New York Times
May 2, 2005
By Erik Eckholm

With vast reservoirs of oil and the potential to rival Saudi Arabia as a megaproducer, Iraq has long tantalized the world's energy industry, as well as economists and political leaders worried about the impact of high oil prices.

But the new Iraqi government's glaring failure last week to agree on an oil minister and the sectarian bargaining over this crucial appointment, as well as the unabated insurgency, have been new reminders of the political faults that keep the country's petroleum promise unrealized.

"Unfortunately, oil in Iraq is being politicized more and more," Issam al-Chalabi, who was Iraq's oil minister in the late 1980's, told a conference of scholars and oil-company executives in Washington in late April. "This is dangerous."

Mr. Chalabi, now a consultant based in Jordan and Baghdad, is not related to Ahmad Chalabi, the former exile who, in the latest of his political ups and downs, has been appointed interim oil minister.

As recently as this April, a senior Iraqi leader evoked the eternal dream that Iraq could produce 10 million barrels a day - close to the Saudi levels - within 10 to 15 years.

Far less progress than that could alter the global oil market and aid consumers everywhere.

But two years after Saddam Hussein was toppled production is limping along at about two million barrels a day, less than before the war, and even at that rate it may be causing long-term damage to poorly maintained fields.

American officials had hoped that output at this stage would be at three million barrels a day, generating badly needed funds for reconstruction. That level of production could also reduce oil prices, which are now around $50 a barrel and a global source of inflationary pressure. But close to $2 billion worth of American technical aid to the oil sector has brought only limited gains.

Sabotage of a pipeline to Turkey has choked off exports from Iraq's northern fields, around Kirkuk, and violence has slowed efforts to renovate the larger southern fields.

But even if the insurgency is tamed, oil experts say, Iraq will never receive the foreign investment and advanced technologies it needs until the country has a strategy and laws, ideally enshrined in a constitution, for developing hydrocarbons. Can foreign firms be partners in exploring and drilling new fields and in reaping the product, or will they simply be hired to do the work?

Whatever pattern Iraq chooses, it must be clearly delineated, industry executives say, and with protections offered to foreign investors.

The volatile question of regional autonomy, especially for the Kurds who want more control over Kirkuk and its oil, must also be resolved before outsiders will be likely to put large amounts of capital at risk.

These issues and more are at play as the newly elected Iraqi leaders seek to write a constitution this year and, more immediately, try to agree on who should become oil minister. The stakes are high, for Iraq and for the world's consumers. Even if achieving Saudi-level output seems little more than a pipe dream, every incremental gain can make a global difference in the price of oil, energy experts say.

"If the northern pipeline could be secured and those fields were brought to their existing capacity, enough oil could flow to change the world oil market," said Lawrence Kumins, an oil expert at the Congressional Research Service. The Kirkuk fields could be producing 800,000 barrels a day within six months to a year, Mr. Kumins said, and "the world oil market swings on a million barrels a day."

Herman Franssen, an oil specialist at the Center for Strategic and International Studies in Washington, cautioned against too much optimism. Even if Iraq's political situation stabilizes, he noted, it takes years to sign contracts and get oil wells working. Any major decisions on oil development must also await the results of a technical study, being conducted by British Petroleum and Royal Dutch Shell, that will chart the state of the country's oil fields and assess the most promising next steps.

"Doubling output to four million barrels a day by the end of the decade would be a major achievement," Mr. Franssen said. "And that would make a big difference in the global market, absolutely."

There is a near consensus in the oil industry, he said, that prices will remain high in the coming years, though not necessarily at recent levels of $50 a barrel and more. Barring a widespread recession, he said, prices may bottom out at $30 rather than the previous low of $18.

No one doubts Iraq's physical potential for enormous production. Only 17 of its 80 known fields have been developed, and the costs of bringing new production on line are among the world's lowest, according to the United States Department of Energy. Only about 2,300 wells have ever been drilled in Iraq; Texas alone has a million.

Huge geologically promising areas of Iraq have never been explored with advanced seismic techniques.

But the focus now is simply on resuming maintenance at existing fields to safeguard their output.

Since the international sanctions that followed Iraq's invasion of Kuwait in 1990, the country has done virtually none of the customary nurturing of oil wells normally carried out every one to three years.

Also halted was the constant drilling of new wells, which is necessary to replace old ones, to reach shifting reservoir pockets or to apply strategic injections of pressure. In a desperate effort to maintain underground pressure, large amounts of fuel oil were injected into some wells, gumming them up.

"Of the 1,500 producing wells in the south, at least 20 percent need to be replaced," Mr. Chalabi, the former minister and consultant, said.

Copyright 2005 The New York Times Company

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