Iraq oil production declining this year

DUBAI, United Arab Emirates – Despite President Bush's optimism on Iraq's reconstruction, the country appears set to pump less crude in 2005 than last year's disappointing showing and far less than under Saddam Hussein.

The only bright spot for Iraq's oil sector, hampered by unrelenting insurgent attacks on its infrastructure, is that near-record oil prices have softened the blow by boosting export earnings.

"The general integrity of Iraqi oil infrastructure appears to us to be heading backwards rather than forwards," London-based Barclay's Capital said in a report issued Thursday.

The attacks have made it all but impossible to attract foreign expertise needed to rejuvenate Iraq's rusty oil infrastructure, drill new wells or take any number of steps toward increasing production or exports.

Legal disputes between Iraq's provinces and central government about ownership of oil is also keeping investors away, said Jamal Qureshi, an oil analyst with PFC Energy in Washington.

"Iraq has a lot of potential, but lots of things have to go right," Qureshi said. "We see no sign of that happening."

Iraq has tumbled a long way since the heady days of 1990, when it pumped about 3.5 million barrels a day, its peak production year. Since then, wars, sanctions and neglect have left the industry in tatters.

Nobody has definitive numbers on Iraq's oil production, but analysts say daily production this year will average about 1.8 million barrels per day, about 10 percent less than 2004 levels of about 2 million barrels — and just over half 1990 levels.

"It's another disappointing year," said Sharif Ghalib of Energy Intelligence Research in New York.

Analysts say 2006 looks just as gloomy, although some predicted it would show an improvement.

"Anything above 2 million barrels per day would be a positive surprise for next year," said David Wech, an oil analyst with PVM Oil Associates in Vienna.

In his speech Wednesday, Bush said Iraq is making quiet, steady progress in repairing its shattered economy, though reconstruction "has not always gone as well as we had hoped" because of violence. Bush did not mention Iraq's oil sector, which is responsible for almost all of Baghdad's export earnings.

Ghalib expects incessant insurgent sabotage to continue to hamstring the sector, even after next week's elections. Iraqi production in 2006 will remain flat at about 1.8 million barrels a day, with exports of 1.3 million barrels a day, Ghalib predicted.

"There's nothing on the horizon that suggests things are going to calm down," he said.

Earlier this year, the Iraqi oil ministry predicted crude production would reach 2.5 million or even 3 million barrels a day by the end of 2006.

"That's pie in the sky," Ghalib said. "It's not going to happen."

In November, Iraqi crude exports plunged to 1.2 million barrels per day, one of the lowest levels since the country restarted oil shipments after the U.S.-led invasion in 2003.

The pain has been offset by a climb in oil prices, boosting oil export earnings. This year's oil revenues are expected to hit $23 billion, almost a third higher than the $17.5 billion in 2004, according to a government report cited by Dow Jones Newswires.

But oil ministry figures say insurgent attacks since 2003 have cost Iraq about $11.35 billion in lost revenue and infrastructure damage as of May 2005.

Iraq's sputtering oil sector has defied prewar optimists led by Vice President Dick Cheney and then-Deputy U.S. Defense Secretary Paul Wolfowitz, who hoped booming exports from an America-friendly Iraq could rebuild the country and cut America's reliance on Saudi crude.

The attacks take much of the blame, directly or indirectly, for crippling Iraq's production and exports.

Saboteurs have been able to keep Iraq's northern export pipeline to Turkey almost constantly shut since the U.S.-led invasion in 2003. They have also occasionally halted exports from Iraq's two Persian Gulf oil terminals in the south.

Attacks and power outages have caused delays for tanker ships arriving at Iraq's Gulf terminals to take on oil, leaving the oil ministry paying as much as $30 million in "demurrage" charges to shipping companies, Dow Jones reported.

On Thursday, nine tankers were anchored off Basra Oil Terminal waiting to take on crude, five of which had been waiting since late November, said Mohammed Hadi, head of Iraq operations for Norton Lilly International.