghanistan to help the Iraqi people establish a new government that would govern a single country, that would not have weapons of mass destruction, that would not be a threat to its neighbors, and that would respect the rights of its diverse populations and the aspirations of all the Iraqi people to live in freedom and to have a voice in their government."
He added, "If the United States were to lead an international coalition in Iraq—and let there be no doubt it would be a very large one—it would be guided by two commitments. Stay as long as necessary, and to leave as soon as possible."
Rumsfeld and Sec. of State Colin Powell have sought to soothe concerns that either the White House officials or Congress will demand that Iraqi-generated oil revenues be used to pay for a war and subsequent reconstruction.
Last December, a group of influential foreign policy experts cautioned policy-makers that the US needs to prepare an explicit exit strategy or face criticisms that the war is about controlling oil.
A report coauthored by the Council on Foreign Relations and James Baker III Institute for Public Policy at Rice University said that it will not be easy or cheap to solve the country's near-term problems (OGJ, Jan. 6, 2003, p. 28).
The report suggested that any proceeds from Iraqi oil be fairly shared by the country's citizens.
How much of this advice the White House has taken to heart is not clearly known. Some oil industry officials familiar with the Bush administration have said that the White House is still debating how much of a role the US government will play when and if it becomes necessary to oversee repairs. Industry sources said that one idea the White House may be considering is to have one US government individual act as a "coordinator" of issues facing the oil sector.
US government officials have declined comment on how active the US government may be in revamping Iraq's oil sector.
But the Bush administration has been more willing to talk about the role that it sees Iraqis playing in a post-Saddam world. Its "Future of Iraq" project over the past few months has brought together Iraqi-born academics, businessmen, and religious leaders to Washington, DC.
They discussed with US officials ways to develop "effective, accountable local government once Saddam Hussein's one-party structure collapses," said a DOS press release. The "Future of Iraq" project includes working groups on many different domestic issues, including energy and oil. Outside of oil, groups have discussed education, role of the media, anticorruption practices, telecommunications, and agriculture.
Iraqi dissident role
The oil working group already has met twice this winter at DOS headquarters to talk about what roadblocks a future Iraqi government might face as it seeks to rehabilitate and modernize infrastructure. Even absent a war, Iraqi oil officials face a daunting task: The sector is already near collapse from more than a decade of neglect. Analysts estimate that the country's current oil production capacity is declining at the rate of 100,000 b/d annually.
A third round of talks with Iraqi-born oil experts originally was scheduled for March but was moved up to the last week in February; the DOS again will host the proceeding although Department of Defense officials will also attend, sources familiar with the discussions said.
Past meetings have focused on both "nuts-and-bolts" issues and long-range planning, including the various directions the country's energy policy may take and the means of encouraging direct foreign investment.
In the shorter term, experts within and outside the DOS's official working group are examining how much production can be maintained immediately following a war.
In the longer term, oil could be a stabilizing force for a new government and for its citizens.
Iraq has the world's second largest oil reserves, and multinational oil companies are all eager to play a role in the country's reconstruction.
International sanctions have limited Iraqi President Saddam Hussein from executing any concrete business deals; the trade he has been allowed to conduct generally has been with what he views as sympathetic United Nations Security Council members, primarily France, Russia, and China.
But most oil experts say any contracts, informal or otherwise, under the Hussein regime are likely to be reconsidered postconflict.
A DOS statement released last month said its working group agreed that investment in the upstream sector will be a key factor helping a post-Saddam nation generate the revenue it needs to rebuild.
"A stable political environment with attractive investment opportunities, that are in line with international norms and practices, are needed in a post-Saddam Iraq. This will allow for revenue generation of the underexplored and underdeveloped oil reserves," DOS said.
Current production
Under the UN oil-for-aid program, Iraq exports crude oil to the US and other markets. Since the UN program began in December 1997, Iraq has exported 3.3 billion bbl of oil valued at $62 billion. About a quarter of that revenue pays for compensation costs associated with the Persian Gulf War and UN administrative costs, including weapons inspections.
Of the funds provided to Iraq from the UN-controlled escrow account, only 25% goes toward food. The remaining 75% is allocated across 13 Iraqi government ministries involving 23 sectors.
Iraq currently exports about 1.6 million b/d, according to Feb. 19 UN estimates, although there are increasing concerns by some UN officials that Iraq is trying to expand illegal exports to circumvent the program and enrich Saddam Hussein's military efforts.
The current aid program is scheduled to expire May 2. Any dramatic changes in the program will be influenced by world events, specifically whether Baghdad can successfully avoid a military confrontation with the US and its allies. A confrontation could happen by early spring, if not sooner, according to US officials.
Clearly, a deadline may be approaching soon. The UN has demanded that Iraq begin destroying illegal missiles by Mar. 1 or face a Security Council action that could lead to war. The next UN inspector report on Iraq's weapons program is expected Mar. 7.
If military action occurs, oil exports may drop dramatically or even stop for days or weeks, oil analysts say.
Monthly Iraqi UN-sanctioned exports have averaged 1.5-1.8 million b/d since October, according to the US Energy Information Administration. The US imported about 367,000 b/d of that total in December, according to EIA.
Total Iraqi oil-for-aid exports averaged 1.27 million b/d in 2002, or about 0.4 million b/d below the 2001 average of 1.68 million b/d. In 2002 illegal Iraqi exports averaged another 200,000-300,000 b/d, although UN officials suspect that figure has grown significantly higher over the past month.
The Washington, DC-based foreign policy think tank Center for Strategic and International Studies, recently reported allegations of government corruption and manipulation of the program. However, it said that, overall, the system has worked with "some efficiency." But in a post-Saddam world, "major alterations' would be necessary to allow for local procurement, limit dependency on the system, and to move Iraq toward "more sustainable and durable solutions."