Oil Income of $15 Billion a Year
Won't Solve Iraq's Pressing Needs
Poor Nation Needs More,
Industry Consultants Say
By BHUSHAN BAHREE
Staff Reporter of THE WALL STREET JOURNAL
PARIS -- For years to come, Iraq's oil revenues could fall well short of what is needed to quickly revive the country and its shattered economy.
The demise of Saddam Hussein's regime and the eventual lifting of United Nations' sanctions on Iraq will almost certainly leave the Iraqi economy better off than before the war. On Friday, the U.S., Britain and Spain asked the Security Council to lift sanctions, allowing Iraq to resume oil exports.
The U.S. is counting on using Iraqi oil revenue to rebuild the country, but some observers question whether petrodollars alone can finance a stable Iraq. Oil-industry analysts say that to kick-start its economy, Iraq will need much more than the $15 billion or so per year that oil sales can provide over the next several years. "For the foreseeable future, oil will simply support a subsistence economy" in Iraq, says J. Robinson West, chairman of the Washington-based industry consultants PFC Energy. "It's only after oil production surges with foreign investment that there will be larger surpluses."
Western oil company officials say large-scale foreign investment in Iraq's oil industry is years away. Even if such investment is made, industry officials expect Iraq's oil output will start rising significantly above its prewar peak only after about five years. Major oil companies are unwilling to invest the billions of dollars needed to develop large new oil fields until Iraq has a stable government, enacts a law governing the petroleum industry and negotiates sustainable deals -- developments that could take three years or longer.
Iraqis have built up expectations of quick and large-scale economic improvements following the ousting of Saddam Hussein. The potential gap between expectations and reality could pose a formidable challenge to the U.S. and its allies, who Friday began pushing in the U.N. for the creation of an Iraqi Assistance Fund that would receive oil revenues to be used for reconstruction and humanitarian purposes. France is still insisting that the U.N. be given a central role in Iraq's reconstruction, a demand that could delay an agreement to lift sanctions.
IRAQ IN TRANSITION
• Rebuilding Iraq1: By some estimates, rebuilding costs could come to more than $600 billion over a decade. Find out what's needed and who has won the contracts.
• For continuing coverage, see Iraq in Transition2
But even if sanctions are lifted swiftly, industry analysts say Iraq has pressing needs that oil alone won't solve: The outside world may have to forgive some of Iraq's huge debt, reduce compensation claims relating to the invasion of Kuwait, and offer aid to help revive the country. An advisory team of Iraqi exiles is also suggesting to the U.S. that Iraq's state-owned oil industry be radically overhauled and partially privatized, to attract investment as quickly as possible.
In an interview with CNN Sunday, U.S. Treasury Secretary John Snow said: "The oil revenues will undoubtedly be the centerpiece of the funding for the rebuilding" of Iraq. "But, just as in Afghanistan, donor countries will want to be involved ... We've suggested that some debt forgiveness, as well, would make sense," Mr. Snow said.
Just before the war, Iraq was producing some 2.5 million barrels a day of oil, and exporting about two million barrels a day, including smuggled oil. Iraq is restarting its oil facilities, though it isn't yet producing enough to meet domestic needs. Output is expected to rise in the months ahead, but precise projections aren't available.
The U.S.-appointed head of Iraq's oil ministry said Sunday he expects the country to be producing more than one million barrels of oil per day by next month. About half of that would be used domestically, leaving some 500,000 barrels of oil for export each day. Thamir Ghadhban, named to lead the ministry on an interim basis, said he expects Iraq to return to prewar production capacity of three million barrels per day by the end of the year.
Late last week, however, the ministry retreated from a more optimistic forecast that Iraq would be producing 1.5 million barrels per day within weeks, blaming severe damage to oil infrastructure caused by looting in the chaotic days after the war. "We are now more realistic than before, but in any case we shall meet that target at a later date, perhaps by the end of June," Mr. Ghadhban said Sunday.
Over the longer term, Western oil-service companies are expected to help bring Iraqi oil-production capacity up to 3.5 million barrels a day, a peak reached in 1979 and possibly attainable again by 2007. At such output levels, Iraq's oil exports -- some three million barrels a day -- could provide revenues of about $20 billion annually at current price levels.
How much more money is needed to meet Iraqi expectations of better living conditions is a matter of debate. Fadhil Chalabi, an Iraqi exile who is a member of a U.S. State Department-sponsored team advising on oil issues, says "the influx of foreign money into Iraq in the coming five years should be not less than $200 billion -- that's a minimum." Otherwise, "Iraq will be a poor country for decades," said Mr. Chalabi, executive director of the London-based Centre for Global Energy Studies.
Mr. Chalabi and the team of Iraqi oil experts are suggesting that Iraq partially privatize its oil industry, a sale that could attract funds to quickly reverse the downward economic spiral. Moreover, privatized oil companies typically seek to maximize oil production, something that the Iraqi oil experts say is needed to get the country on its feet.
The team of exile advisers noted in a report to the State Department that Iraq's per capita gross domestic product fell to $1,178 in 2001 from a peak of $4,145 in 1990. Even if oil production was quickly restored to peak levels, the team said, revenues available for reconstruction and humanitarian needs could be as little as 30 cents per day per person. That assumes the continued diversion of 27.2% of Iraq's oil export revenues to meet compensation claims resulting from the invasion of Kuwait; and fully meeting the investment needs of the oil industry, which initially may be slightly more than $11 billion.
But that estimate doesn't provide for servicing Iraq's foreign debt, which is estimated to be more than $60 billion, according to the report, which was first published last week by the Middle East Economic Survey, a well-regarded newsletter that closely follows oil industry and regional developments.
"Oil will go a long way to helping, but it's far from sufficient" to meet Iraq's needs, said Lawrence Goldstein, president of New York-based Petroleum Industry Research Foundation. "They need aid, both money and in kind." |
