March 27, 2007 in Business

In Iraq, oil is risky business

Associated Press The Spokesman-Review
 
Associated Press photo

Employees work at Sheaiba oil refinery, about 25 miles west of Basra. Iraq is likely to sign billions of dollars in foreign investment deals with some of the world’s largest companies if, as expected, its new oil law is approved soon.
(Full-size photo)

DUBAI, United Arab Emirates — China has sat out the Iraq war, but it could be the first to take advantage when the Iraqi government finishes a law opening up its oil fields to international companies.

The Iraqi oil legislation, expected to be approved by July, will open the door for the government to sign contracts for exploration and production of the country’s vast untapped reserves, a U.S. priority. But since few Western companies are prepared to send equipment or crews into the war zone, it could take five years or more before they begin extracting big shipments of crude.

“You will see announcements and deals. But dollars in the ground is a different story,” said Saad Rahim, a Mideast analyst with Washington-based PFC Energy.

That leaves China.

China is so desperate for energy that Beijing’s government-owned oil companies may be willing to accept higher security risks than others, some analysts say.

By contrast, international oil majors — companies like Royal Dutch Shell and Total SA — are likely to try to sign leasing agreements to stake their claims, believing Iraq is so oil-rich that they can afford to wait a few years for the fighting to subside.

“Iraq’s potential is so tremendous that they’re all ready to pounce as soon as the situation permits,” said Sharif Ghalib, a senior analyst with Energy Intelligence Research in New York. “It’s a bonanza waiting to happen.”

Most estimates put Iraq’s proven oil reserves at 115 billion barrels, the world’s third-largest. But Iraq has lagged in exploration technology for so long that actual reservoirs are probably double that, said Frank Verrastro, an oil analyst with the Center for Strategic and International Studies in Washington.

That potential may outweigh the risk for government oil companies like China’s, motivated less by profit than by the need for steady supplies of oil to run its economy. Oil industry executives have said privately that China’s strategic needs could lead its national oil companies to be early developers of Iraqi fields, perhaps in joint ventures with Western firms.

Feeding that talk: In October, the China National Petroleum Corp. began renegotiating a $1.2 billion contract signed in 1997 with Saddam Hussein’s government to develop the billion-barrel al-Ahdab field, in an area where Shiite militias hold sway.

A Chinese company is also negotiating with a Western oil company to send Chinese workers into Iraq, said a Western oil executive, who declined to give details and spoke anonymously because of the sensitivity of the information. There is an understanding that some workers might be killed, the executive said.

Officials at the China National Petroleum Corp. and China National Offshore Oil Corp., reached by phone last week, said they had no projects under way in Iraq. They refused to discuss future plans.

Iraqi oil workers and oil ministry officials have been gunned down in the past few years, including eight slain on their way to work at the Beiji refinery last March. If such violence is repeated, even the Chinese could be kept away, robbing that country of oil and Iraq of billions in revenue, Ghalib said.

“The Chinese oil companies have gone into Sudan and Iran, discounting threats of boycotts. But I don’t think they’ll be willing to risk their people in Iraq. They’d endanger thousands of technicians and face disruptions all the time,” he said.

For now, the new oil law’s first impact would probably be seen in northern Iraq’s Kurdish region. The violence there is low enough for international firms to send crews and equipment, but crude deposits are thought to be smaller than those in the Shiite south or just outside that region, near the northern city of Kirkuk.

The proposed oil law, which has been pushed hard by U.S. officials in Iraq and Washington, won approval from the Cabinet in February after months of haggling. Final action by the Iraqi parliament is expected by its July recess.

Once the law is approved, Iraqi Oil Minister Hussain al-Shahristani says he will seek bids for projects in the second half of this year.

The latest draft offers 51 known oil fields for development and 65 blocks of territory for exploration, most in western Sunni areas where there is no current production.

Even with a new law in place, Iraq’s investment climate may not be clear. Physical danger aside, the legal environment is a tangle of overlapping jurisdictions and gray areas. The oil law is supposed to resolve those issues, but it is unclear if it will.

Furthermore, there’s no easy way to get the crude to market. Sabotage still hamstrings exports. The British decision to withdraw most of its troops from the south has raised concern about stability at even the largest oil fields. And rickety export infrastructure can’t handle much more than the 2 million barrels a day of Iraqi crude now in production.

“God knows what remains to be discovered there. And we need it badly,” said Conrad Gerber, president of Swiss oil data company Petro-Logistics. “But there are so many bandits and thieves. It’s an absolute nightmare.”

For now, the only realm safe enough for most Western firms or oil majors are the three Kurdish-governed provinces in the north, where officials have said they international oil giants to help them produce 1 million barrels per day in five years.


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