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Iraq: Minister Has Ambitious Plans For Oil Sector

  • Kathleen Ridolfo --> Insurgent attacks against pipelines have scared off investors In May, transitional Oil Minister Ibrahim Bahr al-Ulum set an ambitious program to encourage productivity and foreign investment in the oil sector. The plan calls for reducing attacks on Iraq's oil infrastructure, reducing corruption in the oil sector, and improving fuel availability at home.

Bahr al-Ulum also plans to merge North Oil Company, South Oil Company, the Oil Exploration Company, and the Iraq Drilling Company into an Iraqi National Oil Company by the end of the year. The merger would reportedly create the third-largest oil company in the world in terms of reserves, behind state-run Saudi Aramco and the National Iranian Oil Company.

Other initiatives include the establishment of a "technical committee" with Rio de Janeiro-based Petrobras that will advise Iraqi oil companies about increasing output, reported on 25 May.

The success of the program depends on Iraq's ability to meet the Oil Ministry's primary goal -- establishing security. Recurrent insurgent attacks have left the northern system -- which exports oil through a vast pipeline to Turkey -- nearly crippled. Former interim Oil Minister Thamir al-Ghadban cited 642 attacks on Iraq's oil infrastructure in 2004, costing $10 billion, according to a June 2005 U.S. Department of Energy country-analysis brief ( Al-Ghadban told "Al-Hayat" in February 2005 that there has been a marked increase from the 77 reported attacks in 2003.

Part of the problem remains a shortage of security personnel to secure Iraq's vast pipeline network. In the north, the oil industry has hired tribes to secure Iraq's pipelines, copying a practice used by the Hussein regime. But some oil officials have claimed for more than a year that the tribes -- whether out of revenge or for profit -- are behind the majority of attacks on the pipelines. The tribes, in turn, have blamed the 1,500-strong oil-pipeline-protection force, saying the force has not done enough to protect the pipelines. Tribal leaders outside the program could also be behind the attacks.

While attacks against Iraqi oil installations and pipelines have brought export production in the north to a near halt, there are worrying signs that an increase of attacks on southern oil facilities could increase soon. There have been at least two reported incidents in the past month of raids by insurgents on tankers docked at the Al-Basrah export terminal. U.S.-led forces have since increased patrols in and around the Al-Basrah terminal -- something that was said to have been done in mid-2004 after insurgents loyal to Abu Mus'ab al-Zarqawi carried suicide boat attacks at the terminal.

Hesitant Investors

Investors are likely to remain hesitant about investing as long as insecurity remains an issue. Likewise, Iraq's political stability remains tenuous at best, leaving investors apprehensive about launching major projects inside Iraq. Numerous trade publications report that most foreign oil companies have limited their activities thus far to technical training and consulting. The goal of foreign investors appears to be one of getting their foot in the door without making enormous financial investments in such an unpredictable environment.

As of May, some 30 companies had reportedly signed memorandums of understanding (MOUs) with Iraq. The majority of the contracts are for engineering, procurement, and construction and "generally cover the training of Iraqi staff (often for free), consulting work, and reservoir studies (also often for free). The MOUs are generally considered to be a way for oil companies to show their interest in future Iraq work, gather technical data, and to demonstrate their capabilities. In addition, the MOUs can help companies establish relationships that could be useful in the future, when Iraq is ready to start awarding major oil and gas development projects," the U.S. Department of Energy report said.

But with the Iraqi Oil Ministry's announcement last week of a 10-year plan to more than triple oil production to 6 million barrels per day in the next six to 10 years (current exports remain at 1.5 million barrels per day largely due to insurgent attacks and a crippled infrastructure), it will need some $20 billion in foreign investment, the ministry's director-general, N. K. al-Bayati, said at the Asia Oil and Gas Conference organized by Malaysia's government-owned petroleum corporation Petronas in Kuala Lumpur last week, AFP reported. In order to meet its goals, Iraq plans to seek foreign assistance in the development of 11 oilfields, the ministry's field development chief, Hazim Sultan, told Reuters on 13 June.

Petronas is among the foreign companies currently courting Iraq, and it hopes to gain valuable contracts with the Iraqi government for the development of Iraq's biggest oil reserve near Al-Basrah. Petronas Chief Executive Hassan Marican commented on the talks on 13 June, saying, "any oil and gas player cannot ignore Iraq." Petronas has reportedly been providing Iraq with limited technical assistance and training.

After a year of talks, Iraq is also poised to sign a deal with Iran in which Iraq will send oil to Iran's Abadan refinery for processing. Iranian media reports in early June indicate that a deal is expected to be signed during Bahr al-Ulum's upcoming trip to Iran. Bahr al-Ulum has repeatedly stated Iraq's readiness to work with Iran in the field of oil, a position he took as oil minister under the now-defunct Iraqi Governing Council. Turkish company AvrAsya Technology Engineering secured a contract in December to develop the Khurmala field near Kirkuk, while Canada's OGI Group will help develop the Hamrin field, southwest of Kirkuk.

A consortium of Shell, BHP Billiton, and Tigris Petroleum reached an agreement with the Oil Ministry in January to boost production from fields in the Maysan area of southeastern Iraq, including the Halfayah field. Contracts were also awarded to several companies to evaluate fields west of the Rumaylah fields in southern Iraq. Oil giants Shell and BP stayed away from the bidding process last summer, reportedly due to the small size of the contracts first tendered and the security situation. "We obtained a copy of the tender but the scope and contract format are not compatible with our aspirations for long-term risk-reward contracts," quoted a Shell spokesman as saying in a 9 July 2004 report.

Russian oil companies, meanwhile, have undertaken a number of initiatives aimed at both new development contracts and the reinstatement of contracts initiated with the former regime. Lukoil began training Iraqi oil workers in Russia last year in an effort to get back the lucrative West Qurna contract (see "RFE/RL Newsline," 25 June 2004). Soyuzneftegaz and other companies are in talks to develop the Rafidayn field. Other Russian companies have partnered with foreign firms in an attempt to secure deals in the Iraqi market. Stroitransgas has maintained a contract signed by the Hussein regime for development of Block 4 southwest of Al-Fallujah.

Still, it appears security is a main concern of investors. Iraq announced in 2003 that it would uphold an agreement with Indonesia's Pertamina for development of Block 3 in western Iraq. The announcement prompted Pertamina to announce a $24 million investment over three years in Block 3 only to suspend its activities eight months later due to the security situation.

Bahr al-Ulum insists that Iraq is taking some measures to increase security. "In general we do have two problems: loss of security in the north and lack of investment," quoted him as saying on 15 June. "Also there are technical problems in some of the oil fields and we're trying to accommodate these problems. If we would like to get back to our get 5 to 6 million bpd [barrels per day] by 2011, we need investment, we need to talk to the oil companies," he said.