Oil plays starring role in plans for post-Hussein Iraq

It sounds simple enough: If America overthrows Saddam Hussein's Iraq, that nation's vast oil reserves could serve as a kind of bank account to fund rebuilding and humanitarian relief.

But that plan - the subject of ongoing White House discussion - faces a host of potential complications, from oil-field sabotage to wrangling by Iraqis and Western powers over stakes in the industry.

One thing is certain: Even if oil is not America's prime motive in confronting Iraq (as some Bush critics allege), the resource figures centrally in US plans.

The rapid takeover of Iraq's oil fields will be a key early objective of US troops in any military action, to forestall sabotage that could send oil prices soaring, experts say. And Iraq's oil reserves, the world's second-largest, would become crucial to the operation of a new Iraqi government.

"The morning after, oil becomes the driving issue," says Robert Ebel, an energy expert at the Center for Strategic and International Studies in Washington.

Oil firms from the US, Europe, and Russia may compete for concessions in an industry with huge cash flow. Much of Iraq's oil lies so near ground level it costs less than $2 per barrel to produce.

Well aware of the pitfalls of an Iraq war being perceived as an "oil grab," Secretary of State Colin Powell recently told the press that Iraq's oil will be held "in trust" to benefit the Iraqi people. The humanitarian and rebuilding needs could be great.

Studies of Iraqi oil questions are under way at the departments of State, Defense, and Energy.

To many observers, Mr. Powell's statement about the oil being held held "in trust" by a new regime left key questions unanswered. "What kind of rule? How will the oil industry be run? Who will determine its production?" asks Walid Khadduri, editor of the Middle East Economic Review in Cyprus.

Powell said "we are studying different models" and that it is a legal obligation under international law to use oil revenues for the benefit of Iraqis. He said he lacked the expertise to say whether the money could be used to defray occupation or humanitarian costs.

Nor did he say anything about Iraq using oil revenues to service Iraq's foreign debts of $110 billion or its even larger war reparations owed to Iran and Kuwait.

The Iraqi opposition has its own ideas.

Step 1 will be to get an elected government with an oil ministry to run the industry and determine oil policy, says Faisal Qaragholi, executive senior director of the London-based Iraqi National Congress, a coalition of opposition groups. In a telephone interview, he said any existing petroleum contracts or concessions made by the Hussein regime will be "restudied" to see if they should be continued.

Mr. Qaragholi said that in any new oil deals, the US and its allies "would definitely be favored, because they stood by the Iraqi people." Those nations which support Hussein "should look at where they stand," he warned.

There has been much speculation as to whether the US, in its bid for the support of Russia, China, and France for its tough Iraqi policy, has promised to help these nations get concessions.

Russia was given "some promises," says Ariel Cohen, an economist at the conservative Heritage Foundation, citing discussions he had with some "high-level" Russian officials. "But I don't think these [promises] were strong enough" to satisfy Russia.

Qaragholi said Iraq would need "a few years" to rebuild its oil infrastructure, given its deterioration under "bad years of socialism rule." Then it would consider opening up the industry to the bids of international oil companies for new developments.

Analysts say it will take 18 to 36 months to repair oil production and export facilities. These are now held together by "Band-aids," notes a report by the Council on Foreign Relations and the James A. Baker III Institute at Rice University in Houston.

Iraqi output is now about 2.8 million barrels per day, down from 3.1 million b.p.d. in 1991. Repairs could cost $5 billion, the study says.

If Hussein succeeded in a "Nero policy" of burning and contaminating wells, the price of oil could spike - potentially driving the global economy into a slump.

Sheikh Ahmed Zaki Yamani, who was Saudi Arabia's oil minister when the 1973-74 OPEC embargo quadrupled the price of oil, says prices could jump as high as $100 per barrel in such a circumstance. Or an easy US victory, coupled with revived Venezuelan production, could push oil prices down.

"When you fire the first bullet, you don't know what is next," he said in a telephone interview last week from London, where he established the Center for Global Energy Studies. "This is playing with fire. This is gambling. I am not feeling well about this."

If oil prices push the world into recession, it could spark political unrest that would only fuel more terrorism, Sheikh Yamani said. Falling prices could have their own counterproductive effects: "Texas will be bankrupt."

Even if oil prices hold steady, the US must try to help form a new regime without appearing imperialist. Early on, the Bush administration should guaranty the territorial integrity of Iraq and the nation's control of its oil and gas resources, says Edward Djerejian, who cochaired the study of oil-field repairs. "Anything else will be counterproductive and cause a great deal of enmity in Iraq."

Mr. Ebel says the US should "bend over backwards" to avoid being perceived as the "conqueror" of Iraq, making decisions on oil. "It is not ours to dole out."

Increasing Iraq's oil production to 6 million b.p.d. or more, somewhat less than the 8 million b.p.d. of Saudi Arabia, will take several more years and $30 billion, some reckon.

James Paul, executive director of the Global Policy Forum in Washington, worries that a US client government in Baghdad would hand out production concessions to US and British companies, tipping the balance of power in the world industry toward big firms and away from producer states. It would weaken the OPEC cartel, and thus probably reduce world oil prices.

Says Qaraghali, the Iraqi opposition leader: "Some of these comments come out as if the Iraqi people were born yesterday. We definitely know how to govern ourselves."

Washington experts call for "transparency" should any Iraqi oil business be put out to international bids. Some would like to see eventual privatization, with the Iraqi government benefiting from tax revenues on its industry.

Qaraghali says privatization is "a good idea" at a later stage

Key oil-short countries, such as the US, China, and Japan, have been scrambling for years to tie up a variety of oil sources to avoid over-dependence on a few supplier nations.

For instance, this month a Japanese oil consortium bought a 20 percent interest in a Royal Dutch/Shell project to develop the large Soroosh and Nowrooz oil fields in Iran.

Japan and China are scrambling for more Russian petroleum.