[OPE-L:8494] NYTimes.com Article: Iraq Is a Strategic Issue for Oil Giants, Too

From: rakeshb@Stanford.EDU
Date: Sat Feb 22 2003 - 03:14:21 EST

This article from NYTimes.com 
has been sent to you by rakeshb@stanford.edu.

Iraq Is a Strategic Issue for Oil Giants, Too

February 22, 2003


Even though Iraq has the world's second-largest oil
reserves, after Saudi Arabia, oil companies do not expect
to reap the benefits quickly if Saddam Hussein is ousted. 

Those companies, of course, admit they are eager to develop
Iraq's oil fields, but they see Iraq as one more oil-rich
country that will deal with them only on the toughest

"For any oil company, being in Iraq is like being a kid in
F. A. O. Schwarz," said one senior European oil executive.
"The Iraqis need the foreign money and technology, and they
will have to go to the international oil companies for
that. But oil is their blood, and they won't give the shop

Oil companies, industry executives and experts say, will be
reluctant to invest in Iraq unless they have a wide range
of guarantees. On the broadest level, foreign oil concerns
question how stable Iraq would be after a war. 

More to the point, executives and analysts say, oil
companies worry about how the Iraqi oil industry would
evolve. In what oil fields would the Iraqis want foreign
involvement? What kinds of contractual terms would any new
Iraqi government offer? What legal protections would
companies working in Iraq have. 

What is already apparent is that within the Iraqi oil
bureaucracy, "there is close to unanimity" that "natural
resources should remain under the sovereignty of the
state," according to a recent paper presented at an energy
conference in Houston by Issam A. R. al-Chalabi, a former
Iraqi oil minister and now an independent consultant based
in Amman, Jordan. 

"Foreign oil companies are definitely interested in Iraq,
but they agree that it will take a while to get there," Mr.
Chalabi said in a telephone interview. "The current mood
among oil companies is to wait and see. They're not in a
hurry. Rather, they're waiting for the picture to become
clearer. And I don't blame them." 

International oil companies already understand that getting
a piece of the most promising oil fields in the world, in
places like Russia and the Middle East, is as easy as
trying to dig out of prison with a spoon, and oil industry
executives said they expected such difficulties in Iraq. 

In the Persian Gulf particularly, where oil is the primary
source of income, most nations drive an exceedingly hard
bargain with foreigners. For example, despite years of
negotiations, deals to develop natural gas fields in Saudi
Arabia and oil fields in Kuwait remain distant. Such
limited access to the world's best new fields has meant
that the global oil giants find it harder every year to
increase their production substantially. 

"The Iraqis may be caught between two tendencies: speed,
which means attracting oil companies as soon as possible
and that means offering favorable terms, and nationalist
feeling," said Vera de Ladoucette, a senior director at
Cambridge Energy Research Associates, a consulting group
that sponsored the Houston conference. "It requires finding
a balance between attracting the oil companies and keeping
as much for Iraq as possible. And that is a fine balance." 

Under the United Nations oil-for-food program, which
determines how much oil Iraq can export, Baghdad negotiated
production-sharing contracts in the mid-1990's with several
oil companies, including Lukoil of Russia and TotalFinaElf
of France, before coming back and negotiating new contracts
under much tougher terms, Ms. de Ladoucette said. (Those
contracts, experts say, are likely to be reviewed by any
new government in Baghdad.) 

Such a hard-nosed approach to foreigners, regional experts
say, reflects Iraq's difficult history developing its oil
industry. And it may augur how the Iraqi oil establishment,
if most of it remains intact after a war, would continue to
deal with outsiders. 

Under a 1920 treaty between France and Britain, the British
were essentially given control over Iraq's oil reserves.
For decades, the ancestors of some of the world's largest
oil companies, like Exxon Mobil, the Royal Dutch/Shell
Group, BP and TotalFinaElf, developed Iraq's oil. At the
same time, a parallel Iraqi oil industry gained expertise
by sending engineers and geologists to study abroad.
Gradually, Iraq wrested control from foreign companies,
culminating in the nationalization of foreign holdings in
the early 1970's. 

But Iraq did allow foreigners to continue limited work in
its fields until the Persian Gulf war, mainly as oil field
service companies, said Mr. Chalabi, who was ousted as
minister in 1990 but retains close contact with the Iraqi
oil industry. 

Since 1968, Iraq's oil potential has been nurtured by its
government oil concern, the Iraq National Oil Company,
considered by most in the international oil industry as
among the world's more capable state-run companies. Unlike
employees of other government-held oil companies, employees
at Iraq National built their careers on merit, not on
political affiliation, said Raad Alkadiri, a director at
PFC Energy, a consulting group in Washington. 

Even during the lean last decade, under United Nations
sanctions, the engineers have kept fields pumping, despite
the damage from the gulf war and, since then, the severely
limited access to technology and spare parts. 

"Foreign companies recognize that as far as Iraqi oil
technocrats are concerned, the production risks are
minimal, and consequently the kind of terms that will be
offered on contracts are not going to be giveaways," Mr.
Alkadiri said. "The Iraqis will strike a hard bargain." 

But Iraq has long known that the challenges it faces are so
formidable that significant foreign help is needed. 

Iraq's major oil fields, like Kirkuk in the north and
Rumaila in the south, form a belt along the border with
Iran and have been producing for decades. Fields still to
be explored are in the western desert, near Jordan. Based
on data gathered before the gulf war, the country has 112
billion barrels of proven reserves. But according to Mr.
Chalabi, "there are only 15 developed fields out of 73

Before the gulf war, Iraq had a production capacity of 3.8
million barrels a day; that has fallen to about 2.8
million, Mr. Chalabi wrote. The fields that are working -
along with the pumping stations, pipelines, refineries and
ports - are in dire need of rehabilitation. That task,
industry experts say, will probably be the industry's first
priority if Mr. Hussein is ousted. 

The shortage of parts and technology forced Iraqi oil
workers to resort to pumping methods that kept the oil
flowing but badly damaged oil reservoirs. Analysts said
restoration of fields and facilities would probably be the
first opportunities open to foreign concerns, mainly the
oil field services companies like Schlumberger and
Halliburton. In a report in October, Deutsche Bank
estimated that about $1.5 billion would need to be spent at
the outset to restore fields that are now producing. 

Some critics and some supporters of a possible war have
said that if the United States removes Mr. Hussein, Iraq
will be compelled to open the taps, causing oil prices to
fall sharply. But for oil facilities to be repaired, some
might have to be shut first, and Iraqi production could
actually decline, industry experts say. That reduction of
supplies, in turn, might buoy short-term oil prices. 

For global oil companies, the true prize would be working
on large new fields - and Iraq promises plenty of those.
Mr. Chalabi, in his paper, wrote, "Iraq has the potential
to produce 4.7 million barrels a day more oil from
discovered fields that are ready to be developed." 

With the right investments, Iraq could be producing around
six million barrels a day by 2010, he estimates. Actual
production might be lower if Iraq remains a member of the
Organization of the Petroleum Exporting Countries and
accepts tight export quotas to try to help bolster prices. 

Yet any new development would require substantial
investment, and few experts venture to estimate how much
would be needed. And oil companies say they expect the
Iraqis to look at the rest of the world to figure out what
kind of contracts they should offer foreigners. 

According to Mikhail Khodorkovsky, chief executive of
Russia's largest oil company, Yukos, the Iraqis could opt
to lease fields in blocks, as the Norwegians do. But it is
more likely, he and other experts say, that Iraq would look
at what its neighbors are doing in the Persian Gulf and
take that as an example. If that proves to be the case,
international oil companies may have to wait years for
favorable terms to develop new fields in Iraq. 

After the gulf war, Kuwait welcomed Western oil field
service companies to rebuild wells and facilities destroyed
by the Iraqi army and allied bombing. Little has happened
since. In the late 1990's, Kuwait began an effort to work
with Western oil companies like Exxon Mobil and BP to more
than double the production of its northern fields, to about
900,000 barrels a day from about 400,000 barrels. But the
effort has stalled in the Kuwaiti Parliament, and no
contracts have been signed. 

With the blessing of Crown Prince Abdullah, Saudi Arabia
began negotiations four years years ago with three oil
consortiums to develop several large natural gas fields.
Many oil companies jumped at the chance, because they
thought it might be the first step to winning contracts
someday to work on Saudi Arabia's huge reserves. Yet
despite the high-level backing, the talks have slowed to a
glacial pace, largely because of the resistance of the
Saudi state oil company, industry experts say. 

Around the world, oil-rich countries guard their resources
jealously. Mexico, for example, issues contracts to foreign
companies only for oil field services, not for oil
exploration and production. Foreign oil companies have been
trying for more than a decade to gain a significant stake
in the Russian oil sector. Yet the lack of a favorable tax
structure and strong legal protections have largely kept
them at bay. 

On Feb. 11, BP, the world's third-largest oil company, said
that it would form a new Russian oil company with local
partners and would plow $6.75 billion into the project, the
single largest investment in post-Soviet Russia. Still,
other global oil companies have said they will wait to see
how BP's investment proceeds - and if Russia institutes
certain tax and regulatory changes - before investing
substantially more there. 

The world's largest oil companies complain that because of
such barriers, oil production is growing at a far smaller
pace than they had forecast just a year ago. Many American
and British companies hold as their core assets stakes in
the North Sea, Alaska and the shallow waters of the Gulf of
Mexico, areas where production is declining. In the last
few weeks, companies like BP, Royal Dutch/Shell and
ChevronTexaco announced that they missed their production
growth targets for 2002 and would no longer be providing a
specific forecast for increasing output. 

"The industry feels Iraq may be different" - that it may
open up more quickly to foreigners than its neighbors have,
said Roger Diwan, managing director at PFC Energy., "But
the terms are not going to be good, and people know that." 


For information on advertising in e-mail newsletters 
or other creative advertising opportunities with The 
New York Times on the Web, please contact
onlinesales@nytimes.com or visit our online media 
kit at http://www.nytimes.com/adinfo

For general information about NYTimes.com, write to 

Copyright 2002 The New York Times Company

This archive was generated by hypermail 2.1.5 : Sun Feb 23 2003 - 00:00:00 EST