Iraq's oil riches still languish

Production is up -- but it's still stymied by insurgent attacks and a stalled law that would open the country up to international oil companies.

By Vivienne Walt, Fortune

(Fortune) Vienna -- While officials from some of the world's biggest oil producers holed up in private meetings in Vienna Monday night, to decide whether to increase Opec's oil production, Iraq's Oil Minister Hussain Al-Shahristani retreated to his hotel suite, and watched television instead. Specifically, he tuned into the broadcast of Gen. Petraeus's testimony in Washington about the war.

Alone among the 12 OPEC oil ministers meeting in Vienna this week, Shahristani presides over an Iraqui oil industry that is battling to operate under almost impossible conditions.

Hundreds of thousands of barrels a day are lost to smuggling, according to the U.S. Government Accountability Office. Insurgents have launched hundreds of hit-and-run attacks on oil pipelines. Countless oil engineers have fled the country. And foreign contractors are under continual threat of kidnapping or death.

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But sitting in his suite near midnight on Monday, Shahristani said he agreed with Petraeus's assessment that the conflict in Iraq appeared to be easing off. "There's an awakening of the Sunni Arab tribes in a number of insurgency hotbeds," he said. "American troops can gradually begin returning home."

Shahristani said his ministry has recruited armed Sunni tribesman in recent weeks to guard oil facilities, which have endured hundreds of attacks by insurgents since the U.S. invasion in 2003. Similar to U.S. Army efforts in insurgent-heavy Al-Anbar province, Iraq's oil officials have tapped into groups which have spent years attacking oil facilities. "We managed to get them to volunteer some of their young men to join," he says.

In late August, Iraq began exporting about 300,000 barrels a day to the oil terminal in Ceyhan, Turkey, through a northern pipeline which had been shut since an insurgent attack last year, he said. "The current crude production is about 2.4 million barrels per day," Shahristani said. "That is the highest it has been since the fall of the regime" nearly four and a half years ago.

That figure is exaggerated, according to some analysts. The Washington-based oil consultancy PFC Energy estimates Iraq's oil output at about 1.9 million, and predicts that level will hold through 2008, because of enduring violence and war damage. That estimate includes about 250,000 barrels a day from the oil-rich northern city of Kirkuk, but only about 100,000 barrels a day can safely make it through the northern pipelines to Turkey, according to David Kirsch of PFC, in Vienna. Production has plummeted since pre-war highs of about 3.8 million barrels a day.

"Iraq needs to sort out security problems and repair oil facilities," said Kirsch.

At 65, Shahristani has survived plenty of turmoil himself. Born in the holy Shiite city of Karbala, he was educated in London and Toronto, and became one of Saddam Hussein's key nuclear physicists, and an advisor to the country's Atomic Energy Organization.

There he began to criticize Saddam's quest for nuclear weapons, and was jailed for 12 years at age 37 in the notorious Abu Ghraib prison. Now he is a key member of parliament for the United Iraqi Alliance, a powerful Shiite coalition.

Yet despite his heavyweight credibility, Shahristani has been unable to persuade Iraq's divided politicians to vote in a new national oil law. The draft law was approved last February by Iraq's cabinet, and aims to open Iraq's mammoth oil riches to international companies after decades of war and Western sanctions.

Under the law, companies will be able to sign 10-year exploration deals and 20-year production agreements in partnership with the state-run oil company. Some political parties accuse the government of trying to sell off national assets to foreign corporations. And Kurdistan's powerful regional government says it fears Baghdad will clamp down on its autonomy.

After more than a year of wrangling among politicians, Kurdistan last month passed its own hydrocarbon law in the regional parliament. Last weekend Kurdish officials signed an exploration deal with Dallas-based Hunt Oil Co., a private independent company.

It was the sixth deal signed in Kurdistan since the war, without Baghdad's involvement, and the first with a U.S. company. Shahristani says "almost all the international oil companies" are waiting to start developing Iraq's huge oil fields, but are waiting for a new federal oil law.

To Shahristani and his colleagues in Baghdad, the Kurds' deal with Hunt Oil was bad news -- a sign that Kurdistan can perhaps produce oil without their involvement. Shahristani said the Kurdish oil contracts were illegal.

"Any contract that is signed without the approval of the federal government has no standing," he said, sitting in his hotel room on Monday night. "We are not approving any of those contracts."

But until Iraq's new oil law passes its parliament, it might be the only new oil contracts Iraq sees for a while. Top of page