Iraq's oil booty will only pay part of rebuilding costs

An act of sabotage that damaged a gasoline pipeline near Tikrit in northern Iraq last week highlights one reason oil may not provide the deep pockets for Iraq's reconstruction that some had predicted.

As in other aspects of Iraq's road to peace, security remains a key factor in determining when the country's oil industry will recover. But security remains tenuous, meaning total production may be only substantial enough to pay for base-line services, leaving the US and other countries to foot a bigger bill than expected when it comes to rebuilding the war-torn country.

"Production is coming back and that's a good sign, but it should not obscure the fact that even what they're estimating for the initial rehab is not going to be enough," says Robert Ebel, director of the energy program at the Center for Strategic and International Studies in Washington.

Meanwhile, increased uncertainty over Iraq's oil supply, and the near-term ability to pump up exports, are factors in rising oil prices that are now nearing prewar highs, analysts say.

Iraq's oil production is expected to return to prewar levels - of about 2.8 million barrels daily - by next spring under an industry rehabilitation plan approved recently by American and Iraqi authorities. That plan calls for the US to pay $1 billion of the $1.6 billion initial refurbishing costs - much more than some supporters of an Iraq invasion estimated when they said rebuilding could be self-financing.

Even after production returns to prewar levels, oil revenues will probably only be able to pay part of Iraq's operating expenses - such as government salaries. Iraq needs $20 billion just to keep services at bare-bones levels, a UN official said recently. But revenues from oil and whatever other income the country can muster - such as repatriation of frozen assets held overseas - is likely to provide no more than $15 billion.

That scenario helps explain why officials now say oil revenues won't play much of a role in financing the country's reconstruction for years to come - and why the success of an international donors' conference set for October is increasingly crucial.

Overall, rebuilding Iraq could cost as much as $100 billion over the next few years, says Paul Bremer, Iraq's American administrator. US spending of $1 billion a month is likely to continue for a while, other US officials say. In any case, Iraq is likely to need at least $5 billion from donors just to keep existing services running next year, says the UN's humanitarian coordinator for Iraq, Ramiro Lopez da Silva.

Daunting realities should not obscure the positive side of what has happened so far in Iraq's oil industry, some say. The vast oil fields in the north and south of the country - which sit atop the world's second-largest oil reserves - were not torched during the war as was feared. And oil exports have recently resumed. At about 1 million barrels a day, total production is still well below prewar levels.

The Iraqis should get a "pat on the back" for their ingenuity in keeping oil flowing in difficult conditions following the first Gulf War, says Mr. Ebel. But he adds that the need for spare parts and some serious looting of installations since the war mean "it will take billions just to get [the country] back into shape."

Iraq has earned as much as $20 billion a year from oil, but its peak production years were in the late 1970s, before the Iran-Iraq War. Getting Iraq to produce 3.5 million barrels a day - akin to its distant glory days - could take years and cost more than $30 billion, experts say.

Right now the US is focused on a return to the prewar production of 2.8 million barrels a day, and officials realize security is the key. "The insecurity in and around the oil fields and installations is still a big concern," says Jim Burkhard, at Cambridge Energy Research Associates in Cambridge, Mass.

The contrast between overly optimistic prewar assumptions and reality on the ground has led to two things, Mr. Burkhard says. First, crude oil prices are back to about $30 a barrel. Second, talk of Iraq paying for its own reconstruction has disappeared faster than gas from a guzzler. "The short-term difficulties in getting production to prewar levels has led to this abrupt de-emphasizing of oil as the answer," he says.

Burkhard says the amount of looting in Iraq's oil installations surprised some oil analysts. As a result, any act of sabotage or sign of security problems will take both a psychological toll and cause material setbacks.

With Iraq struggling to maintain an export flow of about 700,000 barrels a day - compared to 2.2 million barrels prewar - continuing security problems could be the rehab plan's Achilles heel.