Iraq Oil - part 1
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Iraq
Iraq holds more than 112 billion barrels of oil - the world's second largest proven reserves. Iraq also contains 110 trillion cubic feet of natural gas, and is a focal point for regional security issues.
Note: The information contained in this report is the best available as of October 2002 and can change. Also, please click here for a complete chronology of events pertaining to Iraq from 1980 through mid-October 2002.
GENERAL BACKGROUND
During the 1980s and 1990s, Iraq experienced two major wars (Iran-Iraq and the Kuwait war), plus more than a decade of economic sanctions. As a result, the country's economy, infrastructure, and society have deteriorated significantly. Iraq's gross domestic product (GDP) has fallen sharply since before the Iraqi invasion of Kuwait, with per-capita income and living standards far below pre-war levels. On the other hand, increased oil production since 1996 and higher oil prices since 1998 resulted in estimated Iraqi real GDP growth (accurate statistics are hard to come by) of 12% in 1999 and 11% in 2000. For 2001, with net oil exports relatively flat and oil prices down from 2000, Iraq's real GDP growth was estimated to have fallen to only 3.2%. For 2002, with higher oil prices but sharply lower oil exports, Iraq's real GDP growth is expected to grow by only 1.5%. Iraqi inflation currently is estimated at around 25% (down slightly from 28% in 2001), with unemployment (and underemployment) high as well. Iraq's merchandise trade surplus is about $4.8 billion, although much of this is under United Nations (U.N.) control. Iraq has a heavy debt burden, possibly as high as $140 billion if debts to Gulf states and Russia are included. Iraq also has no meaningful taxation system, plus erratic fiscal and monetary policies.
On May 14, 2002, the U.N. Security Council approved an overhaul of the "Oil-for-Food" program for Iraq that makes use of an extensive list of "dual-use" goods (goods that could have a military as well as civilian use). Under the modification, Iraq is able to use its oil revenues, which go into a U.N. escrow account out of which suppliers exporting products to Baghdad are paid, in order to purchase items not on the list. The resolution renews the U.N. program until November 25, 2002.
Over the past few years, Iraq has been attempting to improve relations with various Arab (and non-Arab) countries. In March 2002, for instance, at an Arab summit meeting in Beirut, Iraq pledged"non-interference" in Kuwait's internal affairs and recognition of Kuwait's borders. Iraqi Foreign Minister Naji Sabri stated, "We are for the prosperity and independence of the state of Kuwait and also for the normalization of ties, diplomatic, economic, political." In January 2001, Iraq signed free-trade deals with Egypt and Syria, and in August 2001, Syria's Prime Minister visited Baghdad. In April 2001, Iraqi Vice President Taha Hussein Ramadan met Russian President Vladimir Putin, the highest-level Iraqi-Russian contact in several years.
In June 2001, however, in an apparent blow to Iraqi-Saudi relations, Saudi Arabia announced that it had seized ownership of the 1.6-million-barrel-per-day IPSA pipeline that had carried Iraqi crude oil to the Saudi Red Sea port of Yanbu (Mu'jiz) prior to Iraq's invasion of Kuwait. The seizure included pumping stations, storage tanks, and the maritime terminal. Saudi Arabia claimed that the pipeline was confiscated as a result of aggressive Iraqi actions. Iraq insisted that it still owned the pipeline, and in May 2002, stated that the line was "ready for export."
Since the end of the Gulf War in 1991, the United States and the United Kingdom have maintained "no-fly zones" over Iraq, and also have carried out occasional bombing of various targets, primarily in reaction to perceived threats to allied aircraft. U.N. weapons inspectors were expelled from Iraq in December, 1998, and the United States responded at the time with a several-day bombing campaign of Iraq, called "Operation Desert Fox." On October 16, President Bush signed a resolution by the U.S. Congress authorizing him to use force against Iraq if necessary.
OIL
Iraq contains 112 billion barrels of proven oil reserves, the second largest in the world (behind Saudi Arabia) along with roughly 220 billion barrels of probable and possible resources. Iraq's true resource potential may be far greater than this, however, as the country is relatively unexplored due to years of war and sanctions. Deep oil-bearing formations located mainly in the vast Western Desert region, for instance, could yield large additional oil resources (possibly another 100 billion barrels), but have not been explored. Iraq's oil production costs are amongst the lowest in the world, making it a highly attractive oil prospect.
It is important to note that Iraq generally has not had access to the latest, state-of-the-art oil industry technology (i.e., 3D seismic), sufficient spare parts, and investment in general throughout most of the 1990s, but has instead reportedly been utilizing questionable engineering techniques (i.e., overpumping, water injection/"flooding") and old technology to maintain production. There is also some evidence that Iraq may have damaged its oil reservoirs through use of such techniques and through lack of sufficient investment over a lengthy period of time. Iraq's Oil Minister, Amir Rashid, indicated in early 2002 that only 24 of 73 Iraqi oil fields were producing. Recently, oil consulting firm Saybolt International pointed out the risk of a 5%-15% annual decline in production capacity at (possibly ) damaged Iraqi oil fields.
Iraqi oil reserves vary widely in quality, with API gravities in the 24o to 42o range. Iraq's main export crudes come from the country's two largest active fields: Rumaila and Kirkuk. The southern Rumaila field produces three streams: Basra Regular (normally 34o API, 2.1% sulfur, but apparently deteriorating); Basra Medium (30o API, 2.6% sulfur); and Basra Heavy (22o-24o API, 3.4% sulfur). The northern Kirkuk field, first discovered in 1927, normally produces 37o API, 2% sulfur crude, although the API gravity reportedly has fallen in recent years. An additional export crude, known as "Fao Blend," is heavier and more sour, with a 27o API and 2.9% sulfur.
Iraq's proven oil reserves are not distributed evenly throughout the country. In fact, prior to Iraq's invasion of Kuwait in 1990, about two-thirds of Iraq's production was coming out of the southern fields of Rumaila, Zubair, and Nahr Umr. Other potentially huge fields such as Majnoon and West Qurna (see below for more details) are also located in the southern part of the country. Notably, southern Iraq is populated overwhelmingly by Shi'ite Muslims, who make up the majority of Iraq's population but have little power -- Saddam Hussein is a Sunni Muslim from the central Iraqi town of Tikrit -- and who rebelled against Saddam Hussein following the 1991 Gulf War. Although much of Iraq's southern oil infrastructure -- fields, refineries, storage facilities, transportation infrastructure -- was damaged during the Gulf war, the oil potential of this region alone is huge.
In September 1999, more than 50 foreign companies attended an oil and natural gas technology exhibition in Baghdad, the first such gathering in 10 years. Most of the firms were from Canada, France, Italy, and the United Kingdom. No U.S. firms attended, although a high-level Iraqi oil official has stated that Iraq is ready to deal with U.S. oil companies. To help attract foreign investment to the country's energy sector, Iraq's oil ministry has introduced amendments to existing development and production contracts (DPCs). Among other things, the duration of DPCs has been reduced from 23 to 12 years. In addition, Iraq has added a clause referring to "an explicit commitment to achieve target production within a set period."
Production
Following Iraq's invasion of Kuwait and the embargo on Iraqi oil exports, Iraqi oil production fell to around 300,000 barrels per day (bbl/d) (from 3.5 million bbl/d in July 1990). For 2001, Iraqi crude oil production averaged 2.45 million bbl/d, down from about 2.59 million bbl/d in 2000, with large weekly and monthly fluctuations. Iraqi oil output was lowest in June 2001, at 1.13 million bbl/d, and highest in April 2001, at 2.95 million bbl/d. Iraqi officials had hoped to increase the country's oil production capacity to 3.5 million bbl/d by the end of 2000, but did not accomplish this given technical problems with Iraqi oil fields, pipelines, and other oil infrastructure. Iraq also claims that oil production capacity expansion has been constrained by refusal of the United Nations to provide Iraq with all the oil industry equipment it has requested.
Oil industry experts generally assess Iraq's sustainable production capacity at no higher than 2.8-3.0 million bbl/d, with net export potential of around 2.3-2.5 million bbl/d (including smuggled oil). In July 2002, Iraqi Oil Minister Amer Rashid said that Iraq's current sustainable capacity was 3.2-3.3 million bbl/d, and that the country hoped to increase that to 3.5 million bbl/d -- even without help from foreign oil companies.-- by the end of 2003 (Iraq last produced 3.5 million bbl/d in July 1990. According to the Middle East Economic Survey, Iraq also aims to limit crude oil exports under the U.N. "Oil-for-Food" program to around 2.2 million bbl/d, with the remaining 800,000-900,000 bbl/d going for domestic consumption, exports to neighboring Jordan (at preferential rates), and smuggling (to Syria, Turkey, etc.).
Among other challenges in maintaining, let alone increasing, oil production capacity, is Iraq's battle with "water cut" (damaging intrusion of water into oil reservoirs) especially in the south. Saybolt International has reported that Iraq has been able to increase its oil production through use of short-term techniques not generally considered acceptable in the oil industry (i.e., "water flooding," injection of refined oil products into crude reservoirs). A U.N. report in June 2001 said that Iraqi oil production capacity would fall sharply unless technical and infrastructure problems were addressed. The report estimated, for instance, that production in the Kirkuk region could fall by 50% over 12 months, to 500,000 bbl/d, and that output at South Rumaila also could be reduced sharply unless immediate actions were taken. Iraq hopes to counter this by a large-scale program to drill new wells (417 are planned, most of which are to be carried out by Russian, Chinese, Iraqi, and Romanian companies).
Exports
U.N. Resolution 986 (April 1995) allows Iraq to sell specified dollar amounts of crude oil over six-month periods, in part for the purchase of humanitarian supplies ("Oil-for-Food") for distribution in Iraq under U.N. supervision. In December 1999, with Iraq steadily increasing its oil export revenues, the Security Council voted to remove any limits on the amount of oil Iraq could export. The current phase (Phase XII) began May 30, 2002 and is scheduled to end on November 25. Under the Phase XII renewal, the U.N. Security Council makes use of an extensive list of "dual-use" items (goods that could have military as well as civilian use). Iraq is allowed to make use of "Oil-for-Food" revenues to purchase items not on the list. Overall, about three-fourths of the proceeds from "Oil-for-Food" sales are used to purchase humanitarian goods for Iraq, while 25% are earmarked for reparations to Gulf War victims, pipeline transit fees for Turkey (which claims that the embargo on Iraq has cost Turkey more than $35 billion since 1990), and funding for U.N. weapons monitoring activities. On September 26, 2002, the head of the U.N. Iraq Program, Benon Sevan, reported to the U.N. Security Council that the "Oil-for-Food" program was running a large shortfall (around $10 billion total, including $2 billion in the current phase), making it "impossible to implement the humanitarian program effectively." According to Sevan, over 1,200 contracts worth more than $2 billion that had been approved by the U.N. could not be carried out due to a lack of funds.
During 2001, Iraq averaged official (i.e., U.N. monitored) net oil exports of around 2 million bbl/d, although this number fluctuated greatly through the year, and fell sharply during 2002 (to only 1.5 million bbl/d during the first 7 months of the year, and even further during August and September) (see graph). The reduced volume of Iraqi exports in 2002 appears to have been a result of at least two main factors: 1) Iraq's unilateral one-month embargo of oil exports in April 2002 ostensibly in support of the Palestinians; and 2) pressure by the United States and other countries to clamp down on Iraq's practice of charging an illegal "surcharge" on their U.N. -authorized oil exports (see below for more on this subject). As a result, Iraq's exports dropped sharply in the second and third quarters of 2002 before increasing sharply in recent weeks (to over 2 million bbl/d in the week ending September 20, for instance).
Besides the 90,000 bbl/d or so going to Jordan legally (i.e., with tacit U.N. permission, and under a protocol between Iraq and Jordan), and the 460,000 bbl/d or so consumed domestically, the rest (not counting illegally smuggled oil and oil products) was exported either through the Iraq-Turkey pipeline or the Persian Gulf port of Mina al-Bakr. Although U.N. Resolution 986 mandates that at least half of the "Oil-for-Food" exports must transit through Turkey, it appears that in recent months more Iraqi oil (close to three-quarters) has been exported via Mina al-Bakr rather than via Ceyhan, in part due to a shift in oil exports away from Europe and the United States and towards Asia due in part to the U.N. 's "retroactive pricing" plan (see below for more details). In general, Mina al-Bakr is used for Iraqi oil exports to Asia, while Ceyhan is used for Europe.
An estimated 30% of Iraqi oil is sold initially to Russian firms (i.e., Emerkom, Kalymneftegas, Machinoimport, Rosnefteimpex, Sidanco, Slavneft, Soyuzneftegaz, Tatneft, and Zarubzhneft). The remaining 70% of Iraq's oil is first purchased by companies from many countries, including Cyprus, Sudan, Pakistan, China, Vietnam, Egypt, Italy, Ukraine, and others. Iraqi oil is normally then resold to a variety of oil companies and middlemen before being purchased by end users. During 2001, for instance, nearly 80% of Basra Light liftings, and over 30% of Kirkuk oil, went to the United States, with large importers including ExxonMobil, Chevron, Citgo, BP, Marathon, Coastal, Valero, Koch, and Premcor. During the first seven months of 2002, the United States imported an average of 566,000 bbl/d from Iraq.
In addition to U.N.-sanctioned oil exports to Jordan, which are currently carried by truck (plans for a 150,000-bbl/d, $250-$350 million, 120-mile pipeline to Jordan's Zarqa oil refinery were approved by Jordan's cabinet in December 2001, and Jordan reportedly has received more than 30 offers from firms interested in building the line -- with possible completion in late 2004), there have been persistent reports that Iraq has smuggled 200,000-400,000 bbl/d of crude oil and products via a number of routes. These include: 1) to Turkey (as high as 100,000-150,000 bbl/d, mainly of fuel oil) by truck through the Habur border point (reportedly, this smuggling was stopped from September 18, 2001 through January 7, 2002); 2) to Jordan (possibly 10,000-30,000 bbl/d above domestic needs) by truck; 3) to Syria (150,000-200,000 bbl/d or more; see below for details), mainly via the Kirkuk-Banias pipeline, with smaller volumes possibly moving via a railway line from Mosul to Aleppo; 4) to Iran along the Gulf coast and via Qais Island; and 5) to Dubai with the use of small tankers sailing from Umm Qasr. Press reports have estimated that these illegal shipments may be providing Iraq with as much as $600 million-$2 billion per year in illegal revenues, while a U.S. General Accounting Office study released in May 2002 estimated that Iraq had earned $6.6 billion from oil smuggling and illegal surcharges from 1997 through 2001.
In November 2000, numerous press reports indicated that Syria and Iraq had reopened the 552-mile-long, Kirkuk-Banias pipeline, with the Middle East Economic Digest (MEED) reporting initial deliveries of Iraqi crude oil through the line (and also possibly by rail) at around 140,000-150,000 bbl/d (capacity prior to 1982 was 300,000 bbl/d). The oil, most likely Basra Light, reportedly is being used in Syrian domestic refineries, thus freeing up more Syrian oil for export to world markets, earning Syria extra hard currency oil export revenues (and also earning Saddam Hussein significant revenues outside the U.N. "Oil-for-Food" program). Since Iraqi oil exports are allowed only via approved export routes, use of the Kirkuk-Banias line would represent a potentially serious breach of U.N. sanctions against Iraq. On January 23, 2001, the Bush administration offered to allow Iraqi oil exports through Syria as long as they were regulated by the U.N. "Oil-for-Food" program. In January 2002, the United Kingdom directly accused Syria of violating U.N. sanctions on Iraq by shipping over 100,000 bbl/d of Iraqi oil to Syria without U.N. permission. An estimated $100 million or so per month of Iraq's illegal oil export revenues are estimated to be coming from the Syria pipeline alone, with oil sold to Syria at a significant price discount off of Kirkuk published prices.
In April 2000, the U.S. Navy stopped a Russian tanker, the Akademik Pustovoit, which it suspected might be smuggling Iraqi oil. The United Nations later determined that around 20% of the vessel's gasoil cargo (which Shell said it owned) was of Iraqi origin. In April 2001, an Iraqi-owned vessel -- the Zainab -- sunk off the Dubai coast, leaking over 1,000 tons of smuggled diesel oil and polluting Gulf waters and UAE beaches. At least two other ships smuggling Iraqi oil sunk during 2001 -- one off the Kuwaiti coast in October, and one in November. During 2001, Iraqi oil smuggling through Iranian waters reportedly was reduced significantly (possibly 50%), as Iran increased its efforts at stopping suspect vessels. In October 2001, the United Nations discovered that two oil shipments on the "Essex" had been "topped off" after U.N. inspectors had signed off, adding some 500,000 barrels of crude oil to the ship. The Essex was chartered by trader Trafigura, run by former employees of Marc Rich.
In late October 2001, the U.N. Sanctions Committee began imposing a so-called "retroactive pricing" mechanism (proposed by the UK and supported by the United States) to alter the way in which Iraqi oil prices are set. The United States and the UK were concerned that Iraq was using oil price fluctuations to impose a de facto surcharge on oil purchasers, and that this money was going directly to the Iraqi government outside of U.N. control. This was also part of a continuing effort by the United States, the UK, and others to stop Iraq from forcing buyers to pay a $0.30-$0.60 per barrel surcharge, paid directly to the Iraqi government. Under "retroactive pricing," Iraqi oil exports to the United States and Europe (but not Asia) are priced based on oil market developments through the end of the period covered by a particular oil delivery contract. Thus, "official selling prices" for Iraqi crudes (Kirkuk and Basrah Light) are not known until after the oil has been loaded and sold. At this point, prices are set at a level high enough to assure that lifters have no room to pay Iraq the illegal surcharge and still make a profit. By many accounts, this effort appears to have been at least partly successful in reducing illegal surcharges, and may also have had the side effect of reducing overall Iraqi oil exports as 2002 has gone on. Iraqi oil (Kirkuk and Basra Blend) bound for the United States is priced off West Texas Intermediate, while for Europe, Iraqi oil is priced off of dated Brent.
On October 31, 2000, the U.N. Sanctions Committee approved an Iraqi request to be paid in Euros, rather than U.S. dollars, for oil exported under the "oil for food" program. On November 16, Iraq's State Oil Marketing Organization (SOMO) demanded that companies lifting cargoes of Iraqi crude oil begin paying a fifty cent per barrel surcharge directly to the Iraqi government (in violation of U.N. sanctions) starting on December 1, 2000. |
