Cheney Says Iraqi Oil Output Could Be Restored by Year's End

Industry Analysts Rank Political and Legal Problems, Not Technical Ones, as Biggest Obstacles to Production Increases

Iraq could be back to its prewar oil production level of more than 2.5 million barrels a day by the end of the year, providing a crucial source of funds to help rebuild the country, Vice President Cheney said yesterday.

"It's their oil. It's their resources," Cheney said in a speech to the American Society of Newspaper Editors in New Orleans.

Energy experts said that production goal could be reached if Iraq's northern oil fields escape extensive damage and the southern fields remain secure.

But the most serious challenges to Iraq's future oil production are political and legal, not technical, experts said.

While France and other United Nations members say Iraq's oil production should remain under U.N. control, the Bush administration wants new Iraqi leaders to take charge of oil sales and development as quickly as possible, White House spokesman Ari Fleischer told reporters at a briefing.

"The president looks forward" to the removal of United Nations sanctions, which now govern Iraq oil sales, he said.

Deputy Secretary of State Richard L. Armitage told reporters yesterday that he hoped Security Council members were ready to move ahead on Iraq's future, as the administration intends to do.

"We want to get in the situation where the Energy Ministry is able to be run, by and large, by Iraqis with some coalition advice. And any revenues that are realized would go into the central bank, the central bank of Iraq, not the central bank of the United States, to be used by Iraqis for reconstruction."

In the longer term, a new Iraq government must decide whether to honor oil development contracts signed by Russia and China, analysts said.

"I don't think it would be that difficult to get them back to 2.5 million barrels a day, assuming the north can be secured," said Gary N. Ross, chief executive of Pira Energy Group in New York. Iraq's northern fields around Kirkuk produce about 40 percent of the country's output.

"The real issues are political -- what happens with the U.N.," he said.

A new U.N. agreement authorizing Iraq to sell oil is "the best solution but not the only one," said Larry Goldstein, president of Petroleum Industry Research Foundation in New York.

It might be possible for the United States to sell Iraq's oil on the country's behalf relying on rights of a military occupation force under "customary international law." But that approach would rely heavily on custom, not treaty rights, said Peter Krug, a professor at the University of Oklahoma College of Law. "It's a notion that people have a lot of trouble with," he said.

When the Iraqi Oil Ministry is back in operation, it will face the issue of the Russian and Chinese contracts. Lukoil, Russia's biggest oil firm, and two smaller firms, Zarubezhneft and Machinoimport, signed a $3.5 billion deal to tap the 15 billion-barrel reserve in the West Qurna field northwest of Basra. Similarly, the China National Petroleum Corp. and Northern Industries Corp., a Chinese-owned weapons and industrial conglomerate, signed a $1.3 billion pact with Hussein to develop the al-Ahdab field in central Iraq, which is believed to hold 360 million barrels of oil.

Neither consortium did much more than preliminary work in the two fields, and the Iraqis voided the Lukoil deal last December, saying the firm had failed to live up to its obligations to develop West Qurna field. Lukoil seemed unwilling to start in the face of the continuing U.N. sanctions.

But this week, a Lukoil official made it clear his firm won't give up its perceived rights without a fight.

Lukoil Vice President Leonid Fedun said it would file a $20 billion lawsuit against any company that tried to develop the West Qurna field, and seek to get an international court to stop any tankers from shipping Iraqi oil.

"Nobody can develop this field without us in the next eight years," he said in a statement. "If somebody decides to squeeze Lukoil out, we are going to appeal in the Geneva arbitration court, which will immediately arrest this field. This type of trial can last for about six or eight years. We are going to arrest tankers with crude produced in Iraq using the Geneva court."

But Fedun also told Energy Compass, an oil industry newsletter, that Lukoil would settle the disputed rights to the West Qurna field if a new Iraqi government paid it $2 billion to $3 billion as compensation for its expected loss of profits.

China National officials could not be reached for comment, but Amy Myers Jaffe, a senior energy adviser at the James A. Baker III Institute for Public Policy at Rice University, said Chinese interest in Iraqi oil development "had waned" as China intensified development of oil reserves in Indonesia, Sudan and Kazakhstan.

Thad Grundy Jr., an international oil and gas attorney in Houston, said that aside from any political decision on whether the Russian and Chinese deals in Iraq might still be in force, "You'd have to look at the actual provisions of the contracts. My guess is that these contracts would provide for settling of disputes with arbitration in a neutral country," such as in Switzerland, where Fedun said Lukoil would seek redress if need be.

But Grundy said losing oil development rights "is the risk you take in dealing with such an unstable government" as Hussein's. He said that several oil companies around the world, in India, Indonesia, Algeria, Italy and Spain, that have memorandums of understanding to develop Iraqi oil deposits have almost no legal standing to claim a right to proceed.

The Bush administration has said it will leave decisions on the long-term development of Iraq's oil reserves to a future "stable Iraqi government." But there already might be pressure to not honor any contracts signed under the sanctions.

Adam Sieminski, oil strategist for Deutsche Bank AG in London, predicted that "whatever government is in place in Iraq is going to change those contracts. These companies were happy to brag about these deals when Saddam Hussein was in power because maybe they were going to get involved" in Iraqi oil production.

"They were less sensitive to the U.N. rules in signing a contract, happy to negotiate a contract, but sensitive enough to not go in and start drilling. My guess is that things will be negotiated."

Martin Purvis, a senior consultant for Wood Mackenzie in Edinburgh, Scotland, a commercial research firm focusing on the oil and gas industry, said the legality of the Russian and Chinese deals is "pretty murky. They'll be argued over. I'm not sure what will happen. It's a valuable piece of real estate."

Light, sweet crude oil for May delivery rose 85 cents, or 3 percent, to $28.85 a barrel yesterday on the New York Mercantile Exchange.

Staff writer Peter Slevin contributed to this report.