Security concerns keep oil industry in Iraq in low gear

LONDON -- British oil consultant Paul Bristol has traveled to Baghdad six times since the U.S.-led invasion of Iraq, but the risks only hit home when his Iraqi hosts assigned him a driver carrying a gun.

And instead of dining at restaurants after meetings at Iraq's Oil Ministry, he hurried back to his hotel to eat.

The eroding security situation, marked by militants' beheadings of American and South Korean hostages, has taken a heavy toll on Iraq's strategic oil industry.

As the U.S.-run coalition prepared to transfer political power to Iraqis on Wednesday, insurgents escalated attacks against oil facilities, blowing up pipelines that carry crude to export terminals off Iraq's Persian Gulf coast. The sabotage disrupted shipments for several days. A similar blast Tuesday halted the flow of crude to the biggest refinery in central Iraq, the Doura facility outside Baghdad.

The lack of security following Saddam Hussein's ouster exacerbated problems already plaguing the nation's oil business. Pumping stations and other vital facilities sank into disrepair from years of U.N. sanctions, war and lack of investment. Widespread looting after the invasion inflicted at least $200 million in additional damage.

Interruptions in crude supplies to refineries have forced Iraq to rely on imports for one-third of its gasoline and other refined products. Analysts say lack of money has made repairs and the procurement of spare parts more difficult, while corruption and a potential shortage of trained personnel threaten to delay progress further.

"Everybody is disappointed," said Manouchehr Takin of the Center for Global Energy Studies in London. "I like to be optimistic, but it's not very promising."

Iraq has the world's second-largest proven oil reserves, and crude exports are vital to its reconstruction. Iraq's interim prime minister, Iyad Allawi, estimated recently that saboteurs cost the country $1 billion in oil revenues, and he said their attacks on oil facilities likely will continue.

As the U.S.-backed authorities have struggled to patch and protect this economic lifeline, the abductions and killings of contract workers and other foreigners have scared off potential oil investors and service firms.

"Schlumberger has no business in Iraq for the moment," said Ariane Labadens, a spokeswoman for oil services giant Schlumberger Ltd. "We will do business when we feel that the security conditions allow us to do that."

Iraqis won control of their Oil Ministry well ahead of the planned June 30 transfer of sovereignty. The United States, seeking to allay suspicions it might exploit Iraq's oil wealth, distanced itself from direct administration of the industry.

However, Washington may have erred by providing too little oversight, letting Iraqi political authorities sign oil sales contracts without any way of checking whether they got market prices, argues Edward Morse of the New York energy trading firm HETCO.

Washington also failed to ensure that buyers paid no kickbacks to Iraqi officials, Morse wrote in the American quarterly "The National Interest."

Amy Jaffe of the James A. Baker III Institute at Houston's Rice University said, "A lot of corruption has crept back into the system."

One bright spot has been the competence of the largely Western- educated technocrats running Iraq's oil sector. The most salient among them -- Thamir Ghadbhan -- was named oil minister June 1 to wide approval from foreigners and Iraqis.

"I think he should have been put in charge a year ago," said Issam Al-Chalabi, a former Iraqi oil minister and now an independent analyst.

Although Iraq produced about 2 million barrels a day in May, that was less than what it pumped before the U.S.-led invasion and far below pre-1991 Gulf War levels.

Al-Chalabi said from his office in Amman, Jordan, that he fears Iraq, in its desperation to improve output, might be doing irreparable damage to its underground oil reservoirs.

But security is the first concern. Doura refinery used to provide Baghdad's residents with enough gasoline, kerosene and other refined products.

After Saddam's regime collapsed, however, insurgents attacked the pipelines feeding Doura, and for eight months it has operated at about 80 percent capacity, general manager Dathar al-Khashab said.

The result has been electricity blackouts and a reliance on imported gasoline.

"There is nothing wrong with the refinery. As a matter of fact, it's in better condition now than it was two years ago," he said. "Immediately, once the security problem improves, we will stop importing products."

The Development Fund for Iraq, set up by the coalition authority in May 2003 to direct funds into Iraqi reconstruction, has so far received $10.8 billion from oil exports.

However, the authority has budgeted just $352.5 million for the Oil Ministry this year, most of it for an oil field east of Baghdad and a gas project in southern Iraq.

"That's nothing," complained Dara Attar, an Iraqi Kurd working as an independent oil analyst in London.

Attar said Iraq will need to invest at least $20 billion to raise its daily production to 4 million barrels.

The sheer size of Iraq's reserves -- at least 113 billion barrels - - continues to tantalize would-be foreign investors.

Bristol, the London-based consultant, said many Western oil companies are "mad keen" to do business in Iraq once security improves.

"Within three months," he said, "the new government has got to put a stamp on things."

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