By Mariam Karouny
Reuters, 09 March 2006
BAGHDAD (Reuters) - As if sabotage, killings and collapsing infrastructure were not enough, political uncertainty and the failure of Iraqi parties to form a government three months after an election is now dragging on Iraq's oil industry.
Analysts and officials said Iraq risks losing entirely the confidence of the international market as a supplier. The Oil Ministry said a cash crunch could hit even domestic supplies if the limbo continues, something that could provoke public anger.
"With the political situation as it is, the only direction the oil sector is going is downwards," Saad Allah al-Fathi, a former official at Iraq's oil ministry, told Reuters.
"Iraq now supplies the international market with 1.5 million barrels per day (bpd). If the situation continues as it is with the security and political problems, the market will discount Iraqi oil.
"They will view it as a reserve rather than depend on it as a supplier."
Opposition from the Sunni, Kurdish and other minorities to Shi'ite Prime Minister Ibrahim al-Jaafari has hindered U.S.- backed efforts to form a national unity government.
"Delay in forming the government does not benefit the Oil Ministry or the sector which provides the bulk of the national budget," Asim Jihad, the Oil Ministry spokesman, said.
"We are facing a lot of difficulties and challenges. There are a lot of decisions that need to come into force. We need urgently to activate foreign investment laws. The industry cannot develop without a clear investment law," he said.
Iraq's oil sector has lurched from one crisis to another since the U.S. invasion of 2003. Exports have hit their lowest level since then, reaching 1.1 million bpd in December due to sabotage in the north and bad weather in the south combined with logistics problems. They were 1.3 million bpd in February.
DOMESTIC CRUNCH
The export crisis comes at a time when Iraq has tripled state-controlled domestic prices, angering many Iraqis.
Former Oil Minister Ibrahim Bahr al-Uloum protested against the increase in December and was eventually eased out of office.
Iraq has the world's third largest known oil reserves but decades of war, sanctions, under-investment and now widespread violence and sabotage have left it critically short of fuel. It has to import nearly half of all its gasoline.
The government continues to control prices, fostering a thriving black market in fuel for those unwilling to queue for hours, sometimes days, to fill their vehicles.
Spokesman Jihad warned that the ministry may not be able to fulfill its obligations if a government is not formed soon.
"We expect to face a lot of problems and a crisis if a government is delayed. We may not be able to satisfy all demand because we need the government's financial support," he said.
"The budget for 2006 for the Oil Ministry is less than half that of 2005. With attacks on pipelines and because of the security situation we need money to import. This money and the decisions on it are supposed to come from the government."
Iraq's oil sector awaits an oil investment law to organize foreign investment and draw in international companies. The law must be ratified by a parliamentary committee. But such issues will not be discussed before a fully-empowered government can be formed under the constitution ratified in October.
"The interim government cannot strike deals and sign contracts," a senior Oil Ministry official said. "And we all know that without foreign investment the industry will not grow."
REGIONAL CONCERNS
Baghdad officials and some international energy analysts also express concern about the ambitions of regional authorities in Iraq, newly empowered under the constitution, to make their own deals in the sector, bypassing the Baghdad government.
One way to address this would be to clarify -- and limit -- regional governors' powers in the oil investment law.
"They need to get it soon, otherwise there will be chaos," the senior ministry official said, warning of a risk of confusion from arrangements reached by regional authorities.
"We have started to see signs of it in the south. Some officials there have threatened in private to cut supplies" in pursuit of political demands from central government, he said.
"Also in the north we have the Kurdish government striking deals with oil companies without referring to the central government," he added, referring to an exploration deal announced last year involving a Norwegian company.
"If it continues like this then things will be get worse."
Another senior oil official said that even if a full government is formed soon, the industry is in desperate need of reform and assistance: "Even if a government were formed now, it would still need a long time to revive the sector," he said.
"If they don't start now, God knows what will happen to the industry and the country. It will enter unknown territory."
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Citation: Mariam Karouny. "Government delay pulls Iraq's oil sector down," Reuters, 09 March 2006.
Original URL: http://today.reuters.com/business/newsarticle.aspx?type=reutersEdge&storyID=2006-03-09T131303Z_01_KAR926411_RTRUKOC_0_US-ENERGY-IRAQ.xml
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