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Oil Counts in Iraq War Equation

Regime change might mean a rise in output. For Russia, that could put prices, deals at risk.

October 16, 2002|Warren Vieth | Times Staff Writer

WASHINGTON -- The prospect of military action against Saddam Hussein has touched off an international contest for Iraq's vast oil reserves and has complicated U.S. efforts to cultivate Russia as a major future source of oil.

Moscow is seeking assurances from Washington that if Hussein is ousted, Western companies won't take away the lucrative oil-field development rights that Russian oil firms negotiated with the Iraqi president's government. Iraq's reserves are second in size only to Saudi Arabia's.

Industry experts and insiders say the issue has become a potential sticking point in negotiations between the Bush and Putin administrations over Washington's efforts to obtain United Nations backing for its Iraq policy.

"Russian companies are worried the new regime may discard previously signed agreements and favor the U.S. oil industry," said Fred Mutalibov, an oil-field services analyst for SWS Securities in Dallas. "To get Russia's support, or at least their silent agreement, the United States has to assure that Russian oil interests will be considered once the regime change has occurred."

The stakes are high, particularly for Russia. Not only does its fledgling private-sector oil industry stand to lose future development windfalls, but its export-driven economy also would suffer if a new, pro-Western regime in Iraq pumped up current production and flooded world markets with crude. Although Iraq is a member of OPEC, there is no assurance that a new government would abide by the cartel's production restraints.

"They're going to need to massively rebuild," said John Kingston, global oil research director at Platts, an energy information service. "They're going to need lots and lots of money, and there's only one way to get it. They only have one cash crop, so they're going to want to produce as much as they can."

Some analysts predict that oil prices would fall from about $30 a barrel today to about $20 as Iraqi production gradually increased from about 1.5 million barrels a day to about 3 million barrels over several years.

Russia, which depends on oil for about 40% of its export revenue, would be hard hit by a price decline. In addition, Iraqi crude would be competing for the same European markets where Russia sells most of its oil.

"The big blow will be for the Russian economy and the oil industry in general," said Nelli Sharushkina, who tracks the industry from Moscow for Energy Information Group. "The lower the prices are, the worse it is for the Russian economy."

For the Bush administration, the issue presents complex political and economic ramifications. America's economy would benefit from lower oil prices, and U.S. oil firms might prosper if Iraq reneged on its deal with the Russians. But a brazenly U.S.-centric policy would not only damage relations with Russia, it could also undermine the legitimacy of a new Iraqi regime.

"If the legacy of this war is the appearance that the United States is sacrificing Iraq's interests to suit American interests, all it will do is ensure that any government the United States sets up will be seen as a puppet government and will be torn down," said Anthony Cordesman of the Center for Strategic and International Studies, a Washington think tank.

For the international oil industry, a regime change in Baghdad could put one of the world's most restricted petroleum markets into play.

Iraq sits atop 11% of the world's proven oil reserves, about 112 billion barrels. At $30 a barrel, that's $145,000 worth of crude for every man, woman and child in the country. And Iraqi petroleum geologists believe there's at least twice that much in additional reserves still to be confirmed. (By comparison, the United States has 22 billion barrels, or about $2,300 per person.)

Iraq's giant Kirkuk field was discovered in 1927, and U.S. oil companies played a big role in Iraqi oil development before the entire industry was nationalized in the 1970s. But eight years of war with Iran in the 1980s and 12 years of U.N. sanctions following Baghdad's 1990 invasion of Kuwait have destroyed much of Iraq's oil production infrastructure and restricted development of new fields to replace dwindling production from old ones.

Iraqi officials have acknowledged that they lack the financial and technological resources to rebuild their oil industry. They estimate that as much as $50 billion of foreign investment would be needed to reach their production target of 6 million barrels a day over the next decade.

"They're broke," said Matthew Simmons, who heads a petroleum industry investment banking firm in Houston. "They need money. They need help. They need technical assistance, and it becomes particularly urgent if in fact they really have destroyed the backbone of their existing fields."

Five years ago, Hussein's government struck a 23-year, $3.5-billion deal with a consortium headed by Lukoil, Russia's largest oil company, to rehabilitate Iraqi oil fields. But the U.N. sanctions have prevented the work from proceeding.

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