Insurgents go for Iraq's lifeline: oil

Recent attacks that have virtually shut down Iraq's oil industry are just the latest in a prolonged campaign to choke the country's reconstruction.

Strikes against Iraq's oil sector have averaged more than one a week since last June. Bombings Tuesday and Wednesday on the southern pipeline halted oil exports from Basra and could cost Iraq about $65 million a day until repairs are made over the next several days.

The interim government is relying on oil revenues to bolster its authority and shepherd Iraq toward a self-sufficient future. But the ongoing attacks could undermine Iraq's stability as well as rattle the global oil market. With global production stretched to its limits, and prices near a record high, even the loss of Iraq's limited export volumes could have a major effect on prices, analysts say.

"Since the interim government was announced it seems the violence is getting worse,'' says Kate Dourian, the Middle East editor of Platts, an energy information service. "There's no spare capacity anywhere, so it's a question of where the replacement crude will come from."

The closure of Basra's oil shipments dealt a significant blow to the country's overall output. The southern pipeline was accounting for about 90 percent of Iraq's oil exports after repeated attacks effectively shut down the northern pipeline between Kirkuk and Ceyhan, Turkey, Iraq's only other operable pipeline.

"Production through the north has been intermittent at best, so the only real route for Iraqi oil exports has remained in the south," says Ms. Dourian. "When that looks threatened, the oil market becomes very worried."

In another development, gunmen Wednesday shot dead Ghazi Talabani, the security chief for the Northern Oil Company. Mr. Talabani, a Kurd and close relative of Jalal Talabani, head of one of Iraq's main Kurdish parties, was the third oil official to be assassinated since November.

The coalition had hoped to export 2.4 million barrels a day by the end of the year. Iraq's daily average presently stands at about 1.7 million barrels, analysts say.

Oil exports are supposed to provide 98 percent of the new government's revenues this year, according to the coalition.

"Projected Iraqi spending on schools and hospitals among other capital projects will be affected if exports are significantly interrupted for long periods of time," says Neil Partrick, editor of the Middle East and North Africa section of the Economist Intelligence Unit. "That said, the actual expenditure of US and other international aid commitments will in 2004-05 be more important to the reconstruction of the country."

But with oil revenue endangered, the question becomes what Iraq can do to protect its oil infrastructure from attacks, which are both cheap and easy to carry out against the thousands of miles of largely unprotected pipeline.

Before February, almost all attacks against oil installations were in the north and central areas.

But in the past four months, insurgents have concentrated on southern oil facilities.

The faltering oil exports via the Kirkuk-Ceyhan line came to a halt on May 24 when militants blew up a section near Kirkuk. The northern pipe has been attacked three times since then.

"Assaults on oil and other staples of Iraq's attempt to rebuild are likely to continue over the short to medium term, constraining but not necessarily greatly curtailing its oil sector," Mr. Partrick says.

The vulnerability of Iraq's oil exports comes down to the fact that it has so few ways of getting oil out of the country. A pipeline to Syria was badly damaged by US bombing during the invasion, and an old pipeline to Saudi Arabia was long ago expropriated by the kingdom. That leaves the already vulnerable northern route and the increasingly targeted pipeline in the south.

Though the US and its Iraqi partners say they are training oil facility guards as fast as they can, officials in Iraq say protecting the country's sprawling pipeline network is nearly impossible. "It would take the whole Chinese Army to protect all of our pipelines,'' says an Iraqi oil official, who asked not to be named.

Ms. Dourian of Platts says another problem is that there are few redundancies in Iraq's creaking network, while other countries often have parallel lines.

Fixing this will require investment and time, two rare commodities these days in Iraq.

A recent report by Bayphase Ltd., a British-based gas and oil consultancy, says that an investment of $100 billion to $150 billion is required to unlock "some" of Iraq's "potential" reserves, estimated at 330 billion barrels of oil and 324 trillion cubic feet of gas.

An oil industry conference scheduled in Basra last April that US and Iraqi officials had hoped would be attended by oil majors like BP and ExxonMobil had to be canceled after most companies decided it was too dangerous for executives to visit.

Without investment, Dourian says Iraq's exports will remain vulnerable. "This system has been poorly maintained for a long time, and you can squeeze production now, but unless you have investment you could simply be putting off a bigger problem."

Dan Murphy contributed to this report from Baghdad.

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