Iraq 'needs foreign oil companies'

By Emma Clark
BBC News Online business reporter

Iraq's oil industry can achieve its full potential only with the help of international oil companies, Iraqi oil experts have argued.

Iraq's oil industry is dilapidated

The country's oil industry, which has been state-owned since re-nationalisation in 1972, was starved of investment under Saddam Hussein's leadership.

"I believe some kind of drastic change should be considered to provide for the private sector and to get away from state ownership," said Dr Fadhil Chalabi, executive director of the Centre for Global Energy Studies.

Iraq produces about 1.5 million barrels a day (b/d) at the moment, down from 3.5 million b/d before the 1991 Gulf War.

But with sizeable investment of $35bn-40bn, Iraq has the potential to pump 6 million-7 million b/d by 2010, according to management consultant McKinsey.

The country should be widely opened to the private sector to accelerate the range of investments Dr Fadhil Chalabi

However, Dr Chalabi told a conference on Iraq reconstruction in London earlier this week that the state could not achieve these levels of production by itself.

"The country should be widely opened to the private sector to accelerate the range of investments so that Iraq can benefit from its huge potential wealth buried under ground," he said.

Iraqi oil consultant Dr Ali Hussein agreed that "Iraq will have to ask international oil companies to invest".

Dr Chalabi was made under-secretary of oil at Iraq's Ministry of Oil in 1973, before later becoming acting general secretary of the oil cartel Opec in the 1980s.

'Excellent prospects'

Iraq possesses the second largest proven oil reserves in the world, after Saudi Arabia.

However, in the 75 years since oil was discovered in the giant Kirkuk field, only 14 years have witnessed intensive exploration.

Similarly, of the 73 fields that have been discovered, only 15 have been developed.

Table of Iraq's oil potential

"The prospects are excellent," said Dr Hussein. "One day Iraq could be one of the biggest oil industries in the world."

However, the involvement of foreign oil companies, particularly US firms, is controversial because of accusations that the war was a pretext for the Americans to gain control of Iraqi oil reserves.

"It is sensitive because it is a national asset, but what is the use of oil in the ground, when the economy is in ruins?" asked Dr Hussein.

He emphasised, however, that any agreement with foreign oil companies would need to be approved by an elected Iraqi government and parliament.

Rehabilitation deals

Such companies would participate in production-sharing agreements (PSAs), whereby they would invest capital in Iraq's oil industry.

They could then recover their investment by taking a margin of the profits from any oil production.

Following the recent war, the US military has invited bids for two contracts - worth up to $1bn in total - to put Iraq's oil infrastructure back in order.

But these deals will concentrate on rehabilitating Iraq's oil production, rather than building up the industry in the long term.

Dr Chalabi warned that no company would invest in Iraq's industry unless there was "credible governance and a sound legal system".

The Coalition Provisional Authority in Iraq is currently being advised by a board of oil engineers, chaired by Philip Carroll, a former chief executive of Shell Oil in the US and the engineering company, Fluor.

Dr Chalabi emphasised that the board had no power to take any decisions on Iraq's oil industry and had merely an advisory function.

---

Iraq's oil potential
Production	2.48 million barrels a day in Feb 2003, compared with 3.5 million b/d in July 1990
Revenues	Constitute 95% of Iraq's total revenues and expected to cover half of the revenues needed for 2003 budget
Reserves	Second largest proven oil reserves of 112.5 billion barrels, although 90% of Iraq is largely unexplored; only 15 (21%) of the 73 discovered fields have been developed
Investment	Iraq needs $4bn-5bn over two years to restore production to levels before the Gulf War; to increase oil production to 6 million-7 million b/d by 2010, Iraq needs $35bn-40bn over 10 years
Source: Global Investment House, McKinsey

Return to the story