Big reason for hope in Iraq: Oil, and lots of it

McClatchy NewspapersJanuary 26, 2011 

BASRA, Iraq — On a bleak stretch of desert near the Iraq-Kuwait border — half a world away from the Gulf of Mexico and last year's nightmarish blowout — BP is riding high, rapidly developing one of the world's richest oil fields.

The British energy giant plans to drill 3,000 new wells here over the next 10 years and build a town from scratch to house 4,000 employees. BP and Iraqi officials hope the Rumaila field soon will become the second most productive in the world — after Saudi Arabia's Ghawar — propelling the country into competition with Saudi Arabia and its other powerful oil-producing neighbor, Iran.

Iraq sits on the world's third largest oil reserves, after Saudi Arabia and Venezuela, with the biggest known fields lying under the windswept sands outside Basra. Despite aging pipelines, spotty electricity, chronic insecurity and a maze of inefficient bureaucracy, the oil sector is pressing an ambitious expansion plan that will determine Iraq's economic future long after the last American soldiers withdraw at the end of the year.

Earlier this month, thanks largely to the gains at Rumaila, Iraqi officials said that daily oil production had climbed to 2.7 million barrels, the highest level since the U.S.-led invasion nearly eight years ago. Though that's barely a quarter of what Saudi Arabia produces, Iraq claims that within seven years it could surpass its rival by increasing production to more than 13 million barrels per day.

That would be a colossal achievement, and few expect it to happen. But after three decades of dictatorial neglect, economic sanctions and conflict that decimated Iraq's oil sector, the increases so far are "extraordinarily encouraging," said Jim Jeffrey, the U.S. ambassador to Baghdad.

"I can't stress how important that is from the standpoint of Baghdad and the politics and economics of this country as it gets reintegrated with the rest of the world," Jeffrey said during a recent visit to Basra, Iraq's port on the Persian Gulf and the hub of its southern oil region.

The international oil industry views Iraq as one of the last great crude jackpots. Experts think that Rumaila and the nearby West Qurna fields — where a consortium led by Texas-based Exxon Mobil is working — could reshape world markets and bring down oil prices. They also could rattle the Organization of Petroleum Exporting Countries, putting Iraq on a diplomatic collision course with fellow members of the oil cartel.

More immediately, oil could finance Iraq's postwar recovery. Crude exports account for roughly 90 percent of government revenue, more than $190 billion from 2005 to 2009, according to U.S. government figures.

So central is oil to Basra that the province's official seal features a derrick. At the height of the sectarian warfare that followed the invasion, however, it was one of the scariest places in Iraq, a battle zone ruled by Shiite Muslim militias such as Muqtada al Sadr's Mahdi Army and the Iranian-backed Vengeance of God. In 2008, Prime Minister Nouri al Maliki deployed thousands of security forces to retake control.

Today, oil companies worry less about security than about logistics: difficulties securing visas for foreign employees, for example, and long delays in clearing heavy equipment through customs at Basra's airport. Still, the companies employ large private-security details and, in an unusual arrangement, BP and a few other British firms are renting some offices and bedrooms from the British consulate, housed in a bombproof building on the U.S. military base in Basra.

"The British government is not usually in the hotel business," said Alice Walpole, the British consul general in Basra. But the arrangement was "a major help to British companies operating in a particularly challenging environment."

With most of Iraq's new government in place — including a veteran technocrat, Abdul Karim al Luaibi, leading the Oil Ministry — "oil production is likely to increase more rapidly than many forecasters assume," the Eurasia Group, a risk consultancy, wrote in a note to clients this month.

Some experts wonder whether it's expanding too quickly. On Jan. 2, after less than two weeks on the job, Luaibi announced that bidding would start before the end of the year on new blocks for oil and gas exploration in western Iraq, despite concerns over security and the oil sector's ability to serve the existing fields.

"It took a lot of people by surprise," said Ben Lando, the founder of Iraq Oil Report, an industry newsletter. "In seven years you're planning to raise capacity to more than Saudi Arabia, the most oil that any country has ever produced. You don't know what the market is going to look like ... and you are just lacking in the technical and legal capacity.

"To go to a (new) bidding round and stretch yourself even thinner — it's clearly going to be a challenge."

Among the biggest concerns are the old, corroded pipelines that carry three-quarters of the crude that Iraq sells abroad. They were last inspected in 1991 and "are ready to burst or at least drastically leak," Lando said. Some of the aging pipelines are underwater, mainly those that connect the port to offshore terminals.

Iraqi officials acknowledge the danger of a spill but they argue that shutting down even temporarily would cost millions that the government needs for reconstruction.

Instead, Iraq has opted for a combination of quick fixes — injecting a chemical into the piped oil to reduce pressure on the pipelines, for example — and some big initiatives. In September, a Singaporean firm inked a deal to build a $733 million offshore oil terminal that's projected to double Basra's export capacity by early next year.

For all the activity, however, the oil sector has generated relatively few new jobs so far in a country where unemployment is estimated at 30 percent. Some say that Iraqi officials are focusing too heavily on oil when promoting agriculture and small business development would do more to spur employment.

"Nowhere in the world has the oil industry been the response to huge job-creation needs, particularly for young people," said Ad Melkert, the U.N. special envoy to Iraq. "This requires an effort way beyond the oil industry."

BP says it's doubled the number of workers at Rumaila over the past 12 months to 10,000, although the company didn't specify how many were in new jobs.

The payoff for the oil majors could be massive. BP, for example, pledged last year to set aside $20 billion in a fund to compensate victims of the Gulf of Mexico spill. The company expects that Rumaila, where it heads a consortium that includes PetroChina and a state-owned Iraqi firm, one day could produce 2.85 million barrels of oil per day.

If it does, and with oil at today's price of about $90 a barrel, the field would generate $20 billion in about 11 weeks.

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For more news from the Middle East, visit McClatchy's blog, Middle East Diary.

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