The following was published in the Portland Oregonian on February 5, 2003.  It was subsequently republished in several other papers.
 

Iraqi Oil after Saddam

Jim Jackson

During the last year some politicians suggested Iraqi oil production will increase soon after a regime change in Baghdad.  They claimed the added oil revenues will benefit the Iraqis and will also repay the cost of a war. Before launching a war for regime change, we should consider the difficulties of increasing oil production, and we should anticipate the scale of revenues that may result.

Today Iraq is estimated to produce 1.7 million barrels of oil per day (BOPD).  The UN Oil-For-Food Program  uses 80% of this oil’s revenue.  The Saddam regime  allegedly smuggles another 400,000 BOPD out of Iraq. Current  production  is thus below the 3.5 million  BOPD Iraq produced in 1980.

The Baker Institute estimates that, if there is no war damage to the fields, a $5 billion investment could boost production to 3.5 million BOPD in three years. Estimates of the war’s possible cost range from $50 billion to more than $200 billion.

If we assume that Iraqi  oil will sell for $23 per barrel, then a $50 billion war and the $5 billion investment could be paid off in three years.  A $200 billion war could be paid off in seven years. These estimates assume that all of the Iraqi oil revenue is used to re-pay the war’s cost. This use of oil revenue is unlikely to be popular in a post-war Iraq.

There are more optimistic estimates. Ahmad Chalabi, leader of the opposition Iraqi National Congress (INC) claims that $38 billion spent over two to three years could increase production to 6 million BOPD. Last year former Bush Budget Director Lawrence Lindsey suggested that "you could add three to five million barrels of production to (daily) world supply" after a victory in Iraq.  I find substantial technical problems with these estimates, and I mention them for a perspective on the next issue.

Can a post-war Iraq quickly attract  $5 billion or $38 billion of investment?

Seven international companies have agreements with Iraq for oil production contracts that come into force after sanctions are removed. In 1997 a Russian and a French company signed separate agreements for work on two fields. An invitation to revitalize 22 fields issued by the Iraq in 2001 led to five more contracts. These agreements could increase Iraqi production some time after a war, but several INC members indicate they want to void these contracts.

The December INC meeting in London revealed a conflict within the Iraqi opposition over the control of Iraqi oil.  Diverse ethnic groups claim a right to revenue from oil fields located in their traditional homelands, and they dispute the rights claimed by any national government.

Oil companies invest where they find both a stable political climate and a well-defined system of contracts. This will take time, and thus years will pass before Iraqi oil flows increase.  Substantially increased oil revenues for nation rebuilding in Iraq will not soon be available. Thoughts of recovering the cost of the war from these revenues must be dismissed.

I might be wrong!  Have a look at these websites and form your own opinion:

1. The Baker Instiute at Rice University: look for "Guiding Principles  for US Post-Conflict Polity in Iraq:
http://www.rice.edu/projects/baker/

2. The Energy Information  Agency has compiled information from a variety of sources and placed them in this location:

http://www.eia.doe.gov/emeu/cabs/iraq.html
 

Original Members: Saudi Arabia, Venezuela, Iran, Iraq, Kuwait,

Subsequent Members: Qatar, UAE, Nigeria, Colombia, Ecuador

OPEC’S Predecessor Oligopolies

Standard Oil 1865-1909

-East Texas field discovered by "Dad" Joiner in 1930

-Price of oil fell from $1/barrel in Jan 1931 to 8c/barrel Aug

-By late July, 1931 East Texas field produced half of US oil

-Texas Rangers closed the field on Aug 17, 1931

In July 1960 Standard Oil reduced the "posted price" of oil 7%.

In response, Juan Alfonso Perez and Abdullah Tariki convened a meeting in August 1960 in order to found an organization of oil producers on the model of the Texas Railroad Commission. "Economic Waste" would be controlled through a system of production quotas. The five founding members controlled 80% of exported oil production

World Oil Production: data from the US Energy Information Agency shows world production rising from 21Million Barrels of Oil Per Day (BOPD) in 1960 to 60 M BOPD in 1980. OPEC production rose from 9M BOPD in 1960 to 30 M BOPD in 1975, then declined to 27 M BOPD in 1980. Russian/USSR production rose from 3 M BOPD in 1960 to 12 M BOPD in 1980. In 1985, World production fell to 54 M BOPD, OPEC production fell to 17 M BOPD, and USSR production held steady at 12 M BOPD. The US EIA estimates world production in 1999 averaged 66 M BOPD, of which 27 M BOPD came from OPEC and 5-6 M BOPD came from Russia.

US Oil Consumption: The US EIA estimates that US production is currently 6 M BOPD while US consumption is 16 M BOPD. The US now imports more than half of its consumption. Half of the imports come from outside of OPEC. The principal OPEC imports come from Saudi Arabia and Venezuela. It should be noted that oil production and consumption estimates cannot be made with great repeatability, and that sources other than the US EIA will make different estimates. The large-scale trends in oil consumption and production, however, are very similar from most estimators.

How do we know how large these fields are?  How do we know how much these countries have?  We employ a methodology known as Resource Assessment.  There are several techniques. Each one has been developed to address a specific set of problems with a specific set of data. Most methods address technically recoverable oil, and many are sensitive to economic conditions (minimum field size, price scenarios, etc). Many present estimates as a probablistic range of outcomes, however typically only the mean estimate is quoted in the press or by policy makers. One should always ask: what is the meaning of this estimate?

Areal Yield: how much oil/gas per acre or square mile or square kilometer

Volumetric Yield: how much oil/gas per acre-foot

Geochemical Material Balance: used for basin analysis. The product of the following factors:

www.usgs.gov