Exploring New Oil Fields in Iraq: A Risky Business

Article excerpt

It boasts the world's third largest proven oil reserves, a vast unexplored territory of potential oil, and a serious need for cash to rebuild itself. That's why Iraq has taken the first step to open its reserves to the world. In a momentous and highly sensitive move, the interim Council of Ministers is inviting foreign oil companies to develop potential fields.

If it works, the plan could double Iraq's oil revenues, ease somewhat world jitters about an oil crunch, and possibly fulfill what some see as a key goal of the Bush administration - ensuring another reliable oil-rich partner in the Middle East beyond Saudi Arabia.

But the plan carries risks for Iraqi moderates, the business interests of the United States and Britain, and the international oil companies themselves.

Under the new strategy, two national oil companies - one for oil, the other for gas - would run the existing oil fields, says Hilal Aboud al-Bayati, economic adviser to interim Prime Minister Iyad Allawi. The outside companies would develop potential oil fields - a large, multiyear undertaking that could produce some dramatic new reserves, since roughly 90 percent of Iraq remains unexplored.

The government wants to "make things easy" for foreign investment, says Dr. Bayati in a telephone interview. "Iraq has taken steps toward a market economy where the private sector and foreign investors will play a big role in the economy."

His hope is to nearly double the country's production from between 1.6 million to 1.8 million barrels per day to 3 million b.p.d. by 2007. That would be the highest level of production since Iraq invaded Kuwait in 1990. By most estimates, Iraq doesn't have the excess cash to develop those potential fields itself.

But foreign oil companies face big physical, economic, and political risks. A "monster if" - as in if it's safe, says Ronald Gold, an economist with the Petroleum Industry Research Foundation in New York.

The insurgency has already taken its toll: some 182 attacks on Iraq's energy infrastructure since June 2003, according to the Institute for the Analysis of Global Security, a nonprofit energy- security group. That sabotage has slowed output by some 400,000 to 600,000 b.p.d., Bayati estimates. It has also made oil companies wary of moving in. "Security problems are the main obstacle" to attracting foreign investment, he adds.

The political risks are equally serious. The Jan. 30 elections will not change the oil plans drafted by the interim government, Bayati says. But at some point, a new law spelling out the rights of investors in oil must be passed by the as yet unformed legislature. Will nationalist Iraqi politicians - let alone religious hard- liners - let foreign companies develop the nation's oil fields?

"A free Iraqi people will not give their oil away," warns A. F. Alhajji, an economist at Ohio Northern University in Ada. "Negotiations [with foreign oil companies] are going to be very tough." He predicts that the nation's oil reserves will have to remain under government ownership, even if foreign oil companies are allowed to be partners in their exploitation. …