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The one-word answer to sky-high oil prices

Iraq has the third-largest oil reserves in the world – if its government could agree on how to share oil revenues.

There's a cure for superhigh oil prices: Invigorate Iraq's oil output.

"The potential is enormous," says Leo Drollas, chief economist at the Centre for Global Energy Studies (CGES) in London.

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With a decline in sabotage of Iraq's petroleum facilities, oil output has risen from 2 million barrels per day (m.b.p.d.) in September to about 2.4 m.b.p.d. in November. Iraq's oil production peaked in 1990 at 3.5 m.b.p.d. and was running at 2.8 m.b.p.d. before Saddam Hussein was toppled in 2003. After that, it fell to as low as 0.5 m.b.p.d.

"Known recoverable oil reserves would allow Iraq's oil output to rise to 6 to 8 m.b.p.d., provided the economic and political climate is propitious," notes a new study by two CGES experts. Iraq's proven reserves are about 113 billion barrels, third in size after Saudi Arabia's 262 billion barrels and Iran's 133 billion (fourth, if Canada's tar sands are included in the calculation). Some say exploration could boost Iraq's reserves to more than 200 billion barrels.

Even that 0.35 m.b.p.d. increase in oil output in the last couple of months would – at, say, $80 a barrel – add $24 million a day to the Iraqi government's oil revenues. A nice chunk of change.

Reviving and expanding Iraq's oil production won't be easy. Only last week, a fire broke out at a refinery a few miles south of Baghdad. It might have been sabotage, news reports said.

There have been nearly 600 pipeline attacks in Iraq since March 2003, reports Ben Lando, United Press International's energy editor. But recent security strategies have allowed additional oil to flow in the northern pipeline through Turkey to the Mediterranean Sea – about 300,000 barrels per day, says Dr. Drollas.

Apparently, international oil companies have gotten more excited about the prospects for accessing Iraq oil. Mr. Lando writes that Oil Minister Hussain al-Shahristani hinted to him that Iraq is moving forward with oil deals despite the lack of a new national oil law.

That law has been stalled in political negotiations for more than a year. Mr. Shah­­ristani said that oil "supergiants" could be given "technical-support contracts" to develop producing fields, Lando writes.

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Presumably this would be done under the oil laws of Mr. Hussein's old regime.

With greater stability and the help of the international oil companies, Iraq could revive its production to about 3.5 m.b.p.d. in perhaps a year, Drollas reckons. Output higher than that would take five years or more, after years of drilling.

But this won't be easy. For one thing, Hussein let the oil fields deteriorate.

Iraq's "very old oil system" was "grossly overproduced during Saddam's clever gaming of the 'oil for food' era," notes Matthew Simmons, head of Sim­mons & Co. International, an energy financing firm in Houston, in an e-mail. Without foreign investment, "I worry that Iraq will struggle to keep production above 1.5 m.b.p.d. over the long term."

Moreover, there is much opposition in the Iraqi parliament to production-sharing agreements with Western oil companies. These deals generally provide that new oil production is shared between the government and the oil companies, with the government getting between 60 and 80 percent. The bulk of early output would pay off the cost of discovery and production of the new oil.

Pragmatists tend to favor production­-sharing deals that bring in large foreign investments. Nationalists fear that the Iraqi government, relying heavily on American and British forces for its protection from insurgents, will give away the resources too cheaply. Thus they tend to favor service contracts to help develop old and new fields.

"Nationalism and sectarianism will make it hard for international oil companies to invest heavily in Iraq," writes A.F. Alhajji in an e-mail from Riyadh, Saudi Arabia. "Both are high during and after occupation." Dr. Alhajji teaches at Ohio Northern University's business school.

Iraq kicked out the international oil companies in the early 1970s, and its own nationalized oil company soon took over. So the oil majors will require "some guarantee of stability" before returning to Iraq, says David Kirsch, manager of market intelligence at PFC Energy, a consulting firm in Washington. He doubts if they will make deals on the basis of the Hussein-era legislation. Nonetheless, he adds: "International oil companies cannot afford not to be interested in Iraq." The nation offers the largest potential oil reserves known today. It is "low-hanging fruit."

Lando's website, Iraqoilreport.com, lists major oil companies and the specific Iraq fields they are looking at. They are, he says, looking for a "foot in the door."

The new oil law is tied up in the complex sectarian politics of Iraq. "Control of oil revenues is political control," says Mr. Kirsch.

Iraqi legislators cannot agree on the degree of autonomy for Sunni, Shiite, and Kurdish regions in a federal nation. Nor on how oil revenues are to be shared. "They are tip-toeing through a minefield," says Drollas.

But whereas big oil revenues have been disruptive in some developing nations, Drollas sees oil as the glue holding Iraq together. Iraq's future is bright, he adds, if the Iraqi factions realize there is enough oil "for everyone."