Experts predict no windfall from oil in a post-war Iraq

LONDON -- The idea that Saddam Hussein's ouster in a U.S.-led war would mean a surge in Iraq's oil output is probably just a petroleum pipe dream.

The country has managed to produce large volumes of oil -- despite 12 years of U.N. sanctions, a dearth of investment and interference from the Iraqi leader himself -- only because of the tenacity of its oil technicians.

But Iraqis have kept the crude flowing by running their oil industry into the ground -- literally. Engineers shut at least one well in the country's North Jambur oil field after pipe casings corroded so badly that the wellhead subsided into the earth.

Iraq's oil industry was already in "lamentable" shape three years ago, according to a team of visiting U.N. experts who reported the collapsed wellhead. Anecdotal evidence suggests conditions at Iraqi oil fields, refineries and export terminals have deteriorated further.

Iraq has the world's second largest petroleum reserves and in 1990 was capable of pumping 3.5 million barrels of crude a day. Now capacity is down to 2.8 million barrels and falling annually by 100,000 barrels.

Some analysts argue that Iraq would need several years and tens of billions of dollars to boost output capacity much above what it was on the eve of Operation Desert Storm.

Any increase in production would also depend on the price of oil, the extent of damage from a war, and the policies of Iraq's next government.

"Put simply, we do not anticipate a bonanza," said a study prepared in December for the Council on Foreign Relations and Rice University's James A. Baker III Institute for Public Policy.

The notion that Iraqi crude production would rise quickly once the shooting is "not a very realistic scenario," said Michael Rothman of Merrill Lynch in New York. "The issue is not resurgence. The issue is time, to try to rebuild basic capacity."

Iraq has 112 billion barrels of proven oil reserves. Only Saudi Arabia has more.

The immediate threat to this oil wealth would be a scorched-earth strategy of sabotage by Saddam's army. At worst, the destruction could eclipse the damage Iraqis wrought on Kuwait's oil fields in 1991.

To prevent such a disaster, the United States and its allies would need to secure Iraq's oil fields as fast as possible. Their troops could also help deter Iraqi warlords from seizing bits of the oil infrastructure for themselves, said Valerie Marcel of the Royal Institute of International Affairs.

A war would almost certainly disrupt most Iraqi oil exports, so the United States and its partners would want to ensure speedy resumption of shipments. If the fighting ended quickly, Iraq could export 2 million barrels a day "from the get-go," said Jan Stuart of ABN Amro bank in New York.

To keep shipments flowing smoothly, Washington might take over running of the U.N. oil-for-food program, set up to regulate Iraqi exports and imports, Stuart said.

The U.S. government is sensitive to suggestions that it wants to exploit Iraq's oil wealth for itself. Secretary of State Colin Powell has insisted the United States and its allies would control the country's oil for the benefit of the Iraqi people.

Iraq's petroleum engineers and technicians would play a crucial role in rebuilding. Employees of the State Oil Marketing Organization, Iraq's oil monopoly, have kept up production despite supply shortages and Saddam's halting of exports for weeks to try to punish the United States and other oil-dependent nations that support Israel.

They are "incredibly clever people" who have held the industry together "with Band-Aids, prayers and God knows what else," said Axel Busch of Energy Intelligence Group publications.

But their efforts have come at a price. U.N. experts visiting Iraq in 2000 noted severe corrosion, blowouts and pollution in the oil fields and concluded some wells had been irreparably damaged. More recently, rising levels of water and sulfur in Iraqi crude indicate possible harm to oil reservoirs.

Pipelines, pumping stations and loading facilities all need to be upgraded. Iraq's production could even decrease in the first months after a war, due to critical repairs.

Walid Khadduri of the Middle East Economic Survey estimates at least $3 billion is needed to restore Iraqi production to its 1990 level. Iraq might need $10 billion beyond that to increase its production capacity to 5 million barrels a day.

"I don't think Iraq can reach 5 million barrels a day in less than six years," said Manouchehr Takin of the Center for Global Energy Studies in London. If the government maximized production, it could pump as much as 7 million barrels within 10 years, he said.

By comparison, daily output in December for OPEC's top two producers -- Saudi Arabia and Iran -- was 7.75 million barrels and 3.60 million barrels, respectively.

Outside funds would be essential to rebuild Iraq's oil industry. So too would the willingness of foreign creditors to forgive some of Iraq's enormous debts, estimated at $139 billion-$220 billion.

Some U.S. officials want to privatize Iraq's oil industry, in part to guarantee opportunities for Western investors. But Khadduri of the Middle East Economic Survey thinks most Iraqis would resist that.

"It would confirm all the fears that some people have," he said, "that this is a war about oil."

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