Global Policy Forum

By Colum Lynch and Peter Behr

As US forces besiege Baghdad, Iraq's 112 billion barrels of proven petroleum reserves are firing the imagination of oil majors, but experts say the road to Mesopotamia's riches is paved with many obstacles. "To invest in Iraq, international oil companies (IOCs) need first reasonable security," said Ruba Husari, from New York's Energy Intelligence Group (EIG). "Second," she added, "they need a legitimate government who would guarantee the long-term contracts, and thirdly attractive terms" - as those deals involve billion of dollars.

"It is too early to tell if the United States will manage to stabilise Iraq in the long term, even with UN help," said Naji Abi Aad, managing partner of Beirut-based consultant Econergy. "To win the war is sometime easier than to win the peace", he added, referring to Iraq's complex ethnic and religious structure, its history of bloodshed and a long string of coups and coup attempts in the past 50 years. Figures published in different studies on Iraq's reconstruction put the investment needed to bring production capacity back to pre-1991 Gulf war level of 3.5 million barrels per day (bpd) in the range of three to five billion dollars.

This level, higher than current capacity by some one million bpd, could be achieved in two years. Another 30 to 40 billion dollars will be needed to boost capacity to between six and eight million bpd, six to eight years from now. Iraqi oil experts in exile and US officials agreed Saturday during a meeting in London on the need for IOCs to rehabilitate and develop the oil sector, devastated by three wars in two decades and by 12 years of UN sanctions, as Iraq lacks the technical and financial means.

Iraqi delegates at the meeting said foreign participation would probably be sought under production sharing agreements (PSAs) that allows IOCs to be reimbursed with part of the oilfields' output for the duration of the contract. This would not be really new in Iraq, as Saddam Hussein's government provisionally awarded six PSAs to foreign firms in the 1990s, with the obvious aim of enlisting their government's help in lifting the sanctions.

The gushers went to France's TotalFinaElf and Russian companies, while British-Dutch major Shell was frontrunner in a main field under tender, and a string of contracts were under negotiations with a variety of European, Canadian, Australian, Asian and Arab firms. But these contracts could not be implemented because of UN sanctions, and US companies were kept at bay.

The situation is set to change, since Saddam's removal would pave the way for the lifting of the UN sanctions, unlocking Iraq's reserves, the second largest in the world after Saudi Arabia. And US majors could also claim a role commensurate with their country's contribution to the war. "A big question hangs over the fate of the contracts already signed" under Saddam Hussein, said EIG's Husari. "These are likely to be re-examined case by case. They might not be annulled but open to other new partners, especially where the firms that signed are not considered to have the required financial or technical capability," she added.

"Politics will always play a role in the awarding of contracts, just as it had under Saddam Hussein or even in other countries in the region," she said. BP was the first company to raise the issue, as early as last October. "We would like to make sure if Iraq changes regime that there should be a level playing field for the selection of oil companies to go in there if they're needed to do the work there," said BP chief executive John Browne.

And he recalled that it was BP's ancestor, the Anglo-Persian Oil Company, that made the first oil discoveries in Iraq, in the early 20th century. But Abi Aad said that a democratically-elected government in Iraq might not necessarily play the oil game as sought by US and British majors. "See Kuwait: the United States liberated it 12 years ago and it hasn't yet opened up upstream oil to foreign companies. See Venezuela: democracy did not bring in a friend of Washington," he said. He also mentioned the nationalist sentiment that prevails in the oil sector of Iraq which "prides itself with being the first country to have nationalised its petroleum wealth," in 1972. The OPEC oil cartel, occasionally the nightmare of oil-consuming nations, was created in Baghdad in 1960, eight years before Saddam's pan-Arab Baath party came to power.