Oil Counts in Iraq War Equation:
Regime change might mean a rise in output. For Russia, that could put prices, deals at
risk.
latimes.com
By Warren Vieth, Times Staff Writer
WASHINGTON -- The prospect of military action
against Saddam Hussein has touched off an
international contest for Iraq's vast oil reserves and
has complicated U.S. efforts to cultivate Russia as a
major future source of oil.
Moscow is seeking assurances from Washington
that if Hussein is ousted, Western companies won't
take away the lucrative oil-field development rights
that Russian oil firms negotiated with the Iraqi
president's government. Iraq's reserves are second
in size only to Saudi Arabia's.
Industry experts and insiders say the issue has
become a potential sticking point in negotiations
between the Bush and Putin administrations over
Washington's efforts to obtain United Nations
backing for its Iraq policy.
"Russian companies are worried the new regime
may discard previously signed agreements and favor
the U.S. oil industry," said Fred Mutalibov, an
oil-field services analyst for SWS Securities in
Dallas. "To get Russia's support, or at least their
silent agreement, the United States has to assure that
Russian oil interests will be considered once the
regime change has occurred."
The stakes are high, particularly for Russia. Not only
does its fledgling private-sector oil industry stand to
lose future development windfalls, but its
export-driven economy also would suffer if a new, pro-Western regime in Iraq
pumped up current production and flooded world markets with crude. Although
Iraq is a member of OPEC, there is no assurance that a new government would
abide by the cartel's production restraints.
"They're going to need to massively rebuild," said John Kingston, global oil
research director at Platts, an energy information service. "They're going to need
lots and lots of money, and there's only one way to get it. They only have one
cash crop, so they're going to want to produce as much as they can."
Some analysts predict that oil prices would fall from about $30 a barrel today to
about $20 as Iraqi production gradually increased from about 1.5 million barrels a
day to about 3 million barrels over several years.
Russia, which depends on oil for about 40% of its export revenue, would be hard
hit by a price decline. In addition, Iraqi crude would be competing for the same
European markets where Russia sells most of its oil.
"The big blow will be for the Russian economy and the oil industry in general,"
said Nelli Sharushkina, who tracks the industry from Moscow for Energy
Information Group. "The lower the prices are, the worse it is for the Russian
economy."
For the Bush administration, the issue presents complex political and economic
ramifications. America's economy would benefit from lower oil prices, and U.S.
oil firms might prosper if Iraq reneged on its deal with the Russians. But a
brazenly U.S.-centric policy would not only damage relations with Russia, it could
also undermine the legitimacy of a new Iraqi regime.
"If the legacy of this war is the appearance that the United States is sacrificing
Iraq's interests to suit American interests, all it will do is ensure that any
government the United States sets up will be seen as a puppet government and
will be torn down," said Anthony Cordesman of the Center for Strategic and
International Studies, a Washington think tank.
For the international oil industry, a regime change in Baghdad could put one of
the world's most restricted petroleum markets into play.
Iraq sits atop 11% of the world's proven oil reserves, about 112 billion barrels. At
$30 a barrel, that's $145,000 worth of crude for every man, woman and child in
the country. And Iraqi petroleum geologists believe there's at least twice that
much in additional reserves still to be confirmed. (By comparison, the United
States has 22 billion barrels, or about $2,300 per person.)
Iraq's giant Kirkuk field was discovered in 1927, and U.S. oil companies played a
big role in Iraqi oil development before the entire industry was nationalized in the
1970s. But eight years of war with Iran in the 1980s and 12 years of U.N.
sanctions following Baghdad's 1990 invasion of Kuwait have destroyed much of
Iraq's oil production infrastructure and restricted development of new fields to
replace dwindling production from old ones.
Iraqi officials have acknowledged that they lack the financial and technological
resources to rebuild their oil industry. They estimate that as much as $50 billion
of foreign investment would be needed to reach their production target of 6
million barrels a day over the next decade.
"They're broke," said Matthew Simmons, who heads a petroleum industry
investment banking firm in Houston. "They need money. They need help. They
need technical assistance, and it becomes particularly urgent if in fact they really
have destroyed the backbone of their existing fields."
Five years ago, Hussein's government struck a 23-year, $3.5-billion deal with a
consortium headed by Lukoil, Russia's largest oil company, to rehabilitate Iraqi oil
fields. But the U.N. sanctions have prevented the work from proceeding.
Baghdad has entered into smaller development deals with companies in Russia,
China and France, in part to undermine political support for U.S. policy toward
Iraq. All three countries have veto power on the United Nations Security
Council.
Some form of accommodation appears likely. "We are in conversation with our
Russian friends about their interests, and we are taking into account their
consideration," Secretary of State Colin L. Powell told the U.S.-Russian Business
Council this month. Commerce Secretary Donald Evans said the issue came up
in private talks with industry officials at a U.S.-Russia energy conference in
Houston last week. Lukoil President Vagit Alekperov said Russian officials had
assured him that his company would not lose its big contract in Iraq.
"I suspect before the Bush administration gets its vote in the U.N., it's going to
have to have something in writing with the Russians," said Newport Beach
energy consultant Philip Verleger, a senior fellow at the Council on Foreign
Relations. Many industry experts and foreign policy specialists argue that helping
Russia hang on to its Iraqi interests would be the smart thing to do.
"The administration should be thinking of a strategy to jump-start the Iraqi
economy," said Washington attorney Mark Brzezinski, a former National Security
Council staff member. "Russian energy companies have experience working in
Iraq, and their knowledge of how to get things done could contribute toward the
larger objective of getting the economy off the ground."
Ensuring that Russia has a role in future oil development in Iraq would also
advance the administration's efforts to promote more collaboration between U.S.
and Russian oil companies and find new sources of oil outside the Organization
of Petroleum Exporting Countries. Although the lack of big supertanker ports
prevents Russia from shipping much crude to the United States, Russian officials
say planned improvements would allow them to satisfy as much as 10% of
America's oil appetite in future years.
One small sign of growing goodwill: For the first time, several hundred thousand
barrels of Russian crude will be pumped into the U.S. Strategic Petroleum
Reserve this month.
"Everything that's happened since Sept. 11, 2001, makes it not just more likely,
but more real that there will be increasing cooperation between the United States
and Russia," said Joseph A. Stanislaw, president of Cambridge Energy Research
Associates. "Iraq just adds to that. It adds to the imperative."
Yet no matter what assurances the U.S. makes, there might be limits to how
much it can deliver. The rehabilitation and development of Iraq's oil fields would
take years and multiple contracts to complete. The U.S. would hold sway over a
new government in Baghdad. But it would not want to alienate the Iraqi public by
dictating oil policy, and its influence would inevitably wane.
"This isn't the 1800s. We're not talking about a colony. We're talking about an
independent country," said Amy Jaffe, senior energy analyst at Rice University's
Baker Institute for Public Policy, site of last week's conference. President Bush
"is not going to be president of Iraq." |
