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Iraq reopens its oil reserves to foreign companies, but few rush in

Smoke darkening the skies over a row of pipes as excess natural gas is burned off at the South Rumaila oil field near Basra, Iraq. (Mohammed Ameen/Reuters)
International Herald Tribune

BASRA, Iraq: Next to a pipeline snaking across a desert in southern Iraq, villas built for an expected influx of foreign oil workers stand empty.

Nearby, a faded plaque in Russian and Arabic commemorates the opening of a pumping station in 1972, a reminder of the outside ties that helped Iraq develop its oil industry.

Nearly six years after the U.S.-led invasion, Iraq has started once again to open its vast oil reserves to foreign companies.

The country has begun a round of bidding for some of its largest oil and natural gas fields, hoping to attract multibillion-dollar investments.

There is still some confusion about the deals, scheduled to be awarded by June. And a lack of security, rigid bureaucracy and the absence of a legal framework is still deterring the investment that Iraq needs to update its decaying oil infrastructure.

“A foreign oil workers’ compound, whether Exxon, BP, Shell or whoever, would be a bull’s-eye for an attack,” said a senior foreign oil executive who declined to be named because he was not authorized to speak to the news  media.

Foreigners were prime targets in the years of bloodshed unleashed by the 2003 U.S.-led invasion of Iraq, and videos of the beheading of kidnapped Westerners shocked the world.

Iraq sits on an estimated 115 billion barrels of oil, one of the world’s largest reserves. But tin shacks line the road to its oil fields, and the government is desperate to use oil income to rebuild the country.

Villas that once housed Russian workers need repairs. Equipment worn down by war, sanctions and sectarian violence is hopelessly antiquated.

Deprived of outside expertise and money, Iraqi engineers have grown adept at tinkering with old equipment and salvaging spare parts, but the maintenance is only skin deep.

“We painted the tanks, improved the checkpoint, the toilets,” said Khodair Abd, a supervisor at the North Rumaila field, one of Iraq’s two most productive fields. But he said that such simple improvements did not aid production.

“There were companies supposed to come here for that, but I don’t know what happened,” he said. “This is the same station that was installed in 1972.”

At the South Rumaila oil field, which has an estimated output of 800,000 barrels of crude per day, a lack of equipment means that valuable natural gas – released during extraction of the oil – is burned off in huge flares, the smoke streaming like jets of ink into the blue sky.

The violence that almost tore Iraq apart in 2006 and 2007 has fallen sharply in the past 18 months and Iraqis now believe that the time has come for foreign companies to show up.

“The excuse of a lack of security has gone,” said Mohammed Nasser, an engineer at the South Rumaila plant, which dates from the 1950s and where old dials, gauges and switch panels sit next to more modern pieces of electronic equipment. “The security situation has transformed, root and branch.”

Some overseas companies are taking tentative steps.

Chinese National Petroleum Co. started work this year on a $3 billion project in the Ahdab oil field, in Wasit Province, the first foreign company to begin such work since Saddam Hussein nationalized the industry decades ago.

Royal Dutch Shell in 2008 signed a deal with Iraq to collect the byproduct gas in North and South Rumaila.

A U.S. company, Weatherford International, has a deal to operate in North Rumaila and in the Zubair oil field.

But they have few, if any, workers on the ground in the country’s south, which accounts for about 80 percent of Iraqi oil production.

“We probably could do a reconnaissance visit now, but that is very different from sending people in to work at compounds and bases,” said another oil executive who also declined to be named. “We’re not ready for that.”

Despite such skepticism, Iraqi officials say they believe that the oil opportunities will ultimately prove irresistible. “International oil companies are killing themselves to sign contracts with Iraq,” said Isam al-Chalabi, who was the Iraqi oil minister from 1987 to 1990.

One of Iraq’s greatest lures is the ease with its oil can be pumped. The Oil Ministry has said that it costs around $2 a barrel to extract Iraqi crude.

With oil prices below $50 a barrel, down from a high of about $147 in July, the low cost of production gives Iraq an advantage over producers who pump their crude out of deep-sea wells, for example.

Of the 35 companies that qualified for a first bidding round of oil-field-servicing tenders last year, 30 have paid for technical information on about eight oil and natural gas fields.

“That implies there is a real desire to work in Iraq,” the oil minister, Hussain al-Shahristani, said when announcing a second round at the end of December.

Shahristani said he did not see any impediment to foreign oil companies in Iraq’s failure to agree on a law to give foreign companies access to profit-sharing deals, clarify taxation and define how oil resources would be divided between Baghdad and the provinces.

He is not the only optimist.

“I’m confident Iraq will become a rich oil state and that our grandsons will enjoy a welfare state like they currently do in the Gulf countries,” said Sabah Ghani, 65, an Iraqi businessman. “It won’t happen in record time.”

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