TOPICS : Exploring new oil fields in Iraq: A risky business

David R Francis:

It boasts the world’s third largest proven oil reserves, a vast unexplored territory of potential oil, and a serious need for cash to rebuild itself. That’s why Iraq has taken the first step to open its reserves to the world. In a momentous and highly sensitive move, the interim Council of Ministers is inviting foreign oil companies to develop potential fields. If it works, the plan could double Iraq’s oil revenues, ease somewhat world jitters about an oil crunch, and possibly fulfill what some see as a key goal of the Bush administration — ensuring another reliable oil-rich partner in the Middle East beyond Saudi Arabia. But the plan carries risks for Iraqi moderates, the business interests of the US and the UK, and the international oil companies themselves.

Under the new strategy, two national oil companies would run the existing oil fields, says Hilal Aboud al-Bayati, economic adviser to interim Prime Minister Iyad Allawi. The outside companies would develop potential oil fields — a large, multiyear undertaking that could produce some dramatic new reserves, since roughly 90 per cent of Iraq remains unexplored.

The government wants to “make things easy” for foreign investment, says Dr Bayati. “Iraq has taken steps toward a market economy where the private sector and foreign investors will play a big role in the economy.” His hope is to nearly double the country’s production from between 1.6 million to 1.8 million barrels per day to 3 million bpd by 2007. By most estimates, Iraq doesn’t have the excess cash to develop those potential fields itself. But foreign oil companies face big physical, economic, and political risks. The insurgency has already taken its toll: some 182 attacks on Iraq’s energy infrastructure since June 2003, according to the Institute for the Analysis of Global Security. That sabotage has slowed output by some 400,000 to 600,000 bpd, Bayati estimates.

The political risks are equally serious. The January 30 elections will not change the oil plans drafted by the interim government, Bayati says. But at some point, a new law spelling out the rights of investors in oil must be passed by the as yet unformed legislature. Will nationalist Iraqi politicians — let alone religious hard-liners, let foreign companies develop the nation’s oil fields? “A free Iraqi people will not give their oil away,” warns A F Alhajji, an economist at Ohio Northern University in Ada. He predicts that the nation’s oil reserves will have to remain under government ownership, even if foreign oil companies are allowed to be partners in their exploitation.

The US and the UK have hoped that their efforts to oust Hussein might give their oil companies an advantage in seeking postwar Iraqi oil deals. But a new Iraqi government may be reluctant to give such powerful nations added economic leverage over the country, says Alkadiri. Instead, it might let contracts go to the highest bidder, whatever its nationality. Or oil companies may form multinational consortiums to bid in Iraq. When new Iraq oil comes into the world oil market, its impact on oil prices will depend on the demand-supply situation at the time. It could also hang on the willingness of OPEC members, especially Saudi Arabia, to make room for Iraqi oil by trimming its own output — if that is needed. — The Christian Science Monitor