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ANALYSIS-Iraq's oil industry in grip of despair http://today.reuters.com/News/CrisesArticle.aspx?storyId=L27909414
Wed 29 Nov 2006
By Peg Mackey
LONDON, Nov 29 (Reuters) - The present state of Iraq's collapsing oil sector, its economic lifeline, is bleak and its future looks far worse, despairing officials say.
Another damaging oil attack this week, the prospect of British troops handing over the oil city of Basra and virtual civil war have all but crushed hope for Iraqi officials battling to keep exports flowing to world markets.
"One thing is sure. The worst is yet to come," an Iraqi oil industry source said by telephone from Baghdad.
His task is made harder still by gross mismanagement at the oil ministry and chronic underinvestment in the vital sector -- already neglected for decades due to sanctions and wars.
"There is no line of authority at the oil ministry," said an oil official in the capital. "We are crippled. We have the resources and the finances and we are still failing."
With Baghdad in chaos, technocrats fear the oil producing regions in the Shi'ite south and in the north near Kurdistan may seize control of exports and effectively dismember the country that holds the world's third biggest oil reserves.
"Our country may be dismantled -- farewell to central government," the oil source said. "This is the danger."
Salvation, in the form of an eagerly-awaited oil law designed to unify the country and lure foreign investment, is unlikely to arrive by the end of the year.
Control of the oilfields is dividing Iraq's three main communities, the Arab Sunni and Shi'ite Muslims and ethnic Kurds. Sunnis fear autonomous deals by Shi'ites in the south and Kurds in the north will cut them out of Iraq's oil wealth.
They, along with the Kurds and Turkmen, are disputing the status of Kirkuk and its giant oilfield. A December 2007 referendum will decide whether Kirkuk city and the surrounding area should be controlled by the Kurdistan regional government.
"That's the real flashpoint," said Peter Khalil of Eurasia Group. "The Kurds have de facto taken control of Kirkuk."
Whoever does lay claim to Kirkuk will inherit an 80-year-old oilfield that pumped 800,000 bpd or nearly a third of Iraq's output under Saddam Hussein.
Rates have slowed to a trickle since the U.S.-led invasion in 2003 as relentless sabotage along the northern export pipeline to Turkey has kept exports mostly idle.
The field was dealt another blow on Monday when a mortar attack ignited nearby oil tanks and cut Kirkuk production to about 100,000 bpd from 300,000 bpd.
RESTIVE SOUTH
Though plagued by factional fighting, mainly Shi'ite Basra has largely escaped the sectarian violence.
The southern Rumaila oilfields have provided steady exports of around 1.5 million bpd for close to a year.
"The oil flow from the south has been sacrosanct even with Baghdad falling apart," said a Western executive at a major oil company. "But will it last?"
Although more than 7,000 British troops are in the region, they plan to leave by the end of 2007.
Eurasia Group's Khalil said there was an outside chance of an attack on oil facilities when British troops start their hand over. He said, however, the decrepit state of the south's oil network posed a bigger risk to oil flows.
"Even if the security situation gets worse, I don't see the Shi'ites deliberately targeting the oil infrastructure," he said. "They're not going to attack their lifeline."
Iraq's production is stuck at around 2 million bpd, well down on the nearly 3 million bpd hit in the final days of Saddam and even further from the 3.7 million pumped in 1979, prior to the Iran-Iraq war.
A modest amount of foreign cash could swiftly boost flows towards four million bpd. But multinationals will not act without a legal framework and peace restored.
Senior Iraqi officials were to resume talks to resolve a dispute over the energy legislation last Thursday, when bombing in the capital killed 200. There was no word on progress.
Oil Minister Hussain Shahristani wants to retain a strong grip with only participation by the provinces, officials said.
"From a technical and economic standpoint, this is a reasonable solution," said a senior Iraqi executive. "But whether that's acceptable to all parties remains to be seen."
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