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Iraqi Oil Industry Crippled by War, Sanctions Struggles to Get Production Back Online - 2004-07-09

The future of Iraq lies to a large extent with is abundant oil, but years of war, neglect and sanctions have crippled the industry and drastically reduced output. VOA’s Ed Warner reports some views of how to revive an operation crucial not only for Iraq but for a world ever more dependent on oil.

There is no denying Iraq’s oil potential, says Frank Verrastro, a senior analyst at Washington’s Center for Strategic and International Studies. “Iraq’s reserves are second only to Saudi Arabia in terms of oil,” he says, “and there is probably another 50 to 80 billion barrels that you could find because there has been little to no exploration over the last 25 years. The problem is going to be an aging infrastructure, restoring electricity because the pumps, the pipes are all controlled by electric power, and then making sure that security is put back in place so that you can get investment.”

Security is an every day problem with pipelines a favorite target of insurgents, says Keith Crane, a senior economist at Rand, who served as an adviser to the Coalition Provisional Authority in Iraq. That’s the way to get at Americans as well.

“A big problem was that the Americans have definitely shifted from the good guys into the bad guys,” he says. “There is an impression, especially among young Iraqis, that shooting an American or blowing up a pipeline is something that one should do for patriotic reasons in some cases.”

But Iraqis suffer the most from this sabotage, says Matt Simmons, chairman of Simmons and Company, an energy investment banking firm. “Unless they can basically get their oil flowing, it is going to be a very complicated task restoring the economy,” he says. “If you were an insurgent wanting to topple any part of that, it is pretty obvious what you do. You keep going after the oil installations. That is tricky guarding those when you have pipelines stretching all over the country.”

As a result of the continuing attacks on an already eroded infrastructure, oil production has not begun to approach the levels anticipated before the war. Iraq is producing only a little over one million barrels a day.

Matt Simmons says he warned of this. “It was only a year and a half ago that you had all of these oil pundits who were certain that if we had a quick resolution of the war, Iraq would quickly be producing six million barrels a day,” he says. “I would read and hear these guys, and I would say these guys have no earthly idea of what they are talking about.”

But all is by no means lost. Repair is possible and doable, says Keith Crane. Granted Iraq is in greater danger than other countries faced with insurgencies. Still, these show what can be done. “A number of countries, Colombia being a case in point, actually do function with frequent punctures of the oil pipeline,” he says. “They are just very good at fixing those holes. Crude, if it is heavy, does not flow that quickly. So if you detect a leak on the pipeline and get a crew in there pretty quickly, you do not lose an awful lot. You can get the flow back up fairly quickly.”

Mr. Crane says local communities, properly motivated, can do this job, especially as Americans withdraw from the scene.

Over the years, there has been serious degradation of infrastructure even if it is spared attack. Mr. Simmons, among others, is concerned about the condition of underground reservoirs with unknown quantities of water seeping in. Reserves are not so certain in a system that has been overworked and under maintained.

In this case, he adds, how can you say the United States went to war for oil, especially since the CPA is anxious for Baghdad to control it.

The problems should not be exaggerated, says Mr. Crane. Let’s not forget what oil means for Iraq. “What CPA found is that the capital stock is in much poorer condition than had been expected, and they had not expected a lot,” he says. “However, of all the sectors in the economy - water, electric power - oil is by far in the best shape because it really has been the life-blood of the economy and the source of all government revenues.”

And Iraqi oil matters in a world demanding more of it, says Mr. Verrastro. “If there is no upheaval in Venezuela or Nigeria or Saudi Arabia, the world right now can get by without Iraqi oil,” he says. “But as supply and demand get tighter with new demand in India and China and in the United States, we are going to need production from everywhere. So at some point in the next few months, additional Iraqi production would be very helpful in terms of oil prices and supply.”

What is good for Iraq, says Mr. Verrastro, is good for the world.