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THE WALL STREET JOURNAL: Violence Imperils Iraq’s Oil Progress

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THE WALL STREET JOURNAL: Violence Imperils Iraq’s Oil Progress

Attacks in Basra
Come Amid Talks
With Western Firms
By HASSAN HAFIDH in Amman, Jordan, and JOHN D. MCKINNON in Washington
March 28, 2008

The resurgent violence in Iraq is threatening nascent efforts to enlist foreign companies in developing its immense oil wealth, a goal President Bush pushed Thursday as crucial to rebuilding the country.

Fighting in Iraq’s oil-rich south raged for the third straight day Thursday in Basra, the country’s oil capital, in other southern cities and in parts of Baghdad. The violence crossed over into the oil industry after a bomb detonated under a crucial export pipeline near Basra.

Oil officials said that could significantly curtail Iraq’s crude shipments at a time when the fighting is already interfering with production and exports. The pipeline attack sent crude-oil prices higher, with the U.S. benchmark futures contract jumping $2.32 a barrel to $108.22 in intraday trading. It settled at $107.58 a barrel, up $1.68, or 1.6%.

In a speech Thursday, Mr. Bush expressed confidence that the violence and disruptions will be only temporary. He cast the Basra offensive as a battle to overcome lawlessness. He framed the broader fight for Iraq in global economic terms, warning that defeat for the U.S. and its allies “would endanger Iraq’s oil resources and could serve as a severe disruption to the world’s economy.” (Please see related article.)

The battle for Basra marks the latest clash over Iraq’s biggest source of wealth: its oil reserves, comprising 9.5% of the world’s total, according to the BP Statistical Review, an industry bible. The Bush administration and the government of Iraqi Prime Minister Nouri al-Maliki are counting on oil to fund the rebuilding of the country.
Iraq’s oil is also important to world-wide markets. Unrest in Iraq and elsewhere, along with surging demand and rising oil-field expenses, have sent oil prices from $30 a barrel to more than $100 over the past four years.

In Iraq, oil also funds the other side. Across the country, Shiite and Sunni militias routinely siphon oil and petroleum products to sell on Iraq’s black market or smuggle overseas. The stolen oil reduces government revenue and gives insurgent and militia groups a ready source of income — officials peg the estimate at about $5 billion a year — helping to perpetuate Iraq’s violence. U.S. and Iraqi officials have said the smuggling problem is getting worse.

Frustrated Companies

The violence and smuggling frustrate major Western oil companies such as Exxon Mobil Corp., BP PLC and Royal Dutch Shell PLC. In his visit last week to the Middle East, Vice President Dick Cheney held one-on-one meetings with Sunni, Shiite and Kurdish leaders in Iraq to speed passage of a law opening Iraq’s petroleum reserves to more efficient production by global oil companies.

Last week, before the Maliki government began its offensive, U.S. Gen. David Petraeus said Mr. Maliki “is very keen on getting large Western corporations re-engaged in the oil and electricity sectors.” The security challenges posed by the Basra militias “have to be addressed by Iraq,” he added. That “is something that the government of Iraq very much wants to see happen to increase production further and increase electricity production as well.”

Iraq’s military declared a curfew through Sunday in Baghdad, and the U.S. State Department ordered its Green Zone personnel into reinforced safe zones amid the barrage, according to the Associated Press. Thousands of supporters of Shiite cleric Moqtada al-Sadr protested in Baghdad. Mr. Sadr’s Mahdi Army militia has charged the government with unfairly targeting it in Basra and elsewhere.

Mr. Maliki, meanwhile, promised “no retreat” in the government’s offensive against what it has called renegade militias.

Mr. Bush, in a speech to a largely military audience at the National Museum of the U.S. Air Force near Dayton, Ohio, praised Mr. Maliki’s decision to go after fellow Shiites. “This operation is going to take some time to complete, and the enemy will try to fill the TV screens with violence,” he said. “But the ultimate result will be this: terrorists and extremists in Iraq will know they have no place in a free and democratic society.”

Chaotic Aftermath

Efforts to rebuild Iraq have foundered amid the chaotic aftermath of the invasion, the insurgency, funding bottlenecks, corruption and the poor state of the country’s existing infrastructure.

In one potentially hopeful sign, Iraq in recent months returned to its prewar oil-production level of roughly 2.5 million barrels of oil a day. While considerably lower than its estimated potential of as much as six million barrels a day, the level offered a sign that reconstruction funding could strengthen.

Recently, Iraqi oil officials have said they were close to awarding as early as next month a handful of limited, technical contracts to big Western oil companies. The contracts in discussion are designed to increase production at five of the country’s prized oil fields by a total of some 500,000 barrels a day. The world consumes about 85 million barrels a day, but the supplies would be welcome in a time of a tight margin between supply and demand. The recent violence now threatens to upend those negotiations.

Critical First Step

The contracts are relatively small for companies the size of Exxon and Shell, and they don’t allow for rights to reserves or control over development. Still, executives see them as a critical first step to establishing longer-term relationships in Baghdad in a time when new reserves are increasingly hard to find globally. They see more attractive opportunities once security improves and after Iraqi politicians agree on a legal framework for foreign investment in the petroleum sector.

But oil-development legislation has been bogged down in Parliament, while Kurdish officials in Iraq’s semi-autonomous northern enclave have passed an oil law of their own and are signing deals with foreign firms without waiting for permission from Baghdad.

Hopes had been raised amid recent improvement across the country. A temporary increase in American troops, a cease-fire by a key anti-U.S. militia leader and success co-opting one-time Sunni insurgents have all been credited with curbing violence.

That hope is now fading. An Iraqi official with the South Oil Co., the state-run production company based in Basra, said Thursday that oil production and exports have slowed because of power cuts and the inability of workers to get to their work sites, all blamed on the fighting.
The official also said a major oil pipeline taking crude from Iraq’s southern fields to its two export terminals in the Persian Gulf had been bombed amid the fighting, threatening to reduce exports “heavily.”

Western executives have said they won’t send employees into Iraq until security improves markedly.

“You’ll see some limited initiatives to get a foothold in the country,” said David Kirsch of PFC Energy, a Washington-based consulting firm. “What you are not going to see though, we estimate, in the next 10 years are the conditions that allow you to do the really significant type of investments that could let Iraq hit its geologic potential of six million barrels per day.”

Mr. Kirsch estimated the latest round of fighting has knocked down production by about 800,000 barrels a day.

Shell said it is interested in helping with the development of the Kirkuk oil field in the north, discovered in 1927. BP said it is discussing the development of North and South Rumaila, Iraq’s two big fields in the south. Iraqi officials said Exxon is eyeing the development of Zubair oil field in the south. An Exxon spokesman said it “would be interested in participating” with the Iraqi government in developing resources, but added, “it would be premature to discuss any potential opportunity with Iraq.”

Chevron Corp. and France’s Total SA are negotiating over the West Qurna 1 oil field, according to Iraqi officials. A Chevron spokesman declined to comment on the negotiations, but said the company was “broadly supportive of a technical assistance program.” Total declined to comment.

Lingering Concerns

Echoing lingering concerns expressed by other oil executives over safety amid the violence, the Chevron spokesman said the company won’t enter Iraq until there is “a security situation that will allow us to put people on the ground, and at this point we’re still waiting for progress on that front.”

Those concerns have frustrated Iraqi officials. “Some of these companies are procrastinating because they fear that they may fail to meet contracts because of the security situation,” said one Iraqi official involved in the talks.

In an interview earlier this week, the Iraqi prime minister’s petroleum adviser, Thamir al-Ghadhban, said he still expects contracts to be signed in April. He estimated costs for the new developments — including fees for the Western companies — at between $400 million and $500 million for each field. Mr. Ghadhban didn’t disclose what the Western companies would stand to gain financially for their participation.

–Guy Chazan in London, Russell Gold in Austin, Texas, and Robin Moroney in Washington, D.C., contributed to this article.

Write to Hassan Hafidh at [email protected] and John D. McKinnon at [email protected]

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