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To: Tomas who wrote (45667)	5/30/1999 10:49:00 PM
From: Tomas	Read Replies (2) \| Respond to of 95453

Financial Times World Energy: If the UN sanctions imposed on Iraq eight years ago were lifted tomorrow, the Iraqi oil sector would require tens of billions of dollars of rehabilitation to generate the funds needed to rebuild the ravaged country. Sanctions, of course, are not about to be lifted, despite the erosion of support, especially in the arab world, for measures that hurt the Iraqi population far more than the regime they are supposed to target. So, as Iraq grapples with life under sanctions, it finds that its oil industry, which dominates its economy and used to account for virtually all foreign exchange revenues, has gradually sunk into a lamentable state with oil wells watering out and capacity dropping. Sanctions deprived Iraq of all oil exports until Baghdad agreed at the end of 1996 to an exemption allowing it to sell $2bn worth of oil to buy food and medicine every six months. Last year the UN security council agreed to increase the oil-for-food deal up to $5.2bn. Because of the damage inflicted on the oil industry in the past seven years due to the lack of spare parts and given the slump in oil prices, Iraq has not been able to lift six-month export sales beyond $3bn. While before the Gulf war total production stood at 3.07m barrels a day, production today is estimated at about 2.5m b/d, 550,000 bpd of which is for domestic consumption. According to a report by experts at Saybolt Nederland BV, which was contracted by the UN, the predicted decline in the overall oil production capacity of Iraq has been in the range of 4 to 8 per cent. It says production is being lost to wells that are watering out and the ability of the industry to treat crude oil prior to export is limited because crucial spare parts have yet to arrive and be installed. A significant number of wells have ceased production in the north and south due to the lack of water removal facilities, and about 20 per cent of wells are irreparably damaged. The others could be returned to production if appropriate spare parts were provided. The UN security council has agreed to a $600m allocation for Iraq to spend on spare parts, with the first $300m approved six months ago, but approval of contracts and delivery have been exceedingly slow. So far only $10m to $15m worth of spare parts have arrived in Iraq. Saybolt predicts that an increase in production levels is unlikely before March, 2000. Although the US has now speeded up approval of contracts, diplomats say Washington last year was deliberately delaying approval of parts that could restore the industry rather than give it a temporary ability to raise production. The Iraqi regime, which has always objected to the oil-for-food deal on grounds that the US and Britain want to substitute it for a lifting of sanctions, never ceases to make plans for its industry in the post-sanctions period. The government wants to raise production to 3m bpd six months after the end of the embargo and to 3.5m bpd within two years. With tens of billions of dollars needed to revive the oil sector, the government has tried to win political support for an end to the embargo by dangling the prospect of huge potential oil deals. Iraq's oil industry was nationalised in the 1970s, but the government has started to offer production-sharing agreements in discovered fields. In 1997 it signed a deal with Russian companies to develop the West Qurna field. Chinese companies won a contract to develop the Al-Ahdab field and France's Total and Elf Aquitaine are believed to have been in talks with the government to develop two fields in the south of the country. These deals, however, can only go into effect and help develop the Iraqi industry when the sanctions are lifted. Not surprisingly, Russia, China and France have tried to push for an end to sanctions, leading to severe splits among the five permanent members of the UN security council. From Financial Times World Energy, April issue

To: Tomas who wrote (45667)	5/30/1999 11:05:00 PM
From: Tomas	Read Replies (1) \| Respond to of 95453

Financial Times World Energy: Middle East Economies develop taste for foreign money Across the region, governments are changing tack, says Robert Corzine. Gone are the days when they would turn away foreign investment. Indeed, in many cases they are now going out of their way to welcome it Mark Moody-Stuart, the chairman of Royal Dutch/Shell, the Anglo-Dutch oil group, began a recent swing through the Middle East with a visit to Kuwait. Upon arrival his hosts greeted him with the words: "We see you are going to Saudi Arabia next." When he reached Riyadh on the second leg of the tour, his Saudi hosts had a similar welcome prepared: "We see you have just been in Kuwait." Mr Moody-Stuart's experience illustrates the high stakes that countries in the region are playing for as they move at varying speeds towards what some hope will be an eventual full opening of their energy sectors to foreign direct investment. As with most things in the Middle East, the process of opening the oil and natural gas sectors of some of the largest reserve holders in the world has not been particularly transparent. And it is not even certain that it will happen in all cases. But the prospect of access to some of the lowest cost oil and gas reserves in the world has tantalised both big and small international oil companies, which are busy opening or reinforcing offices in the region. To understand why such an uncertain process has generated such intense excitement one needs to go back and examine the recent history of oil production trends outside the the Organisation of Petroleum Exporting Countries. In recent years billions of dollars have been spent in exploring increasingly remote or technically challenging areas of the world. Although non-Opec production has risen steadily as a result, most forecasts suggest that in the coming decade non-Opec will struggle to keep up with growing world oil demand: "For the past 10 years non-Opec has had every financial incentive to squeeze the orange as hard as they can," says Gary Ross of Pira energy consultants in New York City. "But even with those incentives the world still needed more Opec oil. It's simply a matter of who has the reserves." Gaining access to such low cost reserves has become a management mantra in the boardrooms of the biggest western oil companies. But why should the countries of the region be so keen on foreign capital, given that most of the region's oil can be produced relatively cheaply and simply with little need of the high technology equipment that is required in areas such as the North Sea? In the case of Iran and Iraq, there is simply no alternative. Iran's oil and gas infrastructure has been starved of investment for 20 years. The government's high dependence on oil revenues for hard currency and to fund state expenditures means there is little left for the industry. The "buy-back" programme now underway is a compromise that allows foreign investment into the strategic sector without violating the requirements of Iran's constitution, which bans foreigners from "owning" Iranian oil reserves. International companies have responded enthusiastically, not so much because the terms of buy-back deals are attractive - in some cases they are not - but because they hope to use the initial contracts as a basis for more enduring relationships with Iran's government and national oil company. Once United Nations sanctions are lifted, Iraq too will have little alternative but to invite foreign oil companies to rehabilitate and expand its oil and gas industry. Unlike Iran, Iraq has no constitutional restraints, and a number of production sharing contracts - the usual format for foreign investment in most producing countries - have already been concluded or are ready for signing once the oil embargo is lifted. But in the case of Saudi Arabia and Kuwait, the two big Gulf Arab producers which have so far resisted foreign investment in their upstream oil sectors, the economic logic appears less clear, with political considerations likely to play a more important role in any eventual decision. Foreign oil executives insist, however, that there is an economic case for outside investment. In the case of Kuwait, says one European oil executive, a valid argument 20 years ago would have said: "We have huge reserves that are an appreciating asset for future generations, so why should we allow foreigners to become involved." But he claims that argument is no longer valid. The advent of increasingly tough environmental legislation around the world, the requirements under the Kyoto Protocol to reduce greenhouse gas emissions, the displacement of oil by gas in power generation, and new energy technologies, such as fuel cells, all threaten to undermine the pace at which demand for oil will grow. Given real price trends, it could be argued that oil is a depreciating asset. Some have argued that in the case of Kuwait, a direct presence by US and European oil companies would cement crucial defence ties and enhance the state's long-term security. A similar argument is sometimes advanced for Saudi Arabia. But others might view the opening of the two countries' upstream sectors as an admission that oil prices might not stay high for ever, and that they are preparing for future price wars. Financial Times World Energy, April issue