This type of article stands in stark contrast to the bevy of propaganda we have seen indicating $18 WTI as soon as Iraq's spigots were liberated.
The next 6 months should be very profitable for those willing to see through the murk.
Iran Shows It Could Be Years Before Iraqi Oil Weighs on Prices
By Bhushan Bahree
ASSALUYEH, Iran (Dow Jones) - Many people expect a U.S.-led victory over Saddam Hussein will eventually result in a gusher of oil from a liberated Iraq, bringing down petroleum prices. But the recent fate of neighboring Iran's energy industry suggests a different future - one where it could be years before new Iraqi oil has any big or lasting impact on what consumers pay for fuel.
A gargantuan new project called South Pars, off Iran's Persian Gulf coast, attests to the billions of dollars foreign oil companies have invested in Iran since the country launched its "New Dawn" plan in 1991. With it, Tehran aimed to revive its oil industry, ravaged by years of revolution and war with Iraq.
Yet today, Iran can't pump any more crude than a decade ago. The reason: New production has only offset the rapid decline in the productive capacity of Iran's other giant fields, which have been pumping oil for decades.
Attempts to revive the Iraqi industry are likely to face the same knotty problems Iran faces - the glacial pace of negotiations to clinch contracts and the years it then takes to tap large petroleum reservoirs, even as exhausted fields reduce output.
"In Iraq, the situation has been disastrous now for 20 years," says Thierry Desmarest, chief executive of France's TotalFinaElf SA, long involved in Iran. He expects military operations to damage Iraqi oil facilities further.
Buyers of Iraqi oil already note a decline in the quality of the crude coming from the country's prized Kirkuk field, an indication of waning output at a reservoir that has produced oil since 1938. Iraq's other major reservoir, the Rumaila field in the south, also has been pumping for decades.
A United Nations study of Iraq's oil fields a few years ago painted a grim scene of failing wells and equipment, environmental devastation and rampant safety hazards. Since then, little solid detail has emerged on the fields.
Even with a pro-U.S. government in Baghdad, oil veterans say it might take years for the world's giant oil firms to nail down deals.
Depending on the extent of the damage to Iraq's infrastructure and how long it takes for a stable government to emerge, it could be five years or more before oil from new developments boosts world supplies.
"Taking the Iranian example, it is fair to say that the way forward in Iraq will be much more complex than people imagine," says Julia Nanay, an analyst at Washington-based PFC Energy, a consulting firm.
Ms. Nanay, who specializes in the Persian Gulf region, isn't estimating how long it will take to resurrect Iraq's oil-production potential, because "no one knows what they will find there."
Iran's problems, and what they suggest about conditions in secretive Iraq, are worth considering as oil markets gyrate in anticipation of a U.S.-led war on Baghdad.
Oil supplies from Iraq, which exports about 1.7 million barrels a day under a U.N. program, are expected to dry up during a conflict.
War fears, coupled with a disruption in supplies from strife-torn Venezuela, drove up the price of oil by 66% in the year to January. Prices have risen further since then.
Iraq and Iran have roughly comparable petroleum reserves and once held identical output quotas as members of the Organization of Petroleum Exporting Countries.
The two nations severely damaged each other's industries in their 1980-88 war, and they desperately needed to rebuild. TotalFinaElf decided in 1990 to plunge in, and its experiences since offer a window onto both countries' industries.
TotalFinaElf, the lead company in Iran's South Pars project, has kept a foothold in Iraq as well. As Iraq sought in the mid-1990s to loosen U.N. restrictions on its oil exports, it handed out huge production-sharing contracts to companies from France, Russia and China - three permanent members of the U.N. Security Council who might act as a counterweight to the U.S. and the United Kingdom.
TotalFinaElf initialed nonbinding agreements but declined to commit to actually developing the oil, which would have violated U.N. sanctions. But TotalFinaElf was able to perform simulation studies on the fields.
This data, company officials say, would enable TotalFinaElf to get the oil flowing about a year earlier than a competitor starting from scratch. Even then, TotalFinaElf reckons it would take it almost four years to start production if it won a contract from a new Iraqi government.
"The Iraq file is on my shelf, not on my table," says Philippe Boisseau, president of Middle East operations for TotalFinaElf. "But I can reach it quickly if I need to."
While TotalFinaElf efforts in Iraq were eventually stymied by the West's standoff with the Hussein regime, it got a break in Iran.
After losing out to Conoco Inc. (which has since merged with Phillips Petroleum Co. to form ConocoPhillips) in a bidding war to develop Iran's Sirri oil field, TotalFinaElf found itself a winner when the Clinton administration barred the U.S. company from entering Iran.
The U.S. subsequently passed a law that calls for sanctions on companies that invest in Iran's oil industry, sanctions that TotalFinaElf defied by signing up in 1997 to develop part of South Pars.
South Pars is the Iranian part of the world's largest natural-gas field, which is shared with Qatar. The offshore field also contains large volumes of oil.
Development of South Pars is such a huge undertaking that Iran has divided its portion into 30 sections, or phases, with detailed planning done for 15. Each phase will result in gas output equal to a quarter of France's total annual consumption, besides large volumes of oil.
A recent tour of Assaluyeh, a strip of barren land between the Zagros Mountains and the sea about 60 miles from the field, shows the onshore petroleum complex is a work in progress. Phase one, a skein of pipes and towers constructed by an Iranian company, is behind schedule.
Phases two and three, developed by TotalFinaElf for about $2.2 billion, are complete, belching gas flames visible miles away. A ceremony inaugurating the plant took place on Saturday; TotalFinaElf will formally relinquish control of the facility to Iran at the end of March.
"We are already producing 25% of Iran's total gas output," says Ali Akbar Shabanpour, managing director of National Iranian Gas Co., the company that will take over.
What TotalFinaElf gets is an oil dividend. Its field produces more than 80,000 barrels a day of a light oil, which Iran will use to pay back TotalFinaElf over seven years. People with knowledge of the deal say TotalFinaElf will get a return of about 20% on its investment.
But getting this far has been a slog: As is common in modern petroleum deals, it took TotalFinaElf about 12 years to complete its part of South Pars from the time it began exploring a bid in 1990. It will be decades before Iran can complete the entire project.
Just down a road filled with construction vehicles and sport-utility vehicles, Italy's Eni SpA is working on phases four and five. Further away, Norway's Statoil is engaged in phases six, seven and eight. Iran has yet to award contracts for most of the remaining phases.
Some of the gas from South Pars will be reinjected into Iran's older oil fields to increase crude output. Some will be used in Iran to substitute for crude oil, which will add to exports.
And the oil from South Pars will be directly available for export. Iran has so far awarded 15 petroleum-development contracts to foreign companies to produce one million barrels a day of oil and large volumes of gas.
A clutch of new contracts are in the negotiating stage, including further phases of South Pars.
Yet, the slow pace of developments already threatens the country's future as an oil superpower. Iranian officials estimate production from their oil reservoirs is declining by 5% annually.
Unless offset by new development, that rate would reduce capacity from four million barrels a day to about 1.4 million by 2020.
That's about the level of current domestic consumption, and about a fifth of what Iran says it would need by then to maintain its share of OPEC output.
© 2003 Dow Jones Newswires. |
