Toppling Hussein could restore Iraq as a top player in oil market

WASHINGTON—For oil companies and governments in the United States and around the world, there's more at stake in Iraq than weapons of mass destruction. There's oil.

Iraq has the world's second largest oil reserves, after Saudi Arabia's. Toppling Saddam Hussein could restore Iraq as an influential player in the world oil market. Development of Iraq's vast oil reserves—largely suspended during two decades of war and U.N. sanctions—could push down global oil prices and produce a windfall for those oil companies that win the exploration and development contracts.

One camp of political analysts even suggests that, at a time of strained U.S.-Saudi relations, an oil-rich Iraq could lessen U.S. dependence on Saudi Arabia. Those hopes are probably overblown, oil market experts say.

Such theories are "based more on fantasy than on knowledge," said James Placke, a senior associate with Cambridge Energy Research Associates, a consulting company, and a former senior State Department Middle East official.

Any new production from Iraq or other countries such as Russia would provide a limited cushion against a cutoff of oil elsewhere. But Iraq's oil production isn't likely to be large enough to erode Saudi oil power anytime in the foreseeable future.

During the first 10 months of 2001, Saudi Arabia supplied the United States with 1.6 million barrels per day of crude oil, or 18 percent of U.S. crude oil imports. In 2001, the United States imported 778,000 barrels a day of Iraqi oil through third parties.

A major issue for Iraq is its crumbling infrastructure. It's one thing to have oil in the ground. It takes years of costly investment to build the facilities to get it out and to market.

Iraq, which produced 3.5 million barrels a day at its peak in 1990 just before the Persian Gulf War, now can pump only 2.8 million to 3 million barrels because of war damage to facilities and maintenance neglect.

Iraqi oil ministry officials have talked about boosting production to 6 million barrels a day in seven years. Even that might be optimistic. Just getting Iraq back to the 3.5 million barrel a day level could take three to five years, Cambridge Energy estimates.

Saudi Arabia produces about 7.4 million barrels of oil a day and has the capacity to pump at least 10 million barrels, according to the U.S. Energy Department. By 2010, eight years from now, Saudi capacity is expected to reach 15 million barrels a day, according to U.S. Energy Department projections.

"Saudi Arabia is just such a dominant player that you're not going to remove the Saudis," said Raad Alkadiri, an analyst with the Petroleum Finance Co., a consulting group in Washington. The nation has the capacity to pump so much oil that "you're not going to be able to ignore it. Iraq can't replace it."

The end result of new Iraqi production could be increased Western dependence on the Mideast.

"With any of these things, you have to be careful what you wish for," said Lowell Feld, an international energy markets analyst with the Energy Information Administration, a division of the Energy Department.

In the short term, a regime change in Iraq could have a modest impact on oil prices. Iraq currently is producing at least 1 million barrels less than its capacity, largely because of a dispute with the United Nations over an oil-for-food program that limits how Iraq can use its oil revenues.

If the sanctions were lifted, Iraq might add a million barrels a day to the market in quick fashion, which could shave $1 to $2 off the price of a barrel of oil, depending on whether other oil exporters cut production to offset the new Iraqi supply. Oil is trading at around $30 a barrel, which is 42 gallons.

Iraqi oil development still would be lucrative for oil companies. Russian and French companies have been cutting deals with Iraq to develop its oil resources, though they are unlikely to proceed unless the U.N. restrictions on Iraqi oil sales are lifted. U.S. companies have to wait on the sidelines because the government bars them from doing business with Iraq.

"A lot of oil companies are very optimistic about what you're going to see," Alkadiri said.

Iraq has proved reserves of 113 billion barrels, less than half of Saudi Arabia's 265 billion barrels. But Iraq may have much more oil, say experts, noting that the latest oil searching techniques have not been applied because there has been virtually no exploration in more than 20 years.

"No one really knows the full extent of Iraqi reserves," Placke said. "Iraq went into the isolation booth at the start of the Iran-Iraq war in 1979."

The rights to develop Iraqi oil could be a contentious point in seeking Russian support for any military action against Saddam. The Russians would like to see their deals preserved, but the United States would not want to shut its firms out.

"We will certainly have an interest in ensuring an open and level playing field for our oil companies," a senior U.S. envoy in Moscow said. "It's not like we're going to be giving all that to Russia."


(Knight Ridder Newspapers correspondent Mark McDonald in Moscow contributed to this report.)