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Iraq: Oil Output Is Up, But Pace Of Future Growth Uncertain

Iraqi oil officials say the country's oil sector is now routinely producing close to 2.5 million barrels per day -- about the same amount Iraq produced just before last year's war. That is good news for Washington, which is counting on Iraqi oil revenues to fund much of the country's reconstruction. But it remains uncertain how much further output can grow before the dilapidated state of many oil fields forces engineers to slow down and make further repairs.

Prague, 31 March 2004 (RFE/RL) -- Iraqi oil production slumped dramatically following the U.S.-led invasion last year, but it is now routinely back up to immediate prewar levels.

In past weeks, daily production has been running between 2.3 and 2.7 million barrels per day (bpd). That is right around the prewar average of 2.5 million bpd.

The sustained high level of output is good news for Washington, which has raced to get oil production back up as quickly as the dilapidated state of Iraq's oil infrastructure allows. The United States plans to fund much of the country's reconstruction through oil revenues.

The U.S.-led Coalition Provisional Authority (CPA) announced last week that sales of Iraqi oil have generated some $6.6 billion since the toppling of Saddam Hussein, and that the money has been deposited into the CPA's Development Fund for Iraq. That money is in addition to the some $33 billion pledged for Iraq's reconstruction by the international community -- more than half from the United States.

But as U.S. and Iraqi oil engineers push to raise output, it is far from certain whether production can be further increased -- or even sustained at current levels -- in the near future.

Gerald Butt, an oil industry analyst with the Cyprus-based Middle East Economic Survey, says the current production level will likely have to drop in the short term to allow engineers to make badly needed repairs.

"I think it's not going to be sustainable at this level. A time is going to come when a serious amount of rehabilitation work will need to be done on existing fields, and that will have to be done before any other fields can be found to make up the shortfall that comes about when production is cut back from those fields that need attention," Butt says.

He also notes that Iraq's oil sector remains beset by uncertainties, ranging from still unreliable -- though improving -- electricity supplies to security problems.

"There are so many uncertainties, not least the security and not least the ability of engineers to keep functioning a lot of equipment that is badly in need of repair, not just at the oil fields but at pumping stations and so on. There are questions about the electricity supply and, while it has improved enormously over recent weeks, it still is not 100 percent reliable," Butt says.

A top Iraqi oil official said recently that Washington's slowness to release new money for oil-field repairs adds to the uncertainty surrounding further production increases.

The U.S. daily "The Wall Street Journal" recently quoted the head of Iraq's State Oil Marketing Organization (SOMO) as saying that production can only increase with substantial further investments.

SOMO head Shmakhi al-Faraj said, "If we don't really invest, if we don't keep things rolling, then we can't increase production."

The U.S. Congress recently approved an additional $1.2 billion for oil-field repairs, but the funds reportedly have yet to be released to the Iraqi Oil Ministry. Oil-field repairs to date have been through an earlier $2.5 billion contract awarded to a subsidiary of the U.S. oil-services company Halliburton.

Much of the revival of Iraqi oil production has occurred in the southern fields, which are in Shi'a-majority areas and have experienced fewer security problems than some other parts of the country. By contrast, production in Iraq's northern fields has until recently been choked by the persistent sabotage of pipelines.

The security problems are now reported to be easing with the increasing deployment of what will be a 14,000-strong police force patrolling the pipelines. Iraqi engineers this month resumed pumping limited amounts of crude oil along the much-targeted pipeline link between the northern fields around Kirkuk to Turkey's Mediterranean port of Ceyhan.

But observers say the Kirkuk-Ceyhan pipeline is still carrying just 200,000-300,000 bpd, well below its capacity of some 800,000 bpd.

Oil analyst Butt says: "At the moment, they are filling the tanks at Ceyhan, testing the pipeline and doing it on a slow, bit-by-bit, incremental basis, simply because of fears about the state of the pumping equipment, the pipeline itself and the overriding fear of security. Although it has to be said that security has improved enormously over the past few weeks. The police force set up to guard the pipeline appears to be effective."

The CPA has said it hopes to see Iraq routinely producing 2.5 million-3 million bpd by the end of this year -- something comparable to output before the 1991 Gulf War. Iraq reached production levels of 3.5 million bpd for several years while under UN sanctions in the 1990s, but oil analysts say it risked damaging its oil fields to do so.

As oil engineers now strive to raise production, Iraq is making good progress in also increasing its capacity for getting oil to world markets.

SOMO announced in February that it had revived a second offshore oil terminal in the Persian Gulf. The terminal, called Khor al-Amaya, was effectively put out of commission by U.S. and British bombing in 1991. SOMO is reported to be doing some test loadings there this month in hopes of ultimately achieving a capacity of 800,000 bpd.

At the same time, Baghdad has agreed in principle with Tehran to build a 10-kilometer pipeline across the Shatt al-Arab waterway to Iran's Abadan refinery. The Iraqi Oil Ministry says the pipeline could be completed by early summer and would ultimately carry up to 350,000 bpd. Iran would use the Iraqi oil to help supply its Abadan refinery, thus freeing Tehran to export extra crude of its own via terminals farther to the southeast.

Finally, Iraq has recently agreed with Kuwait to send oil by road, rail, and barge to Kuwaiti terminals for loading on supertankers. The temporary arrangement is reported to likely begin sometime after May and reach a capacity of 250,000 bpd.

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