Analysis: Problem, promise of Iraq's oil
By KATE WALKER
UPI Correspondent
Prior to the Iraq war in 2003, it was presumed the country's potentially vast oil wealth -- the country sits on the world's third-largest oil reserves -- would assist in the reconstruction effort.
The U.S. administration had projections showing estimated post-war oil output levels of 3 million barrels per day. By December 2005, bad weather, poor infrastructure and sabotage saw output as low as 1.4 million bpd, less than half that needed to rebuild a country still affected by war.
Navy Capt. Michael Sherbak, of the Iraq Project and Contracting Office, told the Los Angeles Times last month the impetus behind the oft-quoted figure of 3 million bpd was to see Iraq at "a self-sustaining level that is adequate to help them invest in equipment and help them make their oil production more efficient."
But nearly 200 attacks on Iraqi oil installations in 2005 cost the country $6.25 billion in lost revenues, preventing the export of as much as 400,000 barrels per day. Overall production fell by 8 percent in 2005.
"Iraq lost oil revenues worth $6.25 billion in 2005 due to sabotage on the country's oil infrastructure," oil ministry spokesman Assem Jihad told the BBC.
More so than any other country, Iraq's economy depends on oil. Oil revenues make up 94 percent of the government's budget. Consistent and high levels of oil production are necessary to the stability of Iraq's economy.
Returning Iraqi oil output to pre-war levels has long been an aim of the coalition. However, it is an aim that has been stymied by the lack of stability in Iraq: insurgent activity that targets oil infrastructure, general insurgent activity that diverts financial and manpower resources away from the reconstruction efforts and infrastructure -- oil and state -- that has suffered decades of neglect and underinvestment.
"It's taken a lot longer than we thought (because) the problems were greater than what we thought coming in," the L.A. Times quoted an unidentified U.S. official as saying. "I didn't realize the underlying infrastructure was as weak as it is."
In addition to damages suffered during and since the current war, Iraq is faced with a general lack of crude oil storage facilities and decaying refineries. Key hubs were destroyed in wars in the '80s and '90s, and financial sanctions imposed on the country led to a decline in investment and repair work on existing structures, which, in turn, has led to leaking pipelines and additional loss of revenues. The infrastructure as a whole is old, and has long been neglected.
"There is no instant turnaround (for Iraq)," said Paul Horsnell, energy analyst at Barclays Capital, told the newspaper. "It could take five years, six years or seven years."
In view of declining levels of oil production and a separate decline in export levels, the saving grace for the Iraqi economy in recent months has been the high cost of oil on the global market.
According to data from the World Bank, oil sector recovery and investment, coupled with high prices on the global market, led to real economic growth of 47 percent in 2004. In 2005, however, renewed insurgent activity and a continuing reliance on out-dated oil transport and export infrastructure, saw growth projections reduced to a more conservative 3.7 percent.
In the six years between the introduction of the U.N. oil-for-food program and the start of the war, Iraqi oil output averaged 2.1 million bpd, according to figures from the Economist.
Average output in 2005 was 1.83 million bpd. But production reached lows of 1.4 million bpd, and the average output in December -- a month characterized by the Iraqi elections and a brief reduction in insurgent activity -- was 1.57 million bpd, according to figures from the International Energy Agency.
Insurgent attacks have affected the oil industry even in areas that are otherwise relatively stable.
In southern Iraq, the fields near Basra, which have traditionally produced as much as two-thirds of Iraq's overall oil, have been free of insurgent activity. However, attacks on the transport network and a global perception of Iraq as an unstable country with high levels of insurgent activity affect both the fields' capacity to supply oil, and the markets' confidence in purchasing it.
"Even though the southern oil fields are benign, the overall security affects the perception of the government and institutions," the unidentified U.S. official told the Times. "If the capital is under siege, as this one appears to be, then it's difficult because you have to come here and talk to people to make those investments."
Oil exports are also down, primarily as a result of insurgent attacks on pipelines. Before the war, an average 800,000 bpd of oil was exported to Turkey's Mediterranean Sea port of Ceyhan. In 2005, the average was 40,000 bpd, or five percent of pre-war levels.
The U.S. government has so far spent nearly $2 billion trying to regenerate the Iraqi oil industry. World Bank figures estimate the cost of restoring Iraqi oil output to the much-lauded three million bpd will cost $8 billion.