Maureen Lorenzetti
Washington Editor
WASHINGTON, DC, Mar. 25 -- Analysts say politics and spending will control how fast the oil sector recovers in a post-conflict Iraq.
A White House proposal to Congress calls for $74.7 billion, mainly to fund the initial cost of the war but also including some humanitarian aid for Iraqi civilians and foreign aid to Israel and Turkey.
Congressional sources said the funding assumes the conflict will last about 30 days, although the White House refuses to speculate on how long the war will last.
In the longer term, much of the country's reconstruction is expected to come from oil revenue, although the mechanism for that remains uncertain.
Transition government framework
The White House also expects the US would run a new transition government through an interim civilian authority made up mainly of retired US diplomats under the direct control of the military.
Under the current blueprint, indigenous Iraqis have a very limited role in running the country during the first few months of occupation; the United Nations' role remains unclear.
US officials won't commit to how long they want a US-run government to remain in place; Washington has indicated it may consider a larger UN role within 6 months.
How the White House ultimately decides to run the country has obvious implications for future industry investment.
Deutsche Bank AG analysts Mar. 25 predicted two separate phases: reinvesting for reliability, followed by "greenfield" development.
"We expect an interim, partly Iraqi, administration to use the basic INOC (Iraq National Oil Co.) structure to reinvest in existing fields, with advice from the international oil (companies) and oil services contracts to stabilize output," analysts said.
"This may well result in a decline in output near term, as uneconomic and unsafe wells are redrilled. Most likely, Iraq stays in OPEC (Organization of Petroleum Exporting Countries), and a quota of around 3 million b/d leaves room for some 0.5 million b/d of new growth, more likely in 2004 than 2003," Deutsche Bank said.
Martin Purvis, senior consultant with Wood Mackenzie, told investors at a Mar. 18 Deutsche Bank teleconference that the geological promise the country holds is formidable; he predicted potential Iraqi capacity of 6 million b/d by 2012.
But legal wrangling may prevent multinationals from seeing meaningful investment there for several years.
"While the coalition would no doubt like to tear up the Saddam-era deals, this could create legal challenges in the international courts," Deutsche Bank said.
This, plus the time needed to rebuild Iraqi's government, including INOC, points to several years' delay, analysts say. To speed the process along, multinationals may join what could prove to very interesting marriages of convenience.
"The outcome might be partnerships between the 'incumbents' and 'coalition' companies," Deutsche Bank said. "TotalFinaElf (SA) and BP PLC? ChevronTexaco Corp. and OAO Lukoil? Interestingly, BHP (Billiton Petroleum Pty. Ltd.) seems to be in both camps. Could Woodside Petroleum Ltd. be another way in for Royal Dutch/Shell Group?"
Purvis notes that some of the existing contracts may in fact be honored, which would be good news for some majors.
Production-sharing contracts to develop Iraqi oil reserves signed by French and Russian oil producers under Saddam Hussein's regime will probably be validated, predicted Purvis. Future contracts may be less generous, resembling development and production deals that allow companies to develop, but not own, reserves and other assets. Nevertheless, the terms may be attractive enough to pressure Iran and other Persian Gulf countries to lower their own contract expectations.
More-immediate issues
PFC Energy (formerly Petroleum Finance Co.) warned in a recent advisory to clients that Washington may be "seriously" underestimating the amount of money that will be required to rebuild the country, particularly in the postwar phase.
"While the Pentagon has recently announced that the US will fund the running costs of the occupation, US officials are also looking to tap into Iraqi oil revenues to fund postwar current and capital spending in a country where pent-up demand is huge following 12 years of sanctions and where economic expectations will be very high," the report said. "However, these oil export funds will be much lower than the Bush administration seems to anticipate. Even at an oil price of $25/bbl (for West Texas Intermediate crude), Iraqi exports are unlikely to yield more than $14 billion in revenue during the first 2 years after a war, leaving a huge budget deficit (as much as $10 billion) that neither the White House nor Congress will be willing to fund."
PFC said that the war itself could cost as much as $90 billion once deployment is taken into account, and reconstruction costs alone are likely to total around $250 billion over 10 years.
Immediately after the war, the interim US-led government will likely seek UN authority to run a modified oil-for-aid program for a few months at least, PFC predicts. On the Iraqi purchasing and distribution side, authority will be transferred from Baghdad to the UN, the group said. But the oil sales side is less clear. PFC said it is likely the US will turn to its own civilian authority to sign oil sales contracts and invoices.
Oil sector post-Saddam
The US also must be careful in what role if any it should play in deciding whether the state-run oil sector should be privatized, analysts say.
"How do we protect the oil facilities and bring in companies and materiel to sustain and improve those facilities without being criticized for taking over oil or giving the appearance of somehow taking the oil?" asked Amy Myers Jaffe, energy adviser at the Houston-based Baker Institute for Public Policy at Rice University.
The US already faces a public relations problem over Iraq's reconstruction. The French government, for example, said on Mar. 25 it wants assurances from the US and the United Nations that US companies will not be given an unfair advantage for contracts to rebuild the oil sector and critical infrastructure.
A senior Defense Department official tried to calm these concerns during a Mar. 24 Pentagon briefing."This is not about the U.S. trying to gain advantage by taking these oil fields or to preserve its own oil industry," he said. "It is solely and most importantly to preserve the capability of the Iraqi people to stand up very quickly after a Saddam regime and become a functioning, capable member of the economic community."
The Defense Department estimates that potential oil income could be between $20 billion to $30 billion a year.
PFC warns, however, that the US's current plans for the oil sector remain "particularly opaque."
The White House is said to be considering putting immediate responsibility for the sector in the hands of US officials from the Department of Energy, PFC said, but details remain unclear.
There also is a continuing debate in the administration on what future direction the country's oil sector should take. PFC said that, in the longer term, there have been suggestions that the US may take over the running of the sector directly in association with selected Iraqi technocrats, either existing or retired, with the upstream being placed under the authority of a former US oil company executive.
However, many neoconservative hawks argue that the sector should be fully privatized and open to foreign investment.
