Hadi Mizban  /  AP file
An Iraqi official of the Ministry of Oil looks at a burning pipeline last month near Samarra, 75 miles north of Baghdad. Thieves trying to steal gasoline caused an explosion when they breached a pipeline creating a blaze that burned out three cars that were loaded with barrels of gas.
By John W. Schoen Senior producer
updated 1/11/2004 4:22:19 PM ET 2004-01-11T21:22:19

Before the U.S.-led invasion of Iraq, global oil companies were eagerly competing to win lucrative contracts to develop the country’s undeveloped reserves — the second largest in the world, behind Saudi Arabia. But as U.S. and Iraqi officials begin to draw the outlines of the country’s post-Saddam oil industry, the treasure has lost some of its luster. Ongoing guerilla attacks, shipping bottlenecks and damage to the underground oil reservoirs themselves have created major headaches for anyone hoping for a piece of a once-hoped-for Iraqi oil boom.

Unlike its OPEC neighbors, Iraq is in no position to raise oil production at will based on market forces. Before they can begin to think about expanding output, Iraqi officials face a huge repair job on aging facilities that are running on empty. And there are growing concerns that the underground fields themselves have been damaged by years of mismanaged production.

“They were sucking river water from the Euphrates and just injecting it in the fields,” said Marshall Adkins, an oil analyst with brokerage Raymond James. “That just completely screws up the reservoir when you do that.”

From a pre-war peak of about 3 million barrels a day, Iraq’s crude oil production was badly crippled by post-invasion looting and sabotage to already badly decayed facilities. As of last month, production hit close to 2 million barrels a day, and the White House estimates production will reach 2.5 million barrels per day by April.

Expanding Iraqi oil production – and exports – can’t come too soon. The proceeds would help accelerate the rebuilding of the country’s haggard economy. And with world supplies at five-year lows, oil-consuming countries could use the added supply.

But that won’t happen until the shooting stops. Even as production facilities are slowly being rebuilt, near-daily attacks on pipelines have pinched off the flow of oil out of the country. Shipments from the northern oil fields in Kirkuk to the Turkish port of Ceyhan have been halted since April. All of which has made it difficult to even think about drilling for more oil.

“If you’re bottlenecked at the pipeline side and the export side what do you need more drilling for?” said Adkins.

Though pipeline attacks continue, the White House has budgeted more than $500 million for a variety of emergency repair projects – to fix pipelines, power plants, water pumping stations and for new technology to correct badly managed underground oil fields.

While crude production is slowly being restored, Iraq’s refineries are still crippled by intermittent power failures. The problem is so bad that another $400 million in U.S. aid is being set aside to import gasoline and other refined products to keep basic services running.

“Its sort of a situation where there’s so much to be done it almost would be foolhardy to suggest where to begin,” Greg Haas, an oil analyst at Sanders Morris Harris.

But U.S. and Iraqi officials are beginning to lay the groundwork for the long-term development of Iraq’s huge untapped reserves and a complete overhaul of the industry’s 1970s-era technology. Major oil companies are scheduled to meet with Iraqi officials in March to begin discussions on developing new capacity, an undertaking that Iraqi oil minister Ibrahim Bahr al-Ulum has estimated could cost upwards of $50 billion.

Iraq’s vast oil reserves remain a powerful prize for global oil companies; it is sitting on an estimated 112 billion barrels of crude, a pool of oil second in size only to Saudi Arabia’s 264 billion barrels. (By way of comparison, proven U.S. reserves total about 22 billion barrels; the U.S. Strategic Petroleum Reserve holds about 700 million barrels.)

“You’re not going into an area with a lot of wildcat exploration and a lot of uncertainty,” said Peter Zipf, editor in chief of Platt's Oilgram News. “If you’re going in, there’s definitely oil there.”

Some major deals were already in place before the war began in March. In 1997, Russia’s LUKOIL signed contracts to develop Iraq’s West Qurna oil field. The same year, the China National Petroleum Corporation bought a 50 percent stake in the al-Ahdab oil field. (Both were barred from developing those reserves by U.N. sanctions.) And France’s TotalFinaElf negotiated agreements to develop the much larger Majnoon field, but no firm contracts were signed.

Though the Bush administration has said it will bar France and Russia from bidding on U.S.-funded reconstruction contracts, Iraq’s Governing Council has said it will include them in the bidding even though they did business with Saddam Hussein and opposed the war to overthrow him.

It remains to be seen just who will be signing any new contracts. U.S. and Iraqi officials are reportedly leaning toward setting up a single, state-run oil company as opposed to turning over the industry to private investment. Establishment of a state-run company would go a long way to blunting criticism that U.S. invaded Iraq with the ultimate goal of seizing its oil. But the decision will have far reaching effects on global oil markets – at a time when non-OPEC producers like Russia have begun to loosen the cartel’s grip on oil prices.

“Creation of a large, state-run oil company virtually guarantees (that Iraq) will remain a member of OPEC,” said O’Grady.

It could also subject the industry to the kind political infighting that has slowed the formation of an Iraqi government. Iraq’s oil reserves are roughly split between Kurdish-controlled areas in the north and Shiite-controlled southern fields, creating the potential for internal divisions that could slow development of any new oil fields.

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