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Iraq: Government Struggles To Revive Oil Infrastructure

  • Kathleen Ridolfo --> Insurgent attacks on pipelines have led to soaring prices and shortages (epa) PRAGUE, August 31, 2006 (RFE/RL) -- Iraqi Prime Minister Nuri al-Maliki announced to reporters in Baghdad on August 29 that the four-month-long oil crisis has ended. Al-Maliki said the Oil Ministry, under the leadership of minister Husayn al-Shahristani, has taken appropriate steps to contain the crisis.

While it appears that the government has a short-term plan to address the crisis, it remains unclear whether Iraq has a plan to meet the country's long-term oil needs.

Much will depend on the state of security in the coming months. According to recent press reports, the Oil Ministry intends to bring several new refineries online, while continuing to increase imports of refined products. Output has been a recurring problem due to dilapidated equipment and repeated insurgent attacks.

Oil smuggling, particularly from the southern port of Al-Basrah, has become rampant, according to some observers. Still, the Southern Oil Company announced this week its intention to increase output from southern fields from under 2 million barrels per day (bpd) to 2.5 million bpd by year-end.

Output in the north came to a virtual standstill in July, when insurgents blew up a pipeline linking the Bayji refinery and the Al-Dura refinery in Baghdad. Together, the two refineries were responsible for 80 percent of the country's refining. Whereas Iraq once produced about 20 million liters of gasoline per day in 2003, it now produces around 3 million liters per day.

Oil Minister al-Shahristani told reporters on August 29 that Iraq has begun to increase imports from its neighboring to supplement domestic production. The ministry's latest figures indicate that imports have been raised from 8 million liters to 11 million liters per day.

Unreliable Neighbors

Iraq previously relied heavily on exports through Turkey, but insurgent attacks have repeatedly disrupted exports through the Kirkuk-Ceyhan pipeline. When the pipeline is down, northern exports flow solely through massive truck convoys. Oil tankers transport the crude out, refine it, and truck it back in, which is both costly and time consuming.

Trucking oil abroad to refine it is costly and slow (RFE/RL file photo)

In addition, tensions between the two countries arose after Turkey demanded that Iraq agree to buy oil from 17 specific companies, a demand al-Shahristani said was unreasonable.

Some of the oil will reportedly come from Syria. North Oil Distribution Company Director Muhammad Zebari announced earlier this month that the two countries reached an agreement whereby Syria will supply Iraq with fuel.

Al-Shahristani met with his Iranian counterpart, Kazem Vaziri-Hamaneh, in Tehran earlier this month to discuss exchanging Basra light crude for liquefied petroleum gas (LPG) and kerosene produced in Iran. According to Iranian press reports, the two countries signed a memorandum of understanding for Iran to import 100,000 barrels of crude oil per day from Iraq for refining in the Abadan and Kermanshah refineries in exchange for some 2 million liters of paraffin.

The two countries signed a memorandum of understanding last year for the construction of a pipeline between Abadan and Al-Basrah whereby Iraq would supply crude oil to Iran in exchange for gasoline, oil, gas, and kerosene. That project has yet to get off the ground.

Iraq also concluded a new deal this month with Jordan to supply the Hashemite Kingdom with 30,000 bpd of crude oil at "preferential prices," Jordanian Prime Minister Ma'ruf al-Bakhit told parliament this week, Amman's "Al-Dustur" reported on August 28. The details of the deal have not been made public. Iraq and Jordan also signed a memorandum of understanding for the construction of a pipeline between Iraq and the Jordanian port of Al-Aqabah.

Jordan imported some 100,000 bpd at subsidized prices before the fall of the Hussein regime. Al-Bakhit said that Jordan hopes to eventually increase imports to 60,000 bpd.

Prime Minister al-Maliki (left) and Oil Minister al-Shahristani on August 29 (epa)

The new deals will not only help stabilize supply lines, they will also bring in much needed cash to the faltering economy. Iraq's Central Bank noted last week that inflation soared to 70 percent in July, with a concurrent surge in commodity prices. The bank attributed the rise to fluctuations in oil revenues due to sporadic exports.

Upgrading Infrastructure

Al-Shahristani said on August 21 that Iraq plans to build several new refineries and upgrade existing ones by 2010. One mega-refinery will produce 140,000 bpd of gasoline, diesel, and kerosene, AP reported on August 23. New processing plants will be built at the Bayji, Al-Dura, and Al-Basrah refineries, upping the capacity of each refinery by 70,000 bpd. A new refinery will also be built in Koya, with a production capacity of 70,000 bpd.

Long-term development of Iraq's oil fields will take longer and depend largely on security and a transparent investment law. Oil executives recently told Reuters that they would not do serious business in Iraq until both conditions are met, the news agency reported on August 23. Smaller companies have begun prospecting in the Kurdish region, but bigger firms say that such activities are risky. Kurdish officials counter, however, that the region's new investment law and the Iraqi Constitution make investment virtually risk-free.

Deputy Prime Minister Barham Salih told reporters earlier this week that the government is now reviewing a new hydrocarbon law, which will be presented to parliament by the end of the year, Reuters reported on August 29. The law, which aims to restructure the oil industry, would open the door to foreign investment, he claimed. With the right investment climate, Salih predicted production could reach 6 million bpd by 2012.

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