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Iraq Oil Output Lowest Since Invasion

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By JIM KRANE
The Associated Press
Friday, April 28, 2006; 4:49 PM

DUBAI, United Arab Emirates -- With oil prices above $70 a barrel fouling the world economy, dismay is focusing on Iraq, whose exports have slipped to their lowest levels since the 2003 invasion.

"Iraq could be making a tremendous difference," said Dalton Garis, an economist at the Petroleum Institute in Abu Dhabi. Instead, its shortfall is "a significant contributing factor to the high price of oil," he said.

Iraq, a founding member of OPEC, sits atop the world's third-highest proven reserves. Its estimated 115 billion barrels is more than any other OPEC member except for Saudi Arabia and Iran.

But contrary to optimistic expectations, Iraq's oil production has slipped further and further since the U.S.-led invasion, to an average of 2 million barrels a day. It has never regained even the reduced production levels that prevailed in the 1990s, when Iraq was under tough U.N. sanctions.

Iraq's oil could be providing relief to world markets, strained by high demand from China, the nuclear-related showdown with Iran and unrest near Nigeria's oil fields. Instead, it's not even covering its own needs.

The rickety Iraqi oil system has been damaged repeatedly by insurgent sabotage and attacks on maintenance crews. Corruption, theft of oil, and widespread mismanagement compound the problems, analysts say.

Iraq also lacks laws that would protect foreign investment, and its government is still sorting out whether oil will be controlled by the central government or the provinces.

The result: Iraq is importing refined oil products at record high prices at a time that it should be boosting exports to take advantage of those prices to earn money for reconstruction.

In 2005, Iraq's exports averaged just 1.4 million barrels a day, which earned the country about $26 billion. This winter proved disastrous, with January exports failing to reach even 1 million barrels a day, said George Orwel, an analyst with Petroleum Intelligence Weekly in New York.

"It's a mess," he said. "At some point Iraq is going to be back in the picture, but it's been a very bad couple of years. They're missing out."

In 1990, probably its peak production year, Iraq extracted about 3.5 million barrels a day. Restoring production to that level would require years and a $30 billion investment, Orwel said, even in the "best case scenario."

Those figures suggest misplaced optimism by Iraq's oil ministry, which in 2005 predicted crude production would reach 2.5 million or even 3 million barrels a day by the end of 2006. Analysts have called that prediction a pipe dream.

The outlook for this year looks about the same as 2005, Orwel said, casting doubt even on the ministry's revised plans to raise exports to 1.8 million barrels a day by year's end.

Orwel, author of a forthcoming book on Iraq's oil sector, said many of the problems thwarting Iraq's exports have no simple solution _ but some do.

For instance, exports from Iraq's southern oil fields have been hampered by the decrepit tugboats needed to pilot tankers to Persian Gulf terminals. The tugs, so old that spare parts can't be bought, frequently broke down or weren't seaworthy enough to handle rough winter seas.

As a result, charges from tankers forced to delay loading cost Iraq $50 million over the past year, which the oil ministry paid by giving away oil, Orwel said.

Insurgents have been so deft at shutting down the pipelines from the giant fields around the northern city of Kirkuk that Iraqi authorities tried to move crude by truck to its refineries and crude-burning power plants. But after insurgents attacked the trucks, drivers became difficult to recruit and the oil ministry was forced to cut production, Orwel said.

Corruption has worsened the situation, according to a report release Tuesday by the oil ministry's inspector general. The loss of oil revenue to corruption and theft has become the biggest threat to Iraq's economy, costing Baghdad's beleaguered treasury billions of dollars, it said.

"For example, about 20 percent of the oil products that Iraq imported last year, worth $4.2 billion, were smuggled to neighboring countries," the report said.

Iraq's sputtering oil sector has defied optimists led by Vice President Dick Cheney and former Deputy Defense Secretary Paul Wolfowitz, who hoped booming exports from Iraq could pay for its reconstruction and help satisfy world demand.

Instead, repercussions from the U.S.-led invasion are now slowing the global economy, said Saadallah al-Fathi, a former OPEC official who advised Iraq's oil ministry under Saddam Hussein.

"The invasion of Iraq hasn't only been devastating to the Iraqi people, but it has been detrimental to the rest of the world," al-Fathi said from his home in Sharjah, in the UAE. "Iraq has lost a third of its production due to the American invasion."

"Now that Iraq has to import many petroleum products, it's a double whammy," he said.

Oil production was more successful under Saddam, he said. "There were technical problems. But they were contained. Things were improving slowly. We didn't have sabotage. We had full security in the oil fields."


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