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Energy Companies Weigh Their Possible Future in Iraq

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By Neela Banerjee

New York Times
October 26, 2002


Though Iraq's future is hazy, energy companies have begun to weigh the roles they might play in the revival of the country's huge but dilapidated oil industry. According to a report by Deutsche Bank, oil field services companies like Schlumberger Ltd. and the Halliburton Corporation could be the early winners, but the prospects for oil companies themselves are less clear.

"We expect to see oil service contracts to rehabilitate old fields, but anticipate long-drawn-out negotiations on new fields," the report says. Industry experts and the State Department have said that oil revenues will probably finance the rebuilding of Iraq, which has reserves second only to Saudi Arabia's. That would make repair of the industry a priority either for a new regime or for Saddam Hussein's government, if it satisfies United Nations weapons inspectors and the sanctions on Iraq end.

"People talk like we're going to invade, the government is going to fall and Exxon Mobil is going to get a contract right afterward, and it's a lot more complicated than that," said Amy Myers Jaffe, senior energy adviser at the James A. Baker III Institute for Public Policy at Rice University. "The repair of oil export facilities and the prioritization of which facilities will get rebuilt first are the building blocks for Iraq to re-establish its production capacity."

Western energy companies have demurred from discussing the business possibilities in a post-Hussein Iraq, concerned that such talk would reinforce Baghdad's contention that the current conflict is driven by oil. But while industry experts say that such planning is not a top priority at oil and gas companies, the companies are beginning to explore the prospects Iraq might hold.

"It's very clear that if there is a return of Western oil companies to Iraq, clearly companies like Schlumberger will benefit," said Christian Lange, director of investor relations for the company, which is based in New York. "Everybody is looking at what the situation in Iraq may be and how they may individually benefit from what may happen, and we're not unique in that regard."

Deutsche Bank emphasized that its report was not a recommendation to buy shares of companies that might someday enter Iraq. "The report is a way of saying, 'Watch this space,' " said Adam Sieminski, senior oil strategist with Deutsche Bank and an author of the report, "and the oil service work could be near."

The report, based on information from American government agencies, the United Nations and industry sources, points out that the Persian Gulf war and the subsequent years of difficulty in getting parts and services under United Nations sanctions have left the Iraqi oil industry tattered. Over the course of two years, it says, "rehabilitation of under-invested and bombed facilities" could add at least one million barrels a day in production. Iraq now produces about three million barrels a day.

The cost of reconstruction -- and the possible revenues to oil field services companies -- would be around $1.5 billion, the report stated.

But when, and whether, those revenues begin to flow remains uncertain, Mr. Sieminski said. It could vary immensely, depending on whether Mr. Hussein acquiesces to strict weapons inspections, or the United States invades and ousts him quickly, or the conflict drags on and does further damage to the oil sector.

Once critical export terminals, pipelines and oil fields are repaired, the report says, Iraq might consider developing new fields, requiring a total investment of about $38 billion.

Over the last several years, Mr. Hussein has signed memorandums of understanding with oil companies to develop fields once sanctions are lifted. With the United States and Britain most sharply at odds with Mr. Hussein, American companies and BP did not participate in the process. Mr. Hussein himself favored companies from France, Russia and China -- in an effort, Mr. Sieminski said, to win friends in the United Nations Security Council.

There is debate in the industry about whether those agreements will be honored once sanctions are lifted, Mr. Sieminski said. If Mr. Hussein remains, the memorandums would probably remain valid. But if he goes, there would most likely be a great deal of jockeying to develop fields that hold billions of barrels of oil, industry experts said.

The concern among some of those analysts is that the development of the Iraqi oil sector could take the path followed by Kuwait after the Gulf War, when Iraq destroyed most of Kuwait's oil facilities.

The hope was that Western oil field services companies would repair the fields and the Kuwaitis would then invite big foreign oil companies to help develop the country's reserves, Ms. Jaffe said.

"What happened is nothing," she said. The oil field services concerns came but the oil companies were kept out, she said, "because Kuwait had a professional oil industry and a Parliament that voted not to let foreign oil companies in."

"It seems like that could happen in Iraq, too, because it will be a sovereign country," she said.


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FAIR USE NOTICE: This page contains copyrighted material the use of which has not been specifically authorized by the copyright owner. Global Policy Forum distributes this material without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes. We believe this constitutes a fair use of any such copyrighted material as provided for in 17 U.S.C § 107. If you wish to use copyrighted material from this site for purposes of your own that go beyond fair use, you must obtain permission from the copyright owner.