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Tuesday, February 15, 2005

SLOW GOING FOR IRAQI OIL

In the first major pipeline attack since the January 30 Iraqi elections, insurgents blew up an oil pipeline in the Kurdish north on Monday. The pipeline, owned by Iraq’s Northern Oil Company, carried fuel for domestic use, increasing the hardship within the country and also hampering exports. Officials said it would take at least three days to extinguish the blaze and repair the pipeline.

Although security had been increased and pipeline attacks decreased prior to the elections, Iraqi oil production is far below what many had hopefully predicted. Since a March 2004 high of 2.3 million bbl/d production, Iraq output has fallen to around 1.4 million bbl/d currently. Some analysts had predicted that Iraq would reach 3 million bbl/d by the end of 2004 and 3.5 million bbl/d in 2005.

Despite the disappointing recovery rate, the potential remains for Iraq to exceed its Saddam era production capacity. Iraq’s 115 billion barrels of proven reserves rank third behind Saudi Arabia and Canada, with recovery costs comparable to Saudi Arabia’s minimal $1 to $2 per barrel. In addition, only 10% of the country has been explored, and that with inferior exploration technology. Estimates of additional Iraqi reserves range from 45 to 200 billion barrels of crude oil. At present, only 17 of Iraq’s 80 discovered fields have been developed and those fields only to a minimal extent. It has few deep wells compared to neighboring oil producing countries and only about 2,300 wells overall.

Much work remains to be done, however, before this wealth can be tapped. Not only must pipeline attacks be thwarted, but also the regulatory framework guiding Iraq’s oil industry must be developed and codified. Early indications are that Iraq will form one powerful national oil company that several oil production, natural gas, pipeline and marketing companies currently operating. However, unlike in most developing countries, a state-controlled company in Iraq may well be open to foreign investment.

Furthermore, the legality of Saddam era contracts, granted largely to Russia and France, will have to be decided. One large concession, for example, was granted to Russian major Lukoil, 10% of which is now owned by ConocoPhillips. The U.S. super-major also may purchase an additional 10% of the company in the near future.

Such geopolitical and regulatory obstacles have not prevented the world’s oil majors from jockeying for position of course. Royal Dutch/Shell Group, signed an agreement with the ministry Jan. 14 to asses Iraq’s enormous Kirkuk field, estimated to hold 8.7 billion barrels of reserves. It has also agreed to help draft a plan for tapping Iraq’s natural gas. Shell says it will do the work free as a way to strengthen its links with the Oil Ministry.

In a similar show of good graces, ExxonMobil Corp. has volunteered to provide the ministry with technical assistance and conduct joint studies, while ChevronTexaco has been flying Iraqi oil engineers to the United States for training since last year, describing the program as “a goodwill gesture.”

BP signed a contract this month to study the Rumailah oil field near Basra, while an Iraqi-Turkish consortium won a contract in late December to help develop the Khurmala Dome oil field.

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