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Analysis: Iraq oil up end-'07, sketchy '08

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by Ben Lando
Washington (UPI) Dec 28, 2007
Iraq's oil sector ends 2007 on a relatively upbeat note, with production at levels not seen since before the war. But the year had more downs than ups, and sustaining success through next year is far from guaranteed.

Iraq averaged production of 2.4 million barrels per day in November, according to the global energy information firm Platts. That's nearly a half million more than the post-2003 average. Oil exports, around 1.9 million bpd, fund nearly the entire federal budget.

"It was still a challenging year but they still managed to make some inroads," said Robert Fryklund, vice president of industry relations for energy consultant firm IHS. "We still have that issue of trying to get the national legislation up and running, and it seems to be stuck at the moment while they try to work out a few more of the security issues and other issues."

International oil firms are ready to bid on any oil deals the Iraqi Oil Ministry will offer. Oil Minister Hussain al-Shahristani has said negotiations for service contracts with major oil companies for some of Iraq's largest oil fields are under way and nearing the end.

As 2006 turned to 2007, news reports said factions had ended their fighting over the oil law. But the major issues, such as how much power the central government will have over setting and carrying out oil policy and to what extent foreign oil firms will be allowed into the currently nationalized oil sector, remain for the world's third-largest reserves.

A deal was announced in February, but it scuttled by April. Deadlines were set and missed. The oil law is either stuck in a parliamentary committee or awaiting action by the prime minister, depending on who you talk to. Companion legislation on sharing federal revenues, reorganizing the Oil Ministry and reconstituting the Iraqi National Oil Co. are even further behind in the legislative process.

Iraq's Kurdistan Regional Government had signed a handful of production-sharing contracts, which Baghdad railed against. In August it passed its own regional oil law and has signed another 20 more deals, including three U.S. firms, sparking ongoing congressional outrage. The argument over the contracts will add another item on next year's negotiating table for Iraqi policymakers.

Iraq's Oil Ministry is likely to spend only a third of its capital budget in 2007. Though a major increase above the less than 3 percent in 2006, the oil sector is desperately in need of investment -- there's virtually no metering of what is produced, for instance -- in not only the old and damaged producing fields, but the discovered fields that have yet to produce. And Iraq's best informed decisions on how to develop the oil sector can only come after modern testing of what is a mostly unexplored land rich in oil and natural gas.

Iraq's oil and electricity ministries, though interdependent now and in the future, weren't very cooperative this year. The result: Iraqis largely suffered a shortage of electricity and fuels.

Plans to enhance both export and production capacity as well as combined efforts in the oil, gas and power sectors have been outlined and are on the agenda for next year.

In Basra, where much of Iraq's oil reserves are located in or around and nearly all of the exports head to market, political fighting led to gun battles in the streets. Smuggling of crude and fuel remains strong. With the British handover of security, the coming months in the power vacuum there are crucial.

Iraq's oil unions have their largest contingent in Basra, which was the scene this year of major bluster between the workers and the Oil Ministry over demands to be included in negotiations over the oil law, as well as a long list to increase working conditions. They threatened to strike, and occasionally did. The ministry issued arrest warrants, sent security forces to surround workers during a strike and still doesn't recognize any oil union legitimacy.

An estimated 11 billion to 15 billion barrels are located in or around Kirkuk, a disputed territory whose destiny was delayed last week but will be decided under continually tense terms. A referendum is to be held to allow voters to decide its future government, and sectarianism is likely to fuel more violence.

But the security situation, which still sees daily bombings, kidnappings and other horrors of war, has been improved around the northern pipeline, running from Kirkuk to Turkey. Though not 100 percent secure, it is a major reason for Iraq's increased production.

"Relative to places like Colombia and some of the others where they bomb the pipeline hundreds of times a year and disrupt it constantly, Iraq is still much, much better," Fryklund said. "You have to be optimistic. This really is a big step up from where we were. żż If you look back earlier this year, things were not as optimistic."


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