For Iraq's oil wealth, tangled pipes

As US works to restore Iraqi oil production and sales, Russia, France and even the UN hold critical leverage.

As the dust settles on the fighting in Iraq, a formidable battle is shaping up for control of the country's vast mineral wealth, pitting the coalition powers on one side against France and Russia on the other, with the Iraqis themselves caught in the middle.

At stake is Iraq's immense oil potential. Its proven reserves are second only in size to Saudi Arabia's, and pipelines, moreover, run north through Turkey as well as south through the Gulf - a crucial point of diversification.

Conventional prewar wisdom predicted that the victorious US forces would quickly turn Iraq into one super-giant oil well that could feed its voracious energy-importing needs.

But the reality is proving somewhat more complex, and it is becoming clear that the US administration will have to involve the international community, not to mention the Iraqis themselves, in rehabilitating Iraqi oil.

"The US administration doesn't have the legitimacy to begin exporting oil," says Rusa Hubari, a Middle East expert with the Energy Intelligence Group. "No one will buy oil at the moment because they ask: Under what law is it functioning?

"If you are loading oil at [the Turkish port of] Ceyhan and your shipment gets lost, who do you sue and under what law?" she asks. "It will have to go through the UN. There will have to be a debate."

The first salvos of oil battle thundered out last week when President Bush called for UN sanctions against Iraq to be dropped. The request sounds innocuous enough, but it masks an urgent US desire for a free hand to start pumping Iraqi crude once again to raise funds for rebuilding the country.

Russia immediately balked at the idea. The concern in Moscow and Paris - both with considerable pre-war oil interests in Iraq - is that they will be shut out altogether if the United States revives the Iraqi oil industry on its own, arrogating impregnable influence for itself in the process. Saudi Arabia's foreign minister also objected to the move, saying sanctions should end only when a legitimate Iraqi government is in place.

The importance of Iraqi oil has been obvious from the way the war was waged. Some have accused the US-led coalition of doing more to protect oil fields than to protect local people. The most closely guarded building in Baghdad is not a bank or a museum, but the Oil Ministry.

Diverse problems face those who would export Iraq's oil. The first problem is a physical one. Few wells were set on fire during the war, but infrastructure has been looted, and stations and transit pipes will need to be vetted for damage, particularly in the large southern oil fields. This will take weeks, officials say.

In the northern city of Kirkuk, trucks - sometimes even official firetrucks - have arrived at the oil fields under the guise of obtaining water nearby, but then pilfer the oil, a scheme the military is trying to stop, say military officials.

Since Kirkuk is a major site for Iraqi oil production, repairs are a priority. The city's electrical and gas facilities came to a standstill when it fell, but the Patriotic Union of Kurdistan says they have since been turned back on.

Restoring Iraq's oil production will require much Iraqi cooperation, say experts. "This industry has been running on a shoestring budget for years, and if there is are people that know how to do it it's the Iraqis themselves," says Martin Purvis, an energy expert with international consultancy Wood Mackenzie.

"Essentially if you send contractors, you are going to come up against issues they have not seen before, like a lot of technology missing, databases, flow models, computers, that sort of thing," he adds.

Secondly, the system of exports is blocked by the power vacuum in Baghdad. Millions of barrels of Iraqi oil are sitting in terminals in Turkey waiting to be sold, but no buyers will emerge until an internationally recognized Iraqi entity can legally sell the product.

The US will thus ultimately have no choice but to turn to the UN to seek legitimacy for Iraq's interim authority - and that is where the horse-trading will begin.

That debate will likely see France and Russia insist on a more multilateral approach to the handling of Iraq's oil wealth. Both countries had deals in the pipeline with the Saddam Hussein regime, and Russian oil chiefs have been fulminating ominously about legal action if their rights to Iraqi oil fields are not upheld by the new administration.

The next major problem for the liberating powers is how to ensure that Iraqi oil wealth ultimately filters back to the Iraqi people. Bush and his key ally, British Prime Minister Tony Blair, repeatedly stressed that ordinary Iraqis would benefit from the country's oil.

But in practice this may prove hard to achieve, and will ultimately depend on the kind of administration that emerges in Baghdad. The regional stereotype is not, however, encouraging. Standard procedure among energy-dominated Middle Eastern powers is to keep the petro-dollars among the lucky few and leave the hapless many in poverty.

"That is the curse of oil," says Euan Craik, managing editor of the Petroleum Argus publishing house. "When an economy is entirely dependent on oil it attracts corruption and huge divisions in wealth.

"But look at Norway," he adds. "It has huge oil wealth and yet is one of the least corrupt countries in the world. They have an oil fund where a lot of revenues are placed for the benefit of future generations. You could do that for Iraq."

Then there is the question of overall ownership. The allies are determined that the war they have just fought does not merely deliver Iraq's oil wealth to a equally intransigent new regime.

Some experts, including former Iraqi oil chief Fadhil Chalabi - a cousin of US-backed leadership aspirant Ahmed Chalabi - are advocating swift privatization, an approach that would internationalize the industry and give foreign oil giants a greater say.

But previous experience - notably in Russia - shows that privatization can often simply deliver cheap assets into the hands of a clique of well-connected barons, leaving the population with little stake in their own mineral wealth.

"The state oil companies will stay in government hands," predicts Husari. "This is the situation across the Middle East, because governments in producing countries in the Gulf are 90 percent dependent on oil revenues."

The decision to privatize may lie, in part, in the hands of Fadhil Othman. Mr. Othman has more than 20 years of experience as a top Iraqi oil official, and has been reportedly approached by the US to run the new Iraqi oil ministry. Phillip Carroll, the former chief of Royal Dutch/Shell in the US, is thought to be a candidate to help oversee Iraqi oil policy on a US advisory board.

Foreign involvement of some sort will be essential to revive oil production fully, in any case. Iraq needs $6 billion of investment just to return output to pre-1991 levels of 3.5 million barrels a day. It needs tens of billions to modernize and develop an industry decimated by years of sanctions and a generation of war. This capital simply will not be forthcoming within the country.

But the degree to which foreign investors get involved in such a risky venture will depend on three factors: the security situation, the international legitimacy of the Iraqi authorities, and the terms of investment.

To set up the industry for the long run therefore, the US-led coalition must ensure that the new administration in Baghdad has broad international support, say experts.

• Ilene Prusher contributed to this report from Kirkuk, Iraq.