Exploring new oil fields in Iraq: a risky business

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.

The previous Iraqi constitution prohibited foreign ownership of the nation's oil. Further, Shiite Muslim clerics issued religious decrees decades ago that still stand, supporting the nationalization of the oil industry.

Even if the majority of Iraqi legislators go along with the plan, they will have to sort out key issues. How decentralized should the economy be? Will regional governments control the oil and its revenues or will the national government?

Oil is the "lifeblood of the country," says Raad Alkadiri, a director of PFC Energy, an energy consulting firm in Washington. "It's the principal export and principal source of government revenue. It gives you political weight."

The US and Britain have hoped that their efforts to oust Hussein might give their oil companies an advantage in seeking postwar Iraqi oil deals. But a new Iraqi government may be reluctant to give such powerful nations added economic leverage over the country, says Mr. Alkadiri. Instead, it might let contracts go to the highest bidder, whatever its nationality. Or oil companies may form multinational consortiums to bid in Iraq.

Last month, Iraq awarded its first post-Hussein oil contract for $136 million to a Turkish-British-Iraqi consortium to develop an extension of the Kirkuk oil field.

The business risks of searching for oil in a volatile area also loom large. "Oil companies will want to see some of these constitutional issues better clarified before they make major investments," Alkadiri says. He doubts any major foreign oil investment is likely before the end of 2005 or 2006.

Still, the new Iraqi oil strategy makes economic sense, oil experts say. Its potential reserves are huge.Estimates range from some 45 billion barrels to as high as 100 billion barrels, a top-end estimate that would nearly double Iraq's proven reserves.

Oil exploration, of course, involves geophysical risk. It could take hundreds of millions of dollars to find there is no oil. If adequate oil reserves are found, it would take more money to build the infrastructure to get it to the world markets. The total could run to $2 billion to $3 billion, estimates Mr. Simmons.

That's money Iraq doesn't have. The revenue it earns from its current oil fields are needed both for reconstruction and other government expenses, as well as fixing up these fields, experts say.

So foreign investment will be required - and the search for oil will be quite feasible, technically speaking.

"Iraq is one of the relatively less difficult areas of the world," says Mr. Gold. The oil is under dry land, not a thousand feet of water. It is located in the Middle East, where it could be exported with fairly short pipelines and existing ports.

When new Iraq oil comes into the world oil market, its impact on oil prices will depend on the demand- supply situation at the time, oil experts say. It could also hang on the willingness of OPEC members, especially Saudi Arabia, to make room for Iraqi oil by trimming its own output - if that is needed.