What's happened to Iraq's oil?

By Mark Gregory
International Business Reporter, BBC World Service

One of the main problems is getting the oil to export terminals

Iraq's descent into violence, coupled with paralysis and corruption in government, has stymied efforts to rebuild the infrastructure of roads, schools, hospitals and industry.

In many cases, there is little to show for the billions of dollars spent on reconstruction since the American-led invasion in 2003.

The oil sector is a good example of what has gone wrong.

Fixing it has been seen as a high priority, as the revenues from oil exports provide the bulk of Iraqi government income and underpin the entire economy.

Yet crude production is currently still below the pre-war level.

"The Iraqi oil industry has been stuck for the last couple of years." says Manoucher Takin, an analyst at the Centre for Global Energy Studies in London.

"Nothing has really changed.

"It's not that officials have done nothing. The problem is, they can't do much because of the security situation."

Export problems

Mr Takin says the single biggest drag on the industry's recovery has been the failure to get a key export pipeline operating properly.

Iraqi oil leaves the country through two main routes.

Production from the Southern oilfields is taken by sea from a terminal near Basra.

Oil from the Northern wells is transported by a pipe that runs to the port of Ceyhan in Turkey.

The Northern route is extremely vulnerable to sabotage, and has worked only intermittently since the fall of Saddam Hussein.

It means a third of Iraq's production capacity is effectively cut off from overseas markets.

There have also been many attacks and other problems with the Southern oilfields, but they have at least continued to function.

High oil prices

There was nothing inevitable about this.

A pipeline is blown up by insurgents on the outskirts of Kirkuk

In Baghdad soon after the war, US officials confidently predicted that with a bit of effort production would reach 3.5 million barrels a day within 18 months, and five or six million barrels a day within few years.

At that level, Iraq's output would be second only to Saudi Arabia.

No wonder it was widely assumed that once things settled down, Iraq would easily be able to fund its own reconstruction.

Those hopes have been dashed.

At the moment, crude production is stuck at around two million barrels a day.

The only saving grace has been the recent strength of international crude prices.

Iraq gets nearly twice as much money from each barrel sold as it did at the end of Saddam's time.

Wrong sort of oil

Recent security concerns are not the only issue.

Residents of Baghdad have to queue for supplies of heating oil

It was always clear that rebuilding the oil sector would be a difficult task.

The American-led invasion did not cause a great deal of damage, but the industry suffered badly in the looting that immediately followed the war.

This came on top of years of neglect and under investment while Saddam fought his other wars and Iraq was under international sanctions.

Many of the worst problems are in refining and distribution: the part of the industry that supplies finished products like petrol, diesel and heating fuel for use internally in Iraq.

There is a chronic shortage of refining capacity.

It is one reason why Iraqis often have to queue for hours to fill their vehicles with fuel, despite living in a country flush with underground crude.

Mr Takin says Iraq's refineries had hardly been modernised in several decades.

The technology was ancient.

He says that before the war, some Iraqi refineries were in such a state they simply were not capable of producing the highly-refined products that people actually wanted for their cars.

Instead there was an excess of heavy fuel oil, which has few uses.

He says there was so much of it the Iraqis started pumping it back into the ground to increase the pressure to get new oil out - hardly an efficient use of resources.

Appointed staff

Commentators tend to say there was a window of opportunity for reviving the Iraqi oil sector soon after the invasion.

A lot of money and effort did go into improving things.

The problem was not enough was done to really get on top of the issues before security concerns became paramount and the country began its descent into near civil war.

Meanwhile, the oil sector has also been affected by the general chaos and corruption of Iraqi government.

Under Saddam, the oil ministry generally had a high reputation.

It was seen as staffed by competent technocrats who got on with the job.

That is not the case any longer.

As with other ministries, experienced staff have often been replaced by less qualified political appointees.

Planning for the future

At the moment, it is hard to find anyone who is optimistic about the oil industry's immediate prospects.

But no-one doubts the long-term potential: Iraq is sitting on the world's third largest proven reserves. It is widely believe there is a lot still to be discovered. What is more, Iraqi oil is generally easy to extract.

That is why so much store has been set by the terms of a new oil law.

International companies are assessing future opportunities

Its purpose is to set the terms to attract outside capital and expertise to develop Iraq's vast energy reserves.

A draft law was approved by the Iraqi cabinet at the end of February after months of haggling between politicians representing the Shiite, Sunni and Kurdish communities.

A finalised law is supposed to be ready by the end of May.

Mr Takin says the big international oil companies are wary of investing in Iraq while the country is in such a mess.

But he reckons many of them have developed quite detailed plans for what they will do when the situation improves.

Significantly, he says there is no shortage of demand for consultants' reports costing thousands of dollars on the technicalities of Iraq's oilfields.