CFR memorandum continued
THE BROADER CHALLENGE: BUILDING A MORE STABLE MIDDLE EAST
Iraq's neighbors will be critical to the success of the post-Saddam transition period. A U.S.-led attack on Iraq threatens to be a traumatic event throughout the Muslim world. In the Arab world especially, there is a serious risk that war in Iraq will stir up further trouble for the United States, including terrorist attacks against the United States and its partners. The single greatest perceived lacuna in U.S. policy is the great caution this country has shown in engaging on the Arab-Israeli dispute. Therefore, it is essential that the United States reengage actively and directly on the diplomatic track at the highest level and exercise its leadership with both Arabs and Israelis in support of the road map developed by the Quartet (United States/European Union/Russia/UN).
Iraq's strategic location further complicates matters. Problems in northern Iraq, especially the prospect of an independent Kurdish state, could induce Turkish military intervention. The United States must stay committed to the territorial integrity of Iraq, even if that means thwarting Kurdish or Turkish ambitions in key cities such as Kirkuk.
Managing U.S. relations with Iran poses an even greater challenge and opportunity. As post-Taliban Afghanistan shows, there are elements of the Iranian government that will look for opportunities to frustrate U.S. objectives. In the case of Iraq, there is considerably more basis for quiet U.S.-Iranian cooperation, provided that the United States is able to assuage likely Iranian fears of U.S. encirclement and interference in its domestic affairs. At the appropriate time, the administration should consider establishing a mechanism for ad hoc consultations with Iraq's neighbors, in order to bring to the surface regional concerns, manage looming problems, and identify potential areas of cooperation. The United States should also regularly provide the neighbors with assurances that it remains committed to Iraq's territorial integrity.
For over two decades, Saddam Hussein's Iraq has undermined regional stability. The removal of Saddam Hussein, however, will not be the silver bullet that stabilizes the region, and the United States must avoid imposing Versailles-style conditions on Iraq. Even if enlightened politicians govern Iraq, the inevitable pressures to defend Iraq from its stronger neighbors like Iran could spur development of military plans and forces that are potentially threatening to Saudi Arabia and smaller Persian Gulf states.
To cease being a threat to itself and its neighbors, Iraq's military must be significantly reduced and its ethnic composition must be adjusted to reflect the country's diversity. It will be important to consider Iran's order of battle in order to anticipate the real threats faced by any new Iraqi government. But if this task is not done carefully, reconfiguring Iraq's military will only exacerbate regional fears.
INTO THE FUTURE
The United States and the international community face a monumental challenge in Iraq. Once set free from a leadership determined to pursue weapons of mass destruction at the expense of its own people, will a liberated Iraq and the greater Middle East exist within a more stable and secure political environment? The answer depends in part upon how the war is conducted, and the seriousness that American and international planners bring to the post-conflict environment.
Achieving security and stability in the Middle East will be made more difficult by the fact that short-term necessities will seem to contradict long-term goals. For example, the strong American presence that will be needed to establish and maintain law and order immediately after conflict will appear at odds with the long-term goal of a sovereign Iraq. Similarly, protecting Iraq's oil fields from sabotage will likely confirm the worst fears that America is pursuing war in order to steal local resources rather than convince skeptical audiences that such tactics directly benefit the Iraqi people.
It is therefore important that the United States is clear in its intentions, committed to long-term rehabilitation, and credible in its strategy. This will require that American planners adopt an objectives-based approach, rather than one constrained by a pre-determined timeline. A well-crafted public diplomacy campaign and international buy-in will be crucial to improving the chances for success.
The road will be long and difficult. But without serious early planning for "Iraq the day after," a painful future awaits not only the Iraqi people, but American interests in the region as well. Military victory will be quickly overshadowed by political defeat if the United States does not get reconstruction right; and reconstruction may be the hardest part.
ADDENDUM
OIL AND IRAQ: OPPORTUNITIES AND CHALLENGES
Iraqi oil revenues will be central to financing humanitarian assistance and security activities in that country during and after any military campaign. If de-politicized, the existing UN oil-for-food program provides a ready-made structure to ensure that Iraqi oil funds are used to protect and rebuild the country. While considerable resources are available, they will not be enough to provide for the many tasks required to stabilize and rebuild Iraq. Worse, a number of factors could further limit available oil resources.
In 1989, the last full year prior to the Persian Gulf War, Iraqi oil revenues totaled $14.5 billion and already constituted 99 percent of Iraq's export earnings. Iraq's two lengthy wars, first against Iran (1980-1988) and then subsequently Operation Desert Storm and its aftermath, have taken a heavy toll on the diversity of the Iraqi economy, which prior to 1980 relied on oil for only 39 percent of gross domestic product.
The availability of oil revenues during conflict and immediately thereafter is not assured and will depend on effective policy. Oil production has been dropping since 1979, most precipitously over the last several years at 100,000 bpd annually. War and its aftermath could further limit Iraq's production. If not planned for in advance, the challenges faced by Iraq's oil industry could leave Iraq's population of 23 million largely dependent on international donor aid and could portend a humanitarian crisis of unprecedented proportions. This would further delay reconstruction and significantly add to its cost.
With high unemployment and a quickly growing population, Iraq's economic base is considerably worse off than it was before Saddam took office and during the first few years of his rule. The pre-Saddam Iraq that many hold in their memories is not the Iraq of today, nor will it be the Iraq of tomorrow, even under the best of circumstances.
The key challenges to Iraqi oil potential include:
Preventing further damage to Iraqi facilities. Oil experts acknowledge that Iraq's oil sector is being held together by "band-aids." War, sanctions, and political manipulation have all seriously challenged Iraq's highly skilled oil industrialists. Further damage could result either from Iraqi sabotage or a U.S. bombing campaign.
Saddam may try to undertake a "scorched earth strategy," as he did in Kuwait in 1991. While such orders may be given, it is unlikely that Iraqi troops or oil technocrats would carry them out. The consequences are of such magnitude, however, that it would be wise for planners to consider this low probability/high cost scenario in their contingency planning.
Damage could also result from a U.S. military campaign. Key processing facilities can take many months to repair or rebuild. Their destruction could delay the restoration of oil production in the immediate aftermath of hostilities, possibly leading to intermediate-term damage to the country's overall oil production capacity.
Isolating the industry from domestic turmoil. Iraqi oil facilities will be dangerously exposed to domestic hostilities during conflict and its immediate aftermath. Local parties may try to grab control of key oil production installations in order to gain leverage in deliberations over their future use or to create political opportunities in a post-Saddam Iraq. This will be especially true if the benefits of oil revenue are not shared equitably among Iraq's communities. Putting the industry at further risk, localized looting of valuable equipment needed to sustain oil operations is possible.
If a large-scale, prolonged U.S. occupation of Iraq becomes necessary, or if the United States appears to be taking over Iraq's oil sector, guerilla attacks against U.S. military personnel guarding oil installations are likely.
Overcoming technical challenges. Sustaining Iraq's oil production capacity will require proper maintenance of its fields during the period of hostilities and its immediate aftermath. Failure to keep oil fields operating can severely damage future production. Sudden shutdown without adequate mothballing or shutdown procedures could lead to long-term reservoir damage. Iraq has severely tested the resilience of its fields by sporadically shutting down oil exports for political reasons over the past two years. Attention must be given to geological considerations of operations and maintenance of Iraq's fields during a military campaign. Otherwise Iraq is at risk of experiencing a significant loss of production capacity that will jeopardize its future oil revenue stream after hostilities cease.
Iraq will also face high technical hurdles to reaching production of 3.5 million bpd. Even without a war, Iraq's infrastructure is likely to be damaged and billions of dollars will be required to rehabilitate it.
Crafting a viable and credible public diplomacy campaign. Western anti-war activists, the Arab public, average Iraqis, and international media have all accused the United States of planning an attack on Iraq not to dismantle weapons of mass destruction but as a camouflaged plan to "steal" Iraq's oil for the sake of American oil interests. Therefore, any efforts to secure Iraq's oil installations and its future production must be clearly and credibly presented as actions taken to protect the country's wealth on behalf of all segments of the Iraqi population.
Information about oil production, repairs, future investment, oil exports, and sales must be made transparent and involve both international and Iraqi oversight. The United States should develop a strategy for demonstrating that any military or administrative involvement takes place in conjunction with Iraqi nationals and with international cover, and is designed only to protect the resources of the Iraqi nation. A mechanism should be developed to ensure that all proceeds and activities involving Iraq's oil industry are transparent, public, and remain in the ownership of Iraq's treasury. A model for this exists in the UN's current oil-for-food program and the availability of records on earnings, proceeds, and expenditures.
Retaining Iraq's professional sector personnel. Sitting atop Iraq's oil industry is a layer of political appointees from Saddam's inner circle and family who should be tried as war criminals. But this layer is thin. The vast majority of professionals and technicians can be vetted and relied upon to assist with the protection, maintenance and repair, and reconstruction of Iraq's oil and gas industry. Comprehensive involvement of Iraq's oil technocracy is extremely important for technical, moral, political, and social (as well as public relations) reasons. Many senior members of Iraq's oil elite are nationalistic in their attitudes, and they will be sensitive to the nature of U.S. and coalition aims for nation-building in Iraq and to their treatment of its revenue streams.
BACKGROUND
After two major wars and a decade of sanctions, Iraq's oil industry is in desperate need of repair and investment. Iraq's current sustainable oil production capacity is no higher than 2.6 to 2.8 million bpd and could slip further if hostilities result in a sudden or prolonged cessation of oil production. Prior to Operation Desert Storm, Iraq's capacity was about 3.5 million bpd.
There is little doubt that there is great potential to expand Iraq's oil production and export capacity, but it will require massive investment. Iraq has the second largest proven oil reserves in the world (behind Saudi Arabia) estimated at 112 billion barrels, with as many as 220 billion barrels of resources deemed probable. Of Iraq's 74 discovered and evaluated oil fields, only 15 have been developed. Iraq's western desert is considered to be highly prospective but has yet to be explored. There are 526 known structures that have been discovered, delineated, mapped, and classified as potential prospects in Iraq of which only 125 have been drilled.
Iraq's export infrastructure has been badly damaged in its two wars. A rapid increase in Iraqi oil exports will not be possible given the limitations of Iraq's production and export facilities. Even under the most favorable circumstances in which no additional damage was done to existing facilities during a U.S.-coalition military campaign, it would take Iraq at least six months and possibly longer to expand oil production and export rates from current capacity levels. The Working Group believes it will take Iraq between eighteen months and three years to return to its pre-1990 production level of 3.5 million bpd. It will cost an estimated $5 billion to repair and restore previously used facilities, in addition to an estimated $3 billion in annual operating expenses. An estimated $20 billion will be needed to restore Iraq's pre-1990 electricity capacity. Iraq has previously stated a desire to expand its oil production capacity to 6 million bpd. This is geologically possible but would take a number of years and tens of billions of dollars in investment.
Iraqi oil production is concentrated in two geographic areas: in northern Iraq in and around Kirkuk, and in the south in and around Basrah. The Kirkuk oil field accounts for 700,000 bpd of northern oil production, the vast majority of what can be produced and exported from that region. Most northern production is exported via pipeline through Turkey, though no fewer than 180,000 bpd are shipped to Syria by pipeline outside UN supervision. The second largest northern field is Bai Hassan, which produces about 110,000 bpd. Other northern fields make considerably smaller contributions.
The second most important field after the Kirkuk field is the southern field of Rumaila. The north Rumaila field produces about 750,000 bpd, while south Rumaila adds another 500,000 bpd. Other large southern fields include Al-Zubair (240,000 bpd), Missan (160,000 bpd), and West Qurna (120,000 bpd). These fields depend on water injection systems and gas treatment facilities. Production from southern oil fields is exported via a pipeline that extends to northern Iraq and connects to the Turkish pipeline and via the gulf offshore terminal of Mina al-Bakr.
American military planners should give careful consideration to protecting the Kirkuk field in particular. Its proximity to the U.S./UK no-fly zone will make this field highly vulnerable. Beyond the benefits that the Kirkuk field will provide to humanitarian aid programs for all of Iraq, Turkey relies on pipeline tariff revenue from exports from this field.
Protecting this field will not be an easy nor an obvious priority, as its preservation could pose major security challenges. In 1991, during Desert Storm, Kurdish militants briefly occupied the headquarters of the Kirkuk oil industry during the generalized unrest around the area. Kurdish communities now earn 13 percent of Iraq's revenues from northern oil production and will want continued access to this important income stream. Although Kurdish communities benefit greatly from the UN oil-for-food program, the slow turnaround in the repatriation of humanitarian aid and the real stakes involved for Kurdish identity mean that Kurdish cooperation regarding Kirkuk is not a given. Nonetheless, the benefits of protecting the field far outweigh the alternative.
The southern Rumaila fields would also be an important installation to protect, although the task may be complicated by their location in Shi'a border areas.
Access to electrical power is also a critical input to operating and maintaining oil fields and powering export pipelines in Iraq. Severe damage to power stations in and around major oil installations will greatly reduce the level of Iraqi exports.
POST-HOSTILITIES: STABILIZING THE SYSTEM
One of the first priorities in Iraq after the war will be to stabilize current oil production capacity. In June 2001, a UN report stated that "Iraq continues to face significant technical and infrastructural problems, which unless addressed will inevitably result in the reduction of crude oil production." In fact, Iraq's current production capacity is declining at the rate of 100,000 bpd annually.
Because of the extensive repair work required to stabilize the system and the vulnerability of Iraq's oil fields to damage under scenarios of sudden or prolonged shut-down, the country's oil production capacity could actually decrease, rather than easily be rehabilitated and expanded as the media has incorrectly suggested.
Although we believe the possibility to be low that such orders would be carried out, Saddam Hussein could order his troops to set alight certain or all Iraqi oil fields just as he did in Kuwait in 1991. Kuwaiti fires required eight months and approximately $2 billion to douse. Kuwait took over two years to restore oil production to full capacity from the time the fires were smothered. Saddam could also order missile attacks on certain oil installations occupied by coalition forces or localized groups during the early days of a campaign. Any such act would clearly set back oil facility reconstruction timelines, in addition to bringing grave economic hardship on the Iraqi people. These scenarios are not very likely, however, as Iraqi soldiers and oil technicians would be reluctant to destroy the country's future. But in a war setting, no such scenario can be completely ruled out, especially if the Iraqi leadership can arouse nationalistic sentiment regarding the country's oil wealth.
Damage, accidental or collateral, to key processing facilities could also affect Iraq's ability to restore production and exports rapidly in the aftermath of a military campaign. Some processing facilities, such as gas processing and gas oil separation plants, would take a few years to repair or reconstruct (in Kuwait, it takes about two years to build a 100,000 bpd gas/oil separation plant). Oil pipeline pumping stations could require many months if not years to repair and reconstruct. It could take several months of workover and new drilling activity to repair reservoirs from any damage sustained from sudden or prolonged shutdowns, leading to some loss of immediate productive capacity from pre-hostility levels.
OBSTACLES TO INCREASING PRODUCTION
A massive expansion of infrastructure and investment, as well as a stable political environment, will be required for Iraq to increase its oil production capacity to the oft-quoted 6 million bpd mark.
Initial investment requirements will have to compete with costs for Herculean humanitarian and other reconstruction needs that have to be met avoid a major health and economic crisis in Iraq after a war. This trade-off will limit how much money Iraq will have to invest in restoring and expanding its oil industry. If no facilities were damaged, Iraq's total oil revenues would still only likely average around $10 billion to $12 billion annually. Total oil revenues would be less than half of this amount if only northern oil production and export facilities were secured without damage.
Iraq's infrastructure problems are severe. Due to operating constraints and the regime's erratic policies, Iraqi oil managers have resorted to sub-optimal techniques to sustain production. It will be impossible to gauge the extent of Iraq's oil sector damage before completing overall assessments. Therefore the United States must support international and Iraqi efforts to devise a comprehensive plan for the redevelopment of Iraq's entire oil industry that determines:
* the optimum development of oil fields with regard to maximizing access to export facilities and processing plants;
* the optimum manner to develop and expand transportation infrastructure inside Iraq and for export;
* the optimum manner to develop infrastructure for the importation of needed oil field equipment and other supplies with regard to ports, roads, and railways; and
* the allocation of investment to these communications routes as well as the power generation needed to implement capacity expansion.
Repair of export facilities will likely be the determining factor in the restoration and expansion of Iraqi oil production capacity. Current export capacity via Turkey is limited to 900,000 bpd. Repair of two pumping stations and the Zakho metering station must be completed in order to increase Iraq's exports through Turkey to their pre-1990 capacity of 1.7 million bpd via the two parallel pipelines to Ceyhan.
Exports from southern oil fields will depend on the condition and capacity of Iraq's north-south pipeline and repair of its gulf export terminals. The smaller Mina al-Bakr terminal currently can handle 1.3 to 1.4 million bpd. Additional repairs will be needed to restore its operations to nameplate capacity of 1.6 million bpd.
Full repair of the Turkish parallel lines and Mina al-Bakr would bring Iraq's export capacity to 2.8 million bpd. Iraq's other gulf port of Khor al-Amaya could add an additional 1.2 million bpd of export potential if repaired and utilized.
Other export outlets include Syria, where a 1.4 million bpd pipeline connection currently exists. Syria uses most of the line's capacity for its own oil exports, but no fewer than 180,000 bpd of Iraqi oil have been smuggled through Syria in recent years. A small pipeline connection also exists to Iran. Saudi Arabia nationalized the 1.65 million bpd, IPSA-2 oil pipeline that can carry oil from Iraq to Saudi Arabia's Red Sea coast, claiming the facility as war reparations. The integrity of this pipeline has been maintained, and it is considered operational.
Massive repairs are also needed to Iraq's ten oil refineries.
WHO SHOULD MANAGE IRAQ'S OIL?
Iraq has a large, well-trained professional corps of oil industry technocrats and technicians that is capable of controlling the oil industry, as it has for three decades. Failure to tap this national resource to repair, run, and expand Iraq's oil industry would result in serious political, security, and public relations backlash.
During conflict and in its aftermath (if damage is not severe), Iraqi professionals will be able to undertake normal Iraqi oil operations with continued oversight by the United Nations. The continuation of the UN's oil-for-food program structure will assist in building a resource distribution mechanism with minimal corruption and transparent prioritization in the allocation of oil revenues.
Due to massive infrastructure requirements, however, Iraq's oil experts may be amenable to establishing an international consortium, with Iraqi participation and leadership, to assist with planning, coordination, and implementation of a wide variety of projects. Paragraph 30 of UNSCR 1284 already authorizes the UN secretary-general to investigate ways that oil companies could be allowed to invest in Iraq. Thus, the legal basis for the UN to authorize and oversee foreign investment in the repair and expansion of Iraq's oil industry under the oil-for-food program already exists.
Competition for repair, restoration, expansion contracts, and tendering for exploration contracts in Iraqi oil and gas fields should be under the control of Iraq's professional cadre. In the short- and medium-term, the UN should continue its oversight in reviewing the contracting process. Tapping the UN mechanism will help to ensure that the bidding process is transparent and governed under principles of open access.
The legality of post-sanctions contracts awarded in recent years by the current Iraqi regime will have to be evaluated. Contract holders may resort to legal means to assert their rights even under circumstances of regime change. Prolonged legal conflicts over contracts could delay the development of important fields in Iraq and hamper a new government's ability to expand production. It may be advisable to pre-establish a legitimate (possibly UN mandated) legal framework for vetting pre-hostility exploration agreements.
It remains to be seen how eager a new Iraqi leadership will be to welcome back foreign direct investment. In the past, Iraqi oil technocrats have favored a return of such capital. However, the experience of Kuwait after 1991 should temper expectations of a windfall. After hiring Western firms to put out its oil field fires and repair surface facilities, Kuwait's parliament has routinely voted against contracting with foreign firms for oil field development despite a loss of production capacity that has been experienced over the last three years. Given Iraq's desperate economic situation, its leadership may not have the luxury Kuwait did to try to go it alone. But with a new government and greater plurality of views, Iraqi oil nationalists could pursue a variation on the Kuwaiti approach.
Iraq and OPEC. The Working Group is unconvinced that a new Iraqi government will quit the Organization of Petroleum Exporting Countries (OPEC) as some have speculated. As a founding member of OPEC, Iraq will experience a strong historical pull to remain within the organization. As important, if not more so, is the fact that producing outside of an OPEC quota will not necessarily bring increased resources. Every producer must balance between restraining output to create generally higher international oil prices and expanding individual production capacity to seek higher revenues through rising market share but potentially at lower overall international price levels. Operating outside of OPEC will not necessarily garner increased profits, as Iraqi oil decision-makers are also well aware of the fact that Saudi Arabia may punish Iraq by flooding the market with its own oil, if Iraq chooses to quit OPEC.
Saudi Arabia and other OPEC members will likely lobby Iraq hard to accept an oil production quota equal to Iran which is 3.18 million bpd and is in line with historical precedent. Also, because Iraq's success relies on good neighborly relations, there are reasons for Iraq to be part of OPEC that are not as compelling to countries outside the region, such as Russia.
IRAQI GAS: GOOD POTENTIAL BUT NOT A PRIORITY
Iraq holds 110 trillion cubic feet (tcf) of proven natural gas reserves, as well as approximately 160 tcf in probable reserves. Much of the gas has remained untapped. Gas development will probably take a backseat to oil development, where markets and profits are more immediately tangible. Iraq has already discussed gas exports to Turkey in competition with Russia, Iran, and other key gas producers. In 1997, Baghdad reached an agreement with Ankara to build a $2.5 billion 1,380-km gas pipeline from northern Iraq to southwestern Turkey, which could possibly be linked to the Trans-Magreb line that runs from Turkey to Europe. The proposal would involve the transport of 10 billion cubic meters (bcm) of Iraqi gas annually to Turkey from five fields in the north-Al-Anfal, Al-Mansuriya, Jaryat Baka, Al-Khasham Ahmar, and Al-Jamjal.
Turkey, however, has greatly overestimated its gas requirements, mainly for power generation, is in default on a take-or-pay gas contract with Iran, and is slowing movement on a projected major new source of gas from Azerbaijan. Turkey, therefore, is unlikely to present a market for Iraqi gas exports during this decade. Eventually, Iraqi gas might feed into a pipeline system carrying gas from several potential suppliers across Turkey to Europe, if such a system is built.
KEY RECOMMENDATIONS
Given the above analyses, the Working Group recommends:
* issuing official U.S. statements guaranteeing Iraqi sovereignty and territorial integrity and the preservation of Iraq's full national ownership and control over its resources;
* crafting a public diplomacy campaign that explains the need to secure oil facilities and assures skeptical publics that the United States has no aims to "take over" Iraqi oil assets;
* ensuring that the U.S. military has the requisite information to identify the assets that could, if severely damaged or destroyed during military hostilities, substantially delay resumption of the Iraqi oil export program;
* de-politicizing and preserving the UN oil-for-food distribution mechanism in order to handle oil export programs during hostilities and immediately thereafter;
* drawing on UNSCR 1284 to help Iraqis rationalize their oil sector and develop strategies to access foreign oil company assistance and investment;
* leveling the playing field for awarding energy sector contracts by supporting a transparent and competitive tendering process;
* supporting the creation of an international consortium to work with Iraqi industrialists and create a road map for the reconstruction and expansion of Iraq's oil sector; and
* establishing a legal framework within the UN, as early as possible, to handle claims by oil firms holding oil field contracts in Iraq to prevent lawsuits from delaying future development.
[Continued next post: Out line of three phased approach to post war iraq] |
