Iraq Hungers for Better Oil Deal; US Still Wary

For anyone who doubts the importance of oil to Iraq, consider the day when the United Nations allowed it to export the first barrels of oil to the outside world since Iraq's 1990 invasion of Kuwait.

In December 1996, a deal between the UN and Iraq was finally implemented. Iraq could sell $2 billion worth of oil every six months for mostly humanitarian goods - a deal meant to ease the plight of 22 million Iraqis subject to stringent UN sanctions by exchanging oil for much-needed food.

American officials estimate that the sanctions have cost Iraq $110 billion in revenue, but Iraq has the second-largest proven oil reserves in the world, after Saudi Arabia. Dozens of foreign companies - American ones excluded - are already negotiating to leap into this pool of black gold beneath Iraq's desert sands.

Journalists waited for hours in 1996 at the northern pump station, where some nameless government official was expected to turn on the flow of Iraq's oil through a long-dormant pipeline.

Then came a moment of total surprise: President Saddam Hussein, rarely seen in public for a decade, emerged and pushed the button himself.

Fraught with logistical and political difficulties, the oil-for-food deal was more than doubled in January to permit Iraq to sell oil worth $5.25 billion every six months. UN Secretary-General Kofi Annan sought to increase food rations and streamline procedures, but Iraq says it can't export so much without $800 million worth of spare parts and upgrades of pumping capacity damaged during the 1991 Gulf War.

Relief officials say that any increase in the oil-for-food deal will be critical to increase the calorie intake of the majority of Iraqis, including one-third of children under five, whom the UN says are chronically malnourished.

"We're at a very high level of malnutrition, so [oil-for-food] has not been a victory by any means," says Philippe Heffinck, head of the UN Children's Fund (UNICEF) in Iraq. If the program doubled, he says, "we could begin to reverse this trend."

A UN team of oil experts visited Iraq in March to determine requirements for boosting Iraqi oil production. It is expected to table its report next week, but has already noted that Iraqi engineers showed "great ingenuity" in restoring oil production to 60 percent of prewar capabilities.

Finding the right equation, however, will be difficult and shaded with political overtones. Iraq is reluctant to put almost all of its economy under UN control, as would be required. The US - which in February was poised to conduct air strikes against Iraq to force it to comply with UN weapons inspections - is anxious about Iraq rebuilding its oil facilities unbridled.

Oil prices today are low in a buyer's market, and Iraq only now exports 1.6 million barrels per day (bpd). To reach even the $4 billion mark - never mind the $5.25 billion in sales for six months stipulated by the UN - would require an export boost to 2.35 million bpd. Because Iraq requires 700,000 bpd for its own needs and neighboring Jordan, that would require a boost to 3 million bpd - not far off Iraq's 1979 all-time high of 3.5 million bpd.

"The hobbling effect of politics on [the oil] industry is likely to be apparent at every turn in the tortuous path that still separates Iraq from UN clearance to sell more oil and to obtain the equipment needed to export and produce [it]," notes a report by the Energy Intelligence Group.

The March report by the New York-based organization notes that any increase "hinges on agreement of a new distribution scheme for the supplies bought under the plan.... Then there's the big question mark Washington has placed over financing of any oil-industry reconstruction efforts."

On April 2, the State Department said it would encourage US companies to take part in any open bids to upgrade Iraq's oil facilities, one of the first signals that Washington may not seek to hamper approval of such items in the UN sanctions committee as it has done in the past. Iraqi requests for certain chemicals to increase production, however, may be more readily deemed "dual use" items that can also be used for illicit weapons production, and therefore blocked.

Also still disputed is how proceeds will be divided. Under Resolution 986, only 65 percent of the profits are spent on humanitarian goods, while 30 percent must be spent on reparations to Kuwait and 5 percent to fund UN weapons inspections.

"Iraq would like to see all its oil installations rebuilt and working, but it is not keen to export at such a low price, or to see its oil divided up. It wants more to rebuild the infrastructure," says Saad Naji Jawad, a political scientist at the University of Baghdad.

Iraqi troops were forced out of Kuwait by a US-led military coalition in 1991, but the 42-day allied air campaign heavily damaged the oil industry. The scale of that destruction is plain in the Rumeila oilfields of southern Iraq. Irredeemably damaged equipment and storage tanks lie rusted in fields beside rebuilt facilities.

Underpinning the complexities of doubling oil-for-food, relief officials say, is the need to assist those hardest hit by seven years of sanctions. The new deal calls for an increase of calorie intake. It also makes provisions for the rehabilitation of the health sector, and possibly the creation of a two-month food reserve.

"Families complain that their monthly ration ran out after 25 days, leaving a week-long gap," says Mr. Heffinck of UNICEF. "There were serious limitations, and UN agencies raised the red flag.

"Now we're working to fix Resolution 986," he says.