Iraq Economy - Basra and Um Qasr: Part III - Oil, Money and Guns

Basra sits on some of Iraq's largest oil and natural gas reserves. During the 2003 invasion, troops were sent to immediately secure these fields and keep them from being sabotaged as Saddam had done in 1991 in Kuwait and Southern Iraq during his retreat after Desert Storm. These fields and the infrastructure are sorely dilapidated due to the long war with Iran, Desert Storm and the subsequent sanctions that not only limited materials and money that could be spent on this infrastructure, but also allowed Saddam and his cronies to pocket billions without ever investing in the one significant supporter of Iraq's economy: oil.

The Bush Administration had made significant plans with Haliburton and several other US oil companies to immediately take control and operate these oil fields and refineries. It was one of the legs of a plan that insisted that Iraq would be able to eventually pay its own way, to pay for its own security and reconstruction, through the proceeds from its oil sales. The condition of this infrastructure made the task daunting. The oil fields are, as of today, five years after the invasion, just beginning to meet and exceed pre-war production levels at 2.6 million barrels per day. The EIA and others have projected that Iraq could be producing as much as 6 million barrels per day while others offer an optimistic projection of up to 10 million barrels per day. A significant increase both in the market and to Iraq's economy.

However, throughout the terror and insurgency, Iraq's oil infrastructure has taken a beating and the theft of oil, gasoline and other refined products has reached a point that it is taking a huge chunk of money out of the Iraqi government's pocket (possibly as much as $3 billion/year). The crime and damage to the infrastructure, including pipelines and terminals, along with a continuing delay in passing the hydro-carbon law has kept many potential investors away from Iraq.

In the new oil driven market, where a barrel of oil is now $113, the inability to develop and take part in the market is keeping Iraq from realizing billions of dollars in revenue that could go towards building other infrastructure and supporting other aspects of their economy such as agriculture and many state owned industries like cement (a huge market in the region with countries like Dubai and Oman importing millions of tons for their many building projects). Iraq's electrical power is also largely based on oil, gasoline and diesel driven power plants. These have been unable to sustain operations due to inconsistent delivery of fuel related to, in large part, the damage to pipelines, the theft of products at the pipelines, through skimming from shipments or outright hi-jacking. Much of this ends up on the black market which in turn fuels the insurgency, militias and criminal gangs.

The Iraqi government has been working on a hydro-carbon law since its inception in 2005. The law would both spell out the amount of revenue sharing with the central and provincial governments as well as the amount of ownership, investment and profit sharing with any investors or outside oil companies. While the law is pending, Iraq has gone forward with budgeting that allocates oil revenues throughout its national and provincial governments. It has also signed short term (up to two years) "service contracts" with several international companies including Total while approving 35 out of 120 companies to participate in future bids.

The CWC group is hosting an Iraq energy investment conference May 19th through May 21st in Dubai.

The theme of the conference is focused on the huge incentives to improve the investment climate in Iraq’s downstream sector and across the two days the conference will identify and explore the challenges facing the Iraqi oil industry.

There are three significant challenges to Iraq's oil industry today: the law that may or may not be conducive to foreign investment depending on its profit sharing models; the condition of the infrastructure and amount of investment needed to bring it up to par vs. potential profits; and, finally, security, since on going criminal and insurgent activities continue to damage infrastructure and take potential profits out of both the government and th investor's hands.

The multitude of schemes through which these criminal gangs and militias get their money is astounding and, frankly, a serious cause for concern for any company that assumes the risk or responsibility for maintaining, improving or increasing the infrastructure. "Criminals" blow holes directly into pipelines carrying gasoline or oil taking truckloads away to either be spirited across the borders to Iran or Syria (oil) or sold directly on the black market. Such pipelines then must be repaired either by the government or the company with the service contract, leading to millions in continuing repair outside of normal wear and tear.

Most gasoline and diesel is actually shipped into Iraq since it only has a few refineries capable of refining its heavy crude. Oil is shipped out and then returned as gasoline, diesel and kerosene via truck, train or pipeline. Tankers on trucks and trains are routinely "short filled" with the skimmed amount sold on the black market. Sometimes entire shipments are diverted or hi-jacked while others simply stop along the way and sell off part of their shipments. Some have reported that tankers have arrived with as little as a fourth of the amount their manifests indicated.

Other schemes include the state owned and subsidized gas stations that are operated by any number of people and organizations, some that are direct fronts or associated with the insurgency and criminal gangs. Subsidized gas is bought and delivered to these "stations", but much of it is sold on the black market, leaving little at the gas station for its actual intended consumers, forcing them to buy from the black market at a higher rate. In some cases, these stations don't exist or are never built or open, standing literally as "fronts" for black market operations. The government has decided to combat this by ending gasoline subsidies and forcing gas stations to buy the finished product at the market rate, nearly equal to the black market rate, making it less profitable.

Throughout these criminal enterprises, either through intimidation, graft or association, members of the criminal and militia organizations have infiltrated every aspect of the market from the management, to shipping and delivery, to labor. It has given them money to support various "aid" schemes where it buys loyalty through providing services such as housing, food, medicine and clothing. It has provided them with money to purchase weapons and loyalties that are, in turn, used to kill American and Iraqi security forces, weaken the central government, weakened the economy, Iraq's future reconstruction and, most importantly, caused major insecurity for its people.

The gangs and militias of the south lands down Basra way, particularly the Sadrists, are a very significant hindrance to Iraq taking the next step in its physical, economic and political security and stability.