Iraq poised to expand petroleum sector quickly when UN lifts sanctions

Iraq's position as a dominant player in the global oil market is assured in the long run. The key question, of course, is when United Nations sanctions�which depend mainly on the US position�will be lifted. This was the consensus reached at a conference concerning mainly Iraq and held in Versailles July 6 and 7.

VERSAILLES�Iraq's position as a dominant player in the global oil market is assured in the long run. The key question, of course, is when United Nations sanctions�which depend mainly on the US position�will be lifted.

This was the consensus reached at a conference titled "Economics, Geopolitics, and Investment Terms in the Middle East," concerning mainly Iraq and held in Versailles July 6 and 7.

Herman Franssen, director of Petroleum Economics Ltd. (PEL), London, indicated that sanctions as a US foreign policy option "are less popular in Washington today" than in recent years. He believes that, under pressure from humanitarian groups and the business community, sanctions will be gradually eased, rather than lifted all at once, in the foreseeable future.

Contributing to the need for a gradual lifting of UN sanctions against Iraq is a global oil market that is expected to remain tight into 2001 and possibly 2002, says Franssen. "In case Iraq ceased to export oil for whatever reason, other OPEC producers might not be in a position to offset all of the potential shortfall on short notice. Hence, the impact on oil prices could be significant.

"While most observers would expect a roll-over of the UN's oil-for-aid program in December," Franssen continued, "Iraq has hinted that it expects some concessions from the UN"�in particular, relating to spare parts for the oil industry, he said.

But even if the amount that Iraq can spend on spare parts and equipment were doubled to $600 million per period, the potential effect of the added equipment is limited. A number of speakers at the conference, including officials from Iraq's Ministry of Oil, agreed that it is very hard to address the country's oil industry situation in 180-day programs while there is uncertainty about their renewal and without proper investments.

Nonetheless, Faleh H.M. al-Khayat, director of general planning at the oil ministry, reckons that, from the beginning of the embargo in August 1990 until mid-2000, the total quantity of oil produced by Iraq is about 5 billion barrels. The funds allocated by the UN Security Council over that period per barrel of oil produced amounted to 36�/bbl.

He considers this "minimal" compared with prevailing operating costs in the international oil industry and "notwithstanding the devastation suffered by the Iraqi oil industry due to war, pillage, and a decade of sustained oil production at substantial rates." It is not only the money that has been lacking, he insisted, but also the means to do the job.

Despite such conditions, production in July 2000 has reached 3.2 million b/d , said Al-Khayat, who hopes to increase the total to 3.5 million b/d by yearend.

Contract negotiations
At the current stage of sanctions, asked David S. Sellers, a partner in consulting firm Frere Chomeley, what are the prospects for western companies wishing to do business with Iraq? The answer is, they can buy crude or products, sell spare parts and equipment, and develop relationships.

John Fletcher, vice-president of Ranger Oil Ltd., Calgary, described negotiating a deal in Iraq. Also he refers to such negotiations as "a legal minefield," he estimates there are over 60 companies discussing commercial contracts with the Ministry of Oil at present.

The ministry, said Fletcher, "let it be known everything is still negotiable, as new companies continue to arrive and present ever more favorable terms for various projects. Therefore, except for the reserved oil fields of Majnoon (Elf Aquitaine), Nahr Umr (Total SA), West Qurma (a Lukoil-led consortium), Ahdab (a Chinese joint venture) and Amara (Petrovietnam), and five gas fields in northeastern Iraq, the Ministry of Oil is willing to negotiate agreements on other oil field developments and the nine exploration blocks in the Western Desert."

But even the "reserved" contracts undergo continuing negotiation. The so-called development-production contracts that have been signed have changed since they were negotiated in 1992 and 1994, says Ghazi M. Haider, an oil ministry official. "There is no [such thing as a] full signature so long as the embargo lasts," he said.

There is continuing exchange of ideas "for the benefit of both parties," he added. "What we have signed is signed; what we will sign is subject to negotiation."

Production targets
Following the lifting of UN sanctions, Iraqi officials intend to increase oil production capacity to 6 million b/d, with crude exports expected to reach 5.0-5.4 million b/d, depending on growth rates in local consumption, explained Ali R. Hassan, an official at Iraq's State Organization for Oil Marketing. This is twice the export level reached in May 2000.

Production capacity would necessarily be increased gradually until full development of "major discovered but unutilized fields" is achieved. This could take 5-8 years after lifting of the embargo.

Jean-Fran�s Giannesini, chief engineer at Institut Fran�s du P�ole, has determined that "applying new technological breakthroughs to exploration in Iraq could reduce the finding costs by 50%. Applying complex drilling and completion technology could reduce development costs to 55% of current costs."

Giannesini also believes Iraq could boost production capacity to 19 million b/d in 30 years for a yearly investment to $13.4 billion. It would thus be able to produce 80% of Iraq's 312 billion bbl of proven and potential reserves in 60 years, he says.

For Hassan, the 6 million b/d near-term production target easily could be absorbed by an expanding market but would be subject to the Organization of Petroleum Exporting Countries quota system. He also believes that Iraq's future export mix of crudes will not be as diverse as in the past.

"The current thinking is to keep our traditional types (Basrah Light and Kirkuk), adding a heavy type of 24-25� API and an extra light type of 38-39� API. This would still give Iraqi crude an edge over competitors because of its diverse mix."

He also sees another advantage in Iraq's diversified export outlet network through the Mediterranean and Red seas, in addition to the traditional deep sea terminal in the Arabian Gulf. "Such marketing flexibility has been enhanced through construction of the North-South strategic pipeline in 1976," said Hassan.

The pipeline through Syria, which was closed by the Syrians, could be used without delay if Syria would allow transit of Iraqi crude, as repairs have been completed. "We can lift 350,000 b/d through Syria within weeks, not months, of its opening," he said confidently.

Concerning crude oil pricing, Hassan hopes there could be serious discussions "to arrive at a more healthy pricing method leading to a stable and fair price for both producers and consumers." He believes such discussions should also cover the recent alliance and merger-acquisition trend, "because our customer structure has changed significantly and requires a dialogue regarding the new phenomenon and its potential impact."

Hassan is also worried about the impact of the new electronic, or digital, economy and believes it would be in the interest of both OPEC and non-OPEC nations "to arrive at a common understanding on where we are going."

Natural gas
Iraq also has proven gas reserves in excess of 3,000 billion cu m. Undiscovered gas�free and associated�is estimated to exceed 9,000 billion cu m.

Gas consumption increased rapidly during the second half of the 1970s and 1980s to feed power generation and industrial plants, as well as growing utilization by the oil and gas industry. Gas from Rumaila field was exported to Kuwait starting in 1986.

A 20-year gas export project to Turkey reached the stage of a "technical and economic feasibility study" in 1998, and Italy's ENI SPA was selected as the leader to form a contractor group to implement the project as soon as UN sanctions are lifted. Iraq officials are optimistic that the coming months will witness major steps along the path toward project implementation.

Although Iraq intends to enter the gas export market when sanctions are lifted, the regional context, as detailed by Peter Ross, managing director of Barter & Petroleum Services, London, is one of gas-rich, or relatively gas-rich, countries, except for Kuwait, Turkey, and Lebanon, which are gas-short. By the time Iraq arrives on the gas export market, it could well find it has been squeezed out, he says.

Faleh al-Khayat dismissed this notion. Although all gas pipeline schemes in the area "go around Iraq instead of following the traditional camel route through Mesopotamia," he said, this is the cheapest route. [It is] not very far from the gulf, easily linked up to Southern Europe, and is the best route to Southeast and West Turkey," said Al-Khayat. Certainly cheaper, he maintained, than the Blue Stream Project and other gas export schemes.

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