A War for Bananas? - Part IV, Iraq

The Pools

With proven reserves of 112-billion bbl and probable reserves of 214-billion bbl, Iraq has the second largest crude reserves in the world after Saudi Arabia. It also has 110 trillion cubic feet of natural gas.

Two-thirds of Iraq's production comes out of southern fields in the Shi’ite zone of the country. Although much of the southern oil infrastructure was damaged during the Gulf war, the oil potential of this region alone is huge. More huge, still, is the untapped Western Desert region under which lie an estimated additional 100 billion barrels.

The Pipes

The presently proven reserves are serviced by four pipeline networks:

1. Iraq-Turkey. The 600-mile, 40-inch Kirkuk-Ceyhan pipeline is Iraq's largest operable crude export pipeline. It services the European market. This Iraq-Turkey link has a fully-operational capacity of 1.1 million bbl/d, but is working at about 900,000 bbl/d. A second, parallel, 46-inch line has an optimal capacity of 500,000 bbl/d but at last report was inoperable.

2. Iraq-Syria. The 50-year-old, rusting Banias oil pipeline from Iraq's northern Kirkuk oil fields to Syria's Mediterranean port of Banias (and to Tripoli in Lebanon) was considered defunct; but, as of October 2002, the pipeline reportedly was being used (see above), and there also was talk of building a new, parallel pipeline as a replacement.

3. Persian Gulf Outlet. Iraq has three tanker terminals in the Persian Gulf. These terminals are linked to a reversible, 1.4-million bbl/d North-South pipeline built by Iraq in 1975. The system allows for export north through Turkey or south to the Persian Gulf. However, the entire system was severely damaged during the Iran-Iraq and Gulf wars.

4. Iraq-Saudi Arabia. Iraq has also pumped oil through Saudi Arabia to the Red Sea port of Yanbu (Mu'jiz) . However, in June 2001, Saudi Arabia announced that it had confiscated the line included pumping stations, storage tanks, and the maritime terminal. Iraq insisted that it still owned the pipeline, and in May 2002, stated that the line was "ready for export." (In addition to these transportation networks, Iraq trucks oil to Jordan, but this arrangement is of local benefit only.)
Production Problems

Iraq’s entire oil infrastructure was seriously degraded during the Iran-Iraq and Gulf wars and Iraq has resorted to old technology and questionable techniques (i.e., over pumping, water-injection or "flooding") to maintain production even though the questionable techniques could permanently damage some reserves. Notwithstanding the obvious need for serious capital improvements, the U S government Energy Information Agency (EIA) states: “Iraq's oil production costs are amongst the lowest in the world, making it a highly attractive oil prospect.”

However, as of the moment, Iraq deals with just about everyone except American companies who are out of the prospects largely on account of unilateral sanctions imposed by the US government.

Sales

An estimated 30% of Iraqi oil is sold initially to Russian firms. The remaining 70% of Iraq's oil is sold to a grab-bag of countries including Cyprus, Sudan, Pakistan, China, Vietnam, Egypt, Italy, Ukraine, and others. Iraqi oil is normally then resold to a variety of oil companies and middlemen before being purchased by end users, among them: Exxon/Mobil, Chevron, Citgo, BP, Marathon, Coastal, Valero, Koch, and Premcor. In this indirect manner the United States imported an average of 566,000 bbl/d from Iraq in the first half of 2002.

Thus, although U.S. companies do not deal directly with Baghdad and although they are not, at present, involved in production, the United States has become the greatest single end-purchaser of Iraqi oil.

According to ABC News, as of mid 2000, the U.S. refiners largely obtained their crude oil from Russian firms, or middlemen working through Russian firms. However, an authoritative Iraqi source says that as much as 90 percent of the actual amount of Iraq's estimated 1.8 million barrels per day (bpd) are going to U.S. Gulf coast refineries. This was confirmed by the authoritative oil journal Middle East Economic Survey. There is such demand for Iraqi crude in the United States, the report says, that Saddam is banking on it to mitigate the Bush administration's enmity toward his dictatorship in Iraq, and therefore, any attempts to oust him.

Official sales are effected through the United Nations, oil-for-food program. Until early2000, the transactions were posted on a public web site. However, when the Washington Post began to trace deals to companies run by members of the Bush II team, the U.N. closed the site down claiming the information was proprietary. According to the Post, the veil of secrecy allows the U.S and Iraq to engage in their respective public posturing while dealing under the table.

In addition to the above official and U.N. approved sales, the U.S. General Accounting Office estimates that, from 1997 to 2001 Iraq earned $6 billion dollars from illegal oil sales using small tankers sailing under Persian or other false cover.

Development

Russia, which is owed several billions of dollars by Iraq for past arms deliveries, has a strong interest in Iraqi oil development, including a $3.5-billion, 23-year deal to rehabilitate Iraqi oil-fields. The other major development player is China. Another grab-bag of countries from Indonesia to Spain are involved in lesser degrees.

1. Southern Fields:

Iraq hopes to counter production declines in this area by a large-scale program to drill new wells most of which are to be carried out by Russian, Chinese, Iraqi, and Rumanian companies. In October 2001, a joint Russian-Belarus oil company, Slavneft, signed a $52 million service contract with Iraq on the 2-billion-barrel, Suba-Luhais field in southern Iraq, and expecting to sign a service contract to begin drilling later this year. Another Russian company, Lukoil, has a concession to spend $4 billion to develop a "super" oil field in southern Iraq with reserves estimated at 15 billion barrels or the equivalent of the recovery from the North Sea. In October 2002, Lukoil's Chief Executive (Vagit Alekperov) said his belief that the West Qurna contract would "be upheld no matter what happens" in Iraq, and that he had received "guarantees" on this matter from Russian President Vladimir Putin.

2. Northern Fields

The Kirkuk field, with over 10 billion barrels in remaining proven oil reserves, forms the basis for northern Iraqi oil production. In December 2001, the Turkish Petroleum International Corporation won a U.N.-approved contract to drill for oil in northern Iraq, near Kirkuk. Two Russian companies -- Tatneft and Zarubezhneft -- have won U.N. -approved upstream contracts at the Bai Hassan fields.

3. The West & Smaller Fields.

Smaller fields with under 2 billion barrels in reserves also are receiving interest from foreign oil companies, among them Eni (Italy), Repsol (Spain), Pertamina (Indonesia), PetroVietnam, Noor (Syria) and others . Italy's Eni and Spain's Repsol appear to be strong possibilities to develop Nassiriya. Indonesia's Pertamina signed an exploration contract for Block 3 in the Western Desert. Other companies reportedly interested in the Western Desert region include: Repsol, Lundin, Sonatrach, MOL, Petronas, Ranger, and TPAO.

In total, Deutsche Bank estimates that international oil companies in Iraq may have signed deals on new or old fields amounting to nearly 50 billion barrels of reserves, 4 million bbl/d of potential production, and investment potential of more than $20 billion.

©WCG, 2003