Iraq's oil business "is basically ready to hand over now" to Iraqi control, said Robert E. McKee III, the former ConocoPhillips executive who recently completed 6 months' service as senior oil advisor to the Coalition Provisional Authority in Baghdad.
Iraqis "have been running that oil business for a long while. They are very capable of running it," despite having been "in kind of a generation gap" during the 25-year dictatorship of former President Saddam Hussein, said McKee at a May 12 press conference in Houston. Because of the trade ban imposed by the United Nations on Iraq after its 1990 invasion of Kuwait, he said, "Technology has bypassed them, and there are some skills gaps in the workforce. But I guarantee they are fully capable of running the oil business that they've got now."
McKee, who retired Mar. 31, 2003, as executive vice-president of exploration and production after 35 years with Conoco Inc., expressed admiration for what Iraqi oil workers have accomplished despite a widespread lack of technology and equipment. "It's amazing to me that the Iraqis could actually operate some of that stuff, it's in such bad condition," he said.
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Investments, maintenance
Due to lack of investments and the resulting neglected maintenance of wells and equipment, he said, "there is no way in our time frame that we are going to be able to make those assets fail-safe at all, because they basically need to be replaced—refineries, gas plants, pipelines, that kind of thing. So there are going to continue to be problems that will occur, and occasionally there will be an environmental issue with it, like an oil spill or something."
Asked to define that timeframe, McKee said, "I would guess the American investment, the congressional appropriations basically, will be largely spent by the end of this year. After that, they [the Iraqis] are kind of on their own, unless the rules change again. To completely replace all the equipment in the oil fields over there in that timeframe is not reasonable." Such massive replacement would take 5-10 years, he said.
What is possible by the end of this year, said McKee, is "mostly working on some of the strategic things and getting back to prewar conditions in most areas. We're back to prewar production now, which is maybe 2.5 million b/d, and we're back to prewar exports of 1.8 million b/d, which was our first and only goal over there originally. But still there are a lot of things that need to be worked on, and we're actually investing another $1 billion or so in the oil side. We're working over some wells, trying to add to their productive capacity."
As for possible damage to Iraqi reservoirs, McKee said, "These reservoirs are so big and they are such wonderful producers, and there aren't any built-in problems associated with them, that the only thing they have been accused of is, 1) they pull the reservoirs too hard, and 2) that they are not getting waterflood water into the ground on a timely basis."
He noted that Iraq in recent years has "had war after war, and [production] has been up and down, and I just don't think over time that that size of reservoir has been overproduced. As far as water is concerned, the water injection plants were damaged by looting after the [latest] war, and we didn't get a whole lot of water into the reservoirs until early this year."
McKee claimed Iraq's oil reservoirs "are big enough that they may have lost a little bit of recovery but not a lot. Reservoir damage has been minimal, really. The people who have been screaming about that are the people who are trying to benefit by the fact that we'd actually panic and do something about that."
He sees no "really huge hurdle" to Iraq increasing its oil production to 3 million b/d. "Sustaining it might be an issue, but not getting to it. There are enough wells that have been drilled that haven't been completed yet. There are enough fields that have been discovered, if they wanted to drill and develop some of that potential. And there certainly are a lot of wells that are mechanically damaged, and they can go back and work them over. As they put those wells back on production, of course, they've got to deal with gas oil separation plants and gas plants and be able to handle that capacity as well as make sure they've got expanded export capacity. So there's a whole value chain of things that have got to be worked on."
Iraqi production
Speaking at a May 6 topical luncheon at the Offshore Technology Conference in Houston, William H. Lash III, assistant secretary with the US Department of Commerce, said Iraq was currently producing 2.5 million b/d and could increase to 3 million b/d this month. However, the Paris-based International Energy Agency reported May 12 that export disruptions caused Iraqi production to dip to 2.34 million b/d in April.
"My personal opinion is that Iraq probably has the potential to move production up to maybe 6 million b/d over a 5-7 year timeframe," said McKee. "If I were one of the leaders of that country, that is absolutely what I'd be thinking of doing."
Improvement of oil field security "is definitely helping," said McKee. "While I was there, we had something like 50 pipeline incidents where [saboteurs] were successful [in their attacks], and we only stopped them from being successful two or three times during that time [September-November 2003]. The following 3 months as we built the security force up, it came down to only 8 or 10 successful pipeline interdictions, and we averted 20, so the force is successful."
In the subsequent attack on the Basra oil terminal, "which is really one of the most strategic targets in all of Iraq, it was our Iraqi oil guards on the platforms that blew up two of the three suicide boats. If they hadn't been there, it's likely [the terrorists] would have been successful," said McKee "By and large, the Iraqi security forces for oil assets are successful, even in this heightened time of problems."
During his 6 months in Iraq, McKee's office "worked with the oil ministry to establish first of all a code of conduct of how we would like to see that oil ministry run—transparent, aboveboard, ways that are different from the way it has been run before. The ministry has agreed to that code of conduct basically," he said.
"On top of that, we designed what I think is kind of a poster child for national oil companies on one hand, but allowing a lot of outside investment on the other hand. But the Iraqi oil minister has yet to implement that," said McKee. "He tells us he is going to implement it. You never know for sure, but he gradually has gotten on board with that whole idea. I may be being more optimistic than I ought to be, but I think they're going to get there—maybe not all the way we would want them to get to, but close."
At his OTC appearance Asst. Commerce Sec. Lash declared, "Iraq is open for business," and talked of construction plans for hotels, car dealerships, and soft-drink bottling plants. But oil industry critics noted that it will take "more than a chain of new beauty shops" to revitalize Iraq's economy, which is 95% dependent on oil.
During a question-and-answer period, Thad Grundy Jr., a Houston attorney specializing in oil issues who once served as a deputy assistant secretary for international affairs in the US Department of Energy, asked Lash when government regulations and financing would be in place to encourage investment in Iraq by large energy companies. Lash had no answer, acknowledging that petroleum and real estate are the only two sectors of the Iraqi economy not open for direct outside investment involving ownership of resources.
An 'oilman's paradise'
Still, Iraq is "an oilman's paradise for sure," said McKee. "Every oil company worth its salt is looking to see if there will be an opportunity down the road. I talked almost continuously to companies big and small, American and nonAmerican, national oil companies and independent ones, and a lot of them were just doing what you'd expect—trying to scope out the opportunities. The problem, as I told all of them, is there are no rules to the game."
New government regulations would have to be in place before outside companies "can risk any large numbers of personnel or risk any large amounts of money. But they are certainly interested, and Iraqis want them to come. Iraqis need their help, need their money, and need their technology. They were open [to outside participation] before Saddam was ousted," he said.
McKee said he hopes to see some basic laws and financing in place "before this year is out" to help bring outside investors into Iraq's oil business. "They could at least get the rules set down and decide how they are going to invite investors in," he said. "Now when the security situation is going to be good enough to actually begin to make investments is going to be late next year at the earliest."
