Basra's Failed Oil Bonanza.

When British soldiers arrived in Basra in March 2003, they quickly set about ensuring that the local economy continued to function. That involved protecting the tankers which lined up at the Basra crude oil terminal and standing by as the pipeline was connected to their holds. Months later, they realised they had unwittingly been helping audacious smugglers who had been taking advantage of the post-invasion chaos.

Iraq's oil has long attracted would-be profiteers. The country's huge oil reserves have been left relatively untapped by decades of embargoes and war. In the south, it literally seeps from the landscape - a muddy brown expanse, spread by the spring rains, and peppered in all directions by giant flames. The burn-off of impurities causes flames leaping as high as 30 metres from the oilfields, creating a tangerine glow mixed with dust and sand then spans the horizon.

The Bush administration always denied that oil lust was a factor behind the invasion. In purely economic terms, it pointed out, it would have been cheaper to have simply cut a deal with Saddam, as many oil companies did. But the expectation of huge oil revenues certainly contributed to the administration's optimism that the war would be quick and cheap.

A week after the invasion began, the then deputy secretary of defence Paul Wolfowitz told Congress the US was "dealing with a country that can really finance its own reconstruction and relatively soon". He predicted that Iraq's oil revenues would bring $50-100 bn in less than three years. And on April 9, the day Baghdad fell, then Vice-President Dick Cheney predicted crude oil output of 3m b/d by end-2003. Six years on, Iraq's output is still only 2.4m b/d.

Gal Luft, an oil expert and head of the Institute for the Analysis of Global Security in Washington, recalls: "Before the war, the expectation was almost unanimous that Iraq would not only resume its pre-1990 level [crude oil] production but it would increase significantly. People were even talking about seven million barrels a day. There were very high expectations that never really materialised".

Andy Bearpark, a British diplomat and reconstruction expert, became the director of operations and infrastructure for the new Coalition Provisional Authority (CPA) in mid-June 2003. He says: "All the pressure was to get the oil pumping as soon as possible, but it was proving to be a mammoth task. There was this constant mantra: We have to get to 2m b/d. That's what it was when Saddam was in power. That was the key figure that was put out each day and it was hardly ever above 1m. It was no more nor less than anything else done by the CPA - a total disaster".

Bearpark was supposed to be in charge of rebuilding the country's infrastructure, but CPA's head Paul Bremer made clear from the outset that his remit would not include the petroleum industry. That would be run by Americans.

The exclusivity of US influence caused deep unease in the boardrooms of British and European oil companies. Fearing they would lose out to their American competitors, British oil firms held talks with No 10 Downing Street before the invasion about the post-war distribution of contracts, insisting on a level playing field. In the aftermath of the war, multinationals haunted the CPA offices, aiming to stake their claim. But as insurgent attacks on the oil infrastructure gathered momentum in the long, unbearable summer of 2003, high hopes for the Iraqi oil bonanza faded.

Luft says: "When the war really began, the Saudis did not protect their border and thousands of jihadis went across. The Saudis preferred to sit on their hands and allowed this influx into Iraq. Both Iran and Saudi Arabia were concerned that Iraqi oil would eat into their [OPEC production] quotas. They have made a fortune from the lack of Iraqi production".

Erinys, a British private security firm, was given a $40m contract to guard the pipelines, and that led to a temporary improvement, buoying spirits in the CPA, but Bearpark said insurgents soon skirted around the new defences. He admitted: "Those of us inside the system were in a pretty good state of denial throughout 2003 and into 2004. Things kept going wrong, but because there was tremendous pressure to churn out good news for the American public, we began to believe it ourselves". The big oil companies could see the investment required was enormous, the returns uncertain - and began packing their bags.

Libya had voluntarily given up its nuclear programme and was open for business, a much more attractive proposition. US and European companies, together with state-backed competitors from Asia, moved into Libya in 2005 - leaving Iraq behind and the Basra region became chaotic with rival Shi'ite militias struggling for control and the oil smuggling increased.

In the past few years, however, the petroleum industry in southern Iran has begun to recover. Safer roads have led to more tanker convoys and new wells are being planned throughout the Basra province, along with two crude oil processing plants. A total of 45 wells are planned for the huge South Rumaila oilfield south of Basra, while processing plants are scheduled to be installed west of the city at the West Qurna field.

Roads leading to oilfields on each side of the main highway to Baghdad are now heavily guarded by Iraqi troops and are largely secure. So, too, is the highway itself - a straight, flat road of European standard, which was a death run for oil convoys until mid-2008.

Crude oil output in the south has remained stubbornly at the 2m b/d level, and the country still does not have enough refining capacity to be self-sufficent. The cost of importing fuels when prices were high became a heavy burden on the state.

Now PM Maleki is under pressure to bring in capital and expertise while not being seen to "sell out" Iraq's only real wealth-making industry to companies from the outgoing occupying countries. Resource nationalists in parliament have had a major role in delaying passage of a badly needed petroleum law, with the KRG in the north moving its own way (see omt18IraqProspctMay4-09).

The multinationals have sought to squeeze out ever better concessions out of their potential hosts, not least by arguing that the area has become less attractive due to a slump in crude oil prices. In February 2009, 32 IOCs including Shell and BP met with the Iraqis in Istanbul and asked them to come up with more favourable terms for the southern fields, which hold as much as 40 bn barrels of recoverable oil. But predictions of final TSAs in late June now look optimistic.

The tragedy for Iraq was its inability to capitalise on last year's oil price spike. With the current price slump, it is much harder to get the investment needed to salvage the country's petroleum industry.

Luft says: "Iraq had an opportunity to make a lot of money and it was lost. I believe there will be another spike as we move out of recession. The question now is whether Iraq will be in a position to benefit the next time round".

On the other hand, the producing oilfields in the south have seen their output decline in recent months. Some of these fields are encountering serious damage due to lack of proper reservoir engineering and decaying infrastructure in the region needs replacement. The loss of crude oil production in the south so far has been estimated at about 200,000 b/d; and experts are warning that, unless adequate remedies are made soon, the losses will rise (see down19IraqFieldsMay11-09).

Print Get the Mag Weekly Updates