The Observer: Oiling the machinery of war

By Eric Watkins
Posted 28 May 2004

The governments of the US and the UK have always insisted that oil had nothing to do with the invasion of Iraq. But few Iraqis are convinced of that, and many have sought to prevent control of their oil by what they call the "occupation authorities".
Iraqi oil assets are formidable. Industry sources say Iraq contains 115 billion barrels of proven oil reserves, the third largest in the world behind Saudi Arabia and Canada.

But Iraq could have even larger amounts of oil, since only about 10 per cent of the country has been explored.

Some analysts believe that deep oil-bearing formations located mainly in the country's unexplored Western Desert could yield another 100bn barrels or more.

With such resources there is clearly much at stake and little wonder that Iraqis want to retain control.

"Iraq is a nationalist country that is not going to destroy its national resources but that won't hand them over to foreigners either," according to Youssef Ibrahim, managing director of Strategic Energy Investment Group, which advises banks and oil companies on energy supply and geopolitical risk.

"In this respect the real battle for oil is now on," Ibrahim said last year, explaining that "The occupying force will have to contend with some 60,000 Iraqi oil technocrats, who will never accept American hegemony and will sabotage the plan if necessary."

Saboteurs have indeed been at work on the Iraqi oil infrastructure over the past year, and they have been effective.

From as early as June 2003 they were busily bombing the pipelines that allow exports from the country's northern oilfields around Kirkuk.

The bombers have successfully launched as many as 100 attacks on the northern pipeline system, and have managed to shut down the country's exports along that route.

They have also blown up domestic pipelines and storage tanks to prevent use of the oil on the home market. As a result, Iraqi oil is being pumped back into the ground for the lack of any other place to put it.

And the saboteurs have not confined themselves to infrastructure.

Last November 10, Mohammed al-Zibari, distribution manager for the Oil Distribution Company was shot and wounded in the northern city of Mosul in what seems to be the first assassination attempt on officials from an Iraqi oil firm. Zibari's son was killed in the attack.

Less than two weeks later, Abdel Salam Qanbar, an Iraqi police colonel in charge of security for oil installations in Mosul was shot and killed by unknown attackers.

The northern pipeline system, when operating at full capacity, can send some 900,000 barrels per day of oil to world markets. But even at its current reduced capacity of around 600,000 bpd, the system could earn substantial export revenues.

US Administrator for Iraq, Ambassador L. Paul Bremer III last year estimated that sabotage and intimidation are costing the country around $7m per day in export earnings from its northern fields.

As a result, Iraq has had to depend solely on exports of oil pumped from its southern fields through two export terminals on the Persian Gulf - one at the Basra Oil Terminal and the other at nearby Khor al-Amaya.

Through them, Iraq has been able to ship a reported 1.7m bpd to world markets - about 85 per cent of the volumes being exported before the war.

Not surprisingly, in April, saboteurs turned their attention to this southern route, using three explosives-laden boats in a coordinated suicide attack on the export terminal.

Having stopped exports from Iraq's northern fields, the saboteurs knew that a successful attack on the two ports could shut down the country's entire export capacity and undermine the US-led war effort.

A successful attack would also have disrupted life as far away as California, where shipments of Iraqi oil resumed in August 2003, just three months after the end of the war.

Indeed, ChevronTexaco, based in San Ramon, California, was the first US firm to get a contract from Iraq following the war, for 2m barrels, and later signed a second contract for Basra crude covering August through December last year.

The shipments marked the first time that Iraqi oil had reached Californian shores since the US launched its invasion. In addition to unseating Saddam Hussein, Operation Enduring Freedom represented, according to the San Francisco Chronicle, "a big step toward normalcy for California drivers."

Before the war disrupted shipments, Iraq had been California's biggest source of foreign oil, accounting for 20.1 per cent of all the state's imports in 2002, or 6.09 per cent of total supplies.

Japan also would have been hit by a successful attack on Iraq's southern export terminals.

Last December, Japan's Showa Shell Sekiyu KK, a member of the Royal Dutch/Shell Group, announced plans to double its purchases of Iraqi crude oil, raising imports from about 620,000 barrels in December to 1.13m barrels in January.

Ranked third in market share for gasoline sales and fifth in petroleum products sales in Japan, Showa Shell planned to acquire Basra Light crude oil through its top shareholder Royal Dutch/Shell Group.

Given that Showa Shell procures about 16.5m barrels of crude oil per month, the Iraqi oil accounted for around 7 per cent of its total imports.

Although the attacking boats failed to reach their targets, they still succeeded in raising insurance rates for tankers carrying oil exports - creating a so-called "terror premium" and making Iraqi oil more expensive on world markets.

Lloyd's of London broker Tyser & Co. reported that all lead marine underwriters were charging higher additional premiums for ships calling at Iraqi ports as a result of the bombing attempt on the Basra and Khor al-Amaya oil terminals.

Iraqi oil has traditionally been less expensive than that produced by other countries such as Saudi Arabia, due to lower exploration and production costs. As a result, oil companies around the globe have been eager to sign supply contracts with Baghdad.

But price is not everything in the oil business, and what counts more is security of supply, and that is where Iraq's saboteurs are making their mark.

· Eric Watkins writes on world oil, shipping and security.


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