Iraq's oil production falls short of goals

Despite years of rebuilding, petroleum production continues to fall short of targets, due to insurgency vandalism, poor field management, and corruption.

Here's a bit of good news about Iraq and oil: The Al Basrah Oil Terminal finally can work at full speed. This giant H-shaped tanker loading platform, located in the Persian Gulf off Iraq's southeastern coast, is one of the country's most important pieces of economic infrastructure. Thanks to US-funded reconstruction, all four of its berths now are in operation for the first time in many years.

Now the bad news: There's not much else good about Iraqi oil to report. Despite years of rebuilding, petroleum production continues to fall short of targets, due to insurgency vandalism, poor field management, and corruption. Proposed Iraqi legislation on oil revenue distribution – a measure deemed crucial by the White House – remains the subject of bitter sectarian debate.

Four years after the fall of Saddam Hussein, the story of Iraqi petroleum remains one of great promises unfulfilled. Iraqi oil did not pay for the first round of postwar national reconstruction, as Bush administration officials had predicted. Nor has the industry come close to matching its decades-old pumping record of 3.7 billion barrels a day – a level at which Iraq might become a vital source of oil for thirsty world markets.

"I think they are years away from being a reliable 4-million-barrel-a-day producer," says Frank Verrastro, director and senior fellow in the energy program of the Center for Strategic and International Studies (CSIS).

In many ways the Al Basrah Oil Terminal mirrors the promise and problems of Iraq's oil sector as a whole.

Built in 1974, Al Basrah has suffered from war damage and neglect for decades. After the ouster of Mr. Hussein in 2003, US inspectors found the facility capable of only limited operations, due to the dilapidated condition of crude oil loading arms and missing and damaged auxiliary equipment. Rebuilding began in early 2004.

This spring, the US Special Inspector General (SIGIR) for Iraq dispatched a team to assess the oil terminal's rebuilding. They judged it a qualified success.

But inspectors also found that the facility's lifeboat deployment system appeared to be incomplete. Plus, true progress at Al Basrah depends on systemic improvements elsewhere, SIGIR notes. The facility won't be able to approach its 3-million-barrel-per-day capacity until repairs are made on the leaks and patches of the 48-inch diameter sub-sea pipeline that brings Al Basrah its oil.

According to oil ministry experts, overall "the Iraqi oil infrastructure is in desperate need of upgrades and improvements," says the SIGIR assessment.

That need can be seen in the nation's production levels. In the first quarter of 2007 Iraqi crude oil production averaged 1.95 million barrels per day, according to the US Special Inspector General. That's far short of the Iraqi goal of some 2.5 million BPD.

In fact, Iraq has missed oil production targets every quarter since 2004.

Unsurprisingly, the nation's continued violence is a big reason for this shortfall. Since the US invasion there have been some 400 insurgent or terrorist attacks against pipelines, pumping stations, oil fields, and other parts of Iraq's oil infrastructure, according to the Brookings Institution, a Washington think tank.

But security isn't the only problem. Mismanagement of oil reservoirs, inadequate maintenance of pumps and pipes, and shortage of storage facilities at offshore loading terminals in the Gulf has hampered production as well, according to a recent report on Iraq's oil sector by Amy Myers Jaffe, an energy expert at Rice University's James A. Baker III Institute for Public Policy.

Nor has Iraq brought any new oil fields on-line since 2003. "The main reason for this lack of investment has not been lack of funds, but rather the politicization of the oil ministry, the absence and/or exodus of trained personnel, and poor or corrupt management in the oil sector," writes Ms. Jaffe.

Meanwhile, the future of Iraq's draft oil law appears in doubt. Iraqi Kurds and Sunnis have expressed deep misgivings about some legislation details, each group for its own reasons.

The proposed bill would divide up earnings from existing and any new oil fields according to regional population. That's meant to mollify the Sunnis, since Iraq's known petroleum reserves are concentrated in the Kurdish north and Shiite-dominated south.

But Kurdish leaders say they don't think the draft law cedes enough oil field development autonomy to the regions. Sunni legislators have indicated that they believe Iraq's continued violence makes consideration of an oil law premature – and that the proposed bill might open the door too wide to foreign oil companies.

The White House has long held that an effective oil law is a precondition for Iraqi national reconciliation. The US administration has thus made passage of the bill one of the benchmarks of success it wants the Iraqi government to meet.

"All parties have to give a little bit" if an oil law is to be enacted anytime soon, says Mr. Verrastro of CSIS.

In the long run, Iraq's oil resources remain a great regional prize.

Iraq has 115 billion barrels of proven oil reserves, according to the US Department of Energy. Only Saudi Arabia and Canada have more.

The Iraqi government projects that production will rise to 3.1 million barrels a day by 2008. Given current problems, that's unrealistic, say US experts. Further investment of $5 billion to $10 billion will be necessary to get back to prewar oil pumping levels, estimates Jaffe. It may take $15 billion to $25 billion beyond that to increase production further.

High oil prices have propped up Iraqi government export earnings. And a flood of Iraqi oil is unlikely to affect those prices anytime soon, although "an increase in the level of Iraqi oil exports could be a major variable in international energy markets in the coming years," according to Jaffe's report.