Rebuilding Iraqi oil sector must navigate feuds old and new

April 21, 2003
The US-led coalition that toppled the regime of Iraqi President Saddam Hussein has focused on quickly restarting the country's oil sector as its top priority.

The US-led coalition that toppled the regime of Iraqi President Saddam Hussein has focused on quickly restarting the country's oil sector as its top priority.

In doing so, it must cope with old, recent, and possible new feuds among various factions with stakes in postwar Iraq. The coalition already has taken steps to ensure that old enmities between Turks and Kurds don't make the northern Iraqi oil fields a new flashpoint. Meanwhile, coalition governments must deal with the recent schism between traditional allies that could ultimately delay award of contracts needed to get Iraqi oil flowing again. And fresh tensions have flared up between the coalition and Syria, resulting in a halt to unauthorized Iraqi oil sales and in renewed escalation of Middle East tensions.

Competitive bidding planned

With Iraq's oil fields now officially secure, Pentagon officials are planning to solicit competitive bids to upgrade infrastructure and expand production to pre-Gulf War I levels and beyond, US military officials said Apr. 15.

A bid may be announced as soon as late April, but more likely in May with an award in June or July, US officials said. It is too soon to predict how much the contract will be for, the US Army Corps of Engineers said. But a spokesman stressed that bids would be open to qualified oil service companies both inside and outside the US.

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The corps is currently administering a controversial sole-source contract with Halliburton Co.'s Kellogg Brown & Root subsidiary for emergency war repairs and related environmental clean-ups. KBR has performed about $50 million of work on a contract that could be as much as $600 million over a 2-year span. But given that war-related oil field damage has been minimal, the final cost of the project is unlikely to be that high, US government sources predicted.

Production timetables

The northern fields may start producing as much as 1 million b/d within a few weeks, while production restart in the southern fields may take several months. US Army officials said they see no evidence of sabotage in the northern region, but four wells in the south were set ablaze and several other wells were wired with explosives. US military officials said the damage could have been far worse if not for Iraqi oil workers who turned off key valves and pumps to protect critical infrastructures before hostilities began.

Before the war, Pentagon officials feared that Saddam Hussein might try to disable all of the country's 2.5 million b/d of oil production for months or years by setting the fields ablaze. Some analysts and even the Pentagon at one point warned that as much as $7 billion in damage could be inflicted if the Iraqi dictator repeated what he had done in Kuwait during Gulf War I.

Anticipating the worst, the US government in March awarded KBR, already a large military contractor, a noncompetitive "bridge" contract. US officials said they needed to forgo the typical 45-day competitive bidding process so the oil service company could start fixing sabotaged wells quickly.

But because Vice-President Dick Cheney served as chief executive of Halliburton until 2000, some Congressional Democrats immediately alleged the award was politically motivated.

Reps. Henry Waxman of California and John Dingell of Michigan called on the General Accounting Office to determine if the Pentagon offered preferential treatment to the oil services company. In a related effort, the two lawmakers now want GAO to investigate Department of Defense contracts awarded to Halliburton over the past 2 years and to review the process by which the Bush administration has signed or intends to sign contracts with private firms for development work in Iraq.

In an Apr 10 correspondence with the corps, Waxman acknowledged that the Bush administration may have had valid reasons for granting a sole-source contract for emergency work during armed hostilities. But he said it was harder to understand why the corps wrote a multiyear contract potentially worth billions of dollars.

Waxman also questioned the Army's earlier assertion that KBR was the only company that could perform the work because it possessed the requisite security clearances.

Contractor reaction

Meanwhile, a contractor trade group defended the military's conduct, saying proper procedure was followed in the KBR contract award.

Associated General Contractors of America CEO Stephen Sandherr said in a letter to Waxman and Dingell that "while it appears that the GAO may conduct an in-depth investigation of concerns raised in your letter, our initial observation is that appropriate procurement policies have been followed and that the unique national security concerns of this procurement in wartime Iraq protected lives, resources, and the environment."

Sandherr further stated with regard to the contract awarded to KBR to arrest the oil fires in Iraq, "AGC is satisfied that the contract was properly awarded."

Sandherr said that KBR had an existing contract with the corps to provide construction and base logistics services to the DOD in the Persian Gulf region prior to coalition forces entering Iraq.

"In that capacity, KBR was already privy to classified military plans regarding the mission to enter Iraq, as well as intended targets. "

AGC also called on the administration to give US firms a preference in all future contracts and subcontracts in Iraq.

Next steps

Decisions over longer-term reconstruction contracts and related matters may fall under the direct jurisdiction of a yet-to be named interim government.

Industry sources say the Pentagon wants Phillip Carroll, formerly a top executive with Shell Oil Co. and Fluor Corp., to oversee the oil industry during the transitional government stage, but there are many unanswered questions over what the scope of his authority would be.

A strong indicator of the possible answers to those questions may be the pending disposition of Iraqi crude oil in storage that could be sold under the United Nations oil-for-aid program.

There is about 9 million bbl of Iraqi oil in storage at the Turkish port of Ceyhan that the UN maintains is part of its oil-for-food humanitarian program. France, a permanent, veto-holding member of the UN Security Council, has raised objections to the US's approach to reviving the oil sales program, posing another possible roadblock for restarting Iraqi oil sales.

US officials, meanwhile, have suggested that the Bush administration will have the authority to execute oil contracts in a post-Saddam political environment.

UN jockeying for position

UN officials also want to be involved in any process concerning Iraq's reconstruction, including the rebuilding of the nation's oil sector.

UN Sec. Gen. Kofi Annan arrived Apr. 15 to hold high-level talks on a number of issues, including ongoing developments in Iraq, while attending the European Conference being held in that city.

Annan on Apr. 16 began his series of meetings with British Prime Minister Tony Blair, German Chancellor Gerhard Schroeder, and the foreign ministers of France, Germany, Russia, Spain and the UK. On Apr. 17, Annan was to speak with French President Jacques Chirac as well as meet with Greek Prime Minister Costas Simitis.

Annan's special adviser Rafeeuddin Ahmed, meanwhile, will meet with US Department of State, Department of Defense, and National Security Council officials in Washington, DC, in a series of briefings, including meetings to develop a framework for UN involvement in postconflict Iraq.

"Ahmed hopes to get a clearer picture of the coalition's thinking on postconflict Iraq, as part of his ongoing work for the secretary general," UN spokesman Hua Jiang said. Formally appointed special adviser earlier in the month, Ahmed has been helping the UN informally since February in thinking about possible involvement in postwar Iraq and now will serve as the UN focal point for talks centering on such a role.

Turkish, Kurd concerns

Iraq's northern oil fields were a special area of concern for coalition governments prior to the toppling of the regime. The main concern was how Turkey, an ally of the US and UK, might view Kurdish forces seizing the northern oil fields.

The US and Turkey sought to avoid confrontation over Iraq's northern oil fields as US and Kurdish forces captured the cities of Kirkuk and Mosul in their efforts to wrest control of the region from remaining forces loyal to Saddam Hussein.

Kurdish commanders and politicians generally had been careful to deny that their forces would move on Mosul and Kirkuk alone, but they did not rule out doing so under US command and as part of the Iraqi opposition.

Even as late as Apr. 10, commanders in Chamchamal, a Kurdish-controlled town some 22 miles east of Kirkuk, said local "peshmerga" fighters had no plans to launch an assault. "We are not intending to attack Kirkuk," said senior Kurdish commander Mam Rostam.

Still, US Special Forces were reported Apr. 9 to have issued a "blunt warning" to some 3,000 "overzealous" Kurdish fighters who had gathered to march toward Kirkuk. "We told them to cool it," said a US official in the region. "Our people are there now, trying to keep the 'pesh' from taking things into their own hands."

The sudden advance nonetheless set off alarms in Turkey on Apr. 10, with Foreign Minister Abdullah Gul announcing plans to dispatch Turkish "observers" to Kirkuk, and receiving assurances from Sec. of State Colin Powell that US forces would arrive in a "few hours" to maintain control over the town.

Turkey, which had requested written assurance from the US administration that the Kurdish groups would not enter Mosul or Kirkuk, instead received a verbal assurance during Powell's visit to Ankara last week. After a day of meetings with senior Turkish leaders, Powell said the two sides agreed to establish a "coordination committee" to monitor northern Iraq to determine if a Turkish deployment would be necessary.

"I think we have demonstrated to our Turkish friends that we are monitoring the situation closely, we have it under control, and therefore at the moment, there is no need for any movement of Turkish forces across the border," Powell said. He added that the two sides would continue discussing "how we would respond to a problem that might arise in northern Iraq that might affect Turkish interests."

Kurdish state sought?

Ankara wants to send as many as 40,000 troops across the border, largely to block any move to establish an independent Kurdish state. It has repeatedly warned Iraqi Kurds to stay away from Kirkuk and Mosul, fearing takeover of the oil-rich region could provide the economic backbone of an independent nation.

With a sizeable Kurdish population within its own borders, Turkey has even launched high-level contacts with its neighbors Iran and Syria, which also have large Kurdish populations and likewise fear moves toward an independent Kurdish state.

Kirkuk and Mosul became the main objectives of a joint thrust by US special forces and Kurdish fighters in northern Iraq that began after plans to launch a heavier attack through Turkey had to be dropped (OGJ Online, Mar. 28, 2003). The US contingent is thought to number around 2,000 men, but along with the 60,000-strong Kurdish army, it succeeded in pinning down half the Iraqi army—120,000 men in two and a half corps—for the duration of the 3-week war.

Although largely overshadowed by the fight in southern Iraq, the campaign in the north succeeded easily, as US and Kurdish forces swept into a host of towns dotted among the region's oil fields, meeting little or no opposition along the way. In the oil-producing city of Khaneqin, Kurdish forces took control without a fight, while Kurds and US special operations troops met no resistance as they moved into Dibis, where the oil facilities were reported to be "completely intact."

Top Iraqis pursued

Meanwhile, the hunt for remnants of the Iraqi regime included its top oil official and put the US crosswise again with Syria.

As US-led forces put a former Iraqi oil minister on their most-wanted list—to be killed, captured, or pursued—the Greek coast guard was reported to be seeking three oil tankers in the eastern Mediterranean Sea carrying fugitive Iraqi officials.

The Greek coast guard was placed on high alert after US authorities warned that three tankers, said to have sailed from "a Middle Eastern port," were carrying top Iraqi officials and could be heading for Greek waters.

Coast guard sources said air and sea patrols were stepped up in response to the US's tanker tip-off, according to Greek press reports.

The Greek daily, Kathimerini, citing official sources, said senior Baath Party officials, together with members of their families, may have escaped US and UK forces that entered Baghdad and Basra, then boarded the tankers.

The paper did not name the country or port the ships may have sailed from, but US officials repeatedly have said that Syria has been receiving Iraqi officials fleeing coalition forces.

Washington responds

President George W. Bush and Sec. of Defense Donald Rumsfeld said Apr. 13 that some top members of Saddam Hussein's government had taken refuge in Syria, while others have moved on to different countries.

Syrian officials have denied the charges.

The ships, according to information made available to the Greek coast guard, were headed for a European Union port and would probably pass through international waters south of Crete soon.

Greek coast guard vessels, including patrol boats equipped with advanced electronic tracking devices and manned with special forces, have already set off for Crete from the eastern Aegean. The coast guard also is in close cooperation with the Greek navy and North Atlantic Treaty Organization officials.

US-led coalition forces earlier said they were committed to capturing Iraqi leadership attempting to flee via sea, and they were using all available military assets to capture them.

"This includes using the full capabilities of US and coalition military aircraft, warships, submarines, and satellites," the US Fifth Fleet said in a statement on Mar. 21. "As part of this search operation, US Fifth Fleet and coalition forces are currently querying commercial vessels in the region, particularly those operating in vicinity of Umm Qasr and Khor Abd Allah waterways.

"Anyone suspected of assisting or transporting Iraqi leadership should expect to be boarded, and will risk the sinking or seizure of vessel, and will be detained and jailed," the Navy said.

Rasheed tops wanted list

The stepped-up search in the eastern Mediterranean follows an announcement that Iraq's former oil minister, Amer Mohammad Rasheed, is one of 52 officials being sought by US-led coalition forces. Central Command spokesman US Brig. Gen. Vincent Brooks said the list of 52 includes Saddam Hussein, his two sons, Deputy Prime Minister Tariq Aziz, and others linked to Hussein's administration and Baath Party.

Apart from his service as oil minister, Rasheed was a general in the Iraqi army and is believed to have overseen manufacture of weapons. Rasheed became oil minister in June 1995 but was unexpectedly removed from the position in January this year. The official reason for his removal was that he was beyond Iraq's mandatory retirement age of 63.

Experts questioned whether the sudden departure of Rasheed was connected to the role of his wife, Rihab Taha, known to be near the top of a list of biological weapons scientists UN arms inspectors were trying to interview.

Taha is thought to have carried out work on germs that cause botulism poisoning and anthrax infections at the top-secret biological research laboratory al-Hakim in the late 1980s.

Almost as suddenly, Rasheed was reappointed Iraq's oil minister and, shortly after the outbreak of the war in March, he denounced coalition forces during a press conference at Baghdad's Daura refinery.

Syria latest feud

Even as the US and UK raise the specter of economic sanctions against Syria, the Arab state has already been hit hard by the loss of substantial oil revenues following the end of its reportedly illicit supplies from Iraq.

US military forces shut off a pipeline that carried "illegal oil" flowing from Iraq to Syria, Rumsfeld told a Pentagon briefing Apr. 15. "We have been told that they have shut off a pipeline. Whether it's the only one, and whether that has completely stopped the flow of oil between Iraq and Syria, I cannot tell youU. I cannot assure you that all illegal oil flowing from Iraq into Syria is shut off. I just hope it is."

Rumsfeld denied earlier reports that said US forces destroyed the pipeline . "We have preserved infrastructure in that country," he said.

Kuwait's Al-Rai Al-Aam newspaper earlier had reported that the pipeline between Kirkuk in northern Iraq and the Syrian port of Banias was blown up by US special forces, along with a railway link between the two countries that also carried Iraqi crude oil.

Syria's losses

Some analysts say the shutdown will cost Syria $500 million-1 billion in estimated annual revenue from Iraqi oil illegally exported through the pipeline—a significant percentage of Syria's annual $7.5 billion budget.

Before the war, Syria was said to be receiving as much as 200,000 b/d of oil through the pipeline, paying as much as $1 billion/year to Iraq, making it the single largest source of revenue for Baghdad outside the UN's oil-for-aid program.

But the US action put an end to that arrangement, ending Washington willingness to tolerate Syria's unauthorized imports of Iraqi oil.

Pipeline history

Rasheed first announced on Aug. 7, 1997, that Iraq was prepared to pump its crude oil through the Iraq-Syria pipeline.

In August 1998, Rasheed and Syria's Oil Minister Muhammad Mahir Jamal signed a joint protocol for the rehabilitation of the pipeline and the resumption of contacts to bolster future oil cooperation.

Work on Iraq's side was completed by August 1999, and Iraqi experts and technicians started repairs on the Syrian side. Baghdad's official Jumhuriya newspaper reported on Aug. 14, 1999, that "the part of the pipeline inside Syria needs some turbines, which will enable the pipeline to export 200,000 b/d (of oil)."

On Mar. 1, 2000, Iraqi radio announced "the completion of restoration work on the oil pipeline and the pumping stations in the crude oil exporting system via Syria to Banias terminal on the Mediterranean."

Shipments of oil began in November 2000, and the US Department of State soon expressed concern about the export of Iraqi oil to Syria, insisting that all shipments be made subject to UN sanctions on Baghdad.

While Syria said it was receiving only enough oil to "test" the pipeline, a senior State department official said the shipments seemed to exceed what would be required for that purpose. "There's more happening than what we'd like to see," he said.

On Jan. 23, 2001, State department spokesman Richard Boucher said US officials had talked with their Syrian counterparts about the reopening of the 552 mile pipeline.

Boucher said the US would be supportive if Syria asked to have its pipeline designated as an authorized route for exporting Iraqi oil under the UN oil-for-aid program. This would have ensured that revenues earned by Iraq could not be spent by President Saddam Hussein on rebuilding his military.

US plans interrupted

US Sec. of State Colin Powell said he was assured by Syria's President Bashar Assad during a meeting in February 2001 that Damascus would allow UN control over the pipeline that industry analysts then estimated was carrying 120,000-200,000 b/d of Iraqi crude. But Damascus never sought UN oversight.

Analysts estimated that the Iraqi oil, delivered to Syria at a discount of some $15/bbl, could generate $2-3 million/day of income for Iraq—all outside the UN oil-for-aid accounts and available for Baghdad's arms purchases.

A UK Royal Navy boat, part of coalition forces in Iraq, patrols Persian Gulf waters off Umm Qasr as part of a coalition team providing security and mine-spotting for shipping traffic. Photo courtesy of the Royal Navy.
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At the time, the Bush administration also was working on a plan to overhaul sanctions on Iraq that called for posting UN monitors just outside the country's borders and at key foreign airports to prevent Hussein's regime from importing military goods.

As an inducement to cooperate, neighboring countries—such as Jordan, Turkey, and Syria—would be allowed to buy Iraqi oil at discounted prices. Some or all of their payments might be deposited into special accounts that Iraq could use only to buy imports from the neighbors.

Although the US was drawing a bead on the illicit trade between Baghdad and Damascus, the Sept. 11, 2001, suicide attacks on New York and Washington, DC, brought a significant change in the aim of the Bush administration—away from Iraq to the terrorists responsible for the attacks.

Although it remained on the State department's list of state sponsors of terrorism, Syria stepped up its sharing of intelligence with the US concerning militant groups linked to Osama bin Laden, the leader of the Al-Qaeda terrorist network blamed for the Sept. 11 attacks.

The Bush administration, seeking to nurture a growing intelligence relationship with Syria in the war on terrorism, refrained from confronting Damascus about its illicit imports of Iraqi oil. But with Al-Qaeda largely out of the picture and Hussein deposed, the US changed its focus.

Even before Rumsfeld's announcement, Syrian officials acknowledged on Apr. 1 that supplies of Iraqi oil ceased with the ramping up of the US-led war against Baghdad.

Reuters news agency quoted a Syrian industry source as saying that the pumping of about 200,000 b/d of crude from Iraq's southern oil fields for export to Syria had stopped.

"The situation inside Iraq does not permit the continuation of the oil flow from a technical point of view," the Syrian source told Reuters.

Syria's ambassador to the US, Rostom Zoubi, summed up the end of the pipeline saga, saying, "This is an old line and all of Iraq is being destroyed, so what's a pipeline? Nothing."

Contributing to this article were Washington Editor Maureen Lorenzetti, Executive Editor Bob Williams, and OGJ's Middle East correspondent.