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New Iraq Oil Law One of Many Obstacles

Wednesday October 25, 6:14 pm ET
By Thomas Wagner, Associated Press Writer

U.S. Demand for New Oil Law in Iraq Is Only One Challenge Industry Faces


LONDON (AP) -- Industry experts believe the bitter rivalry among Shiites, Sunnis and Kurds will make it difficult to pass a law on distributing Iraq's oil wealth -- one of the key steps in a timeline for restoring production to prewar levels and shoring up the shaky Baghdad government.

But even if Iraq's politicians do better than expected, two other problems the industry is facing have shown no sign of abating: widespread attacks on pipelines and oil smuggling.

SIGIR, the U.S. agency that oversees Iraq's reconstruction, recently announced that oil production in Iraq, which had hovered around 2 million barrels per day during 2005 and most of the first half of 2006, briefly reached the prewar level of 2.5 million barrels per day in mid-June. It also said oil exports had increased, averaging 1.6 million bpd during that quarter.

But oil analysts have dismissed those numbers as a blip, not a benchmark.

"Figures for one week, or even one month don't mean much. Oil markets look at the numbers over an average of six months. That is what we call sustained figures," said Issam al-Chalabi, a former Iraqi oil minister now working as an oil consultant in Jordan.

"Nothing has changed. Nothing has improved," he said in an interview, adding that if it had, major international oil companies wouldn't still be sitting on the sidelines, waiting for Iraq to clarify its laws and reduce its widespread violence.

On Tuesday, Zalmay Khalilzad, the U.S. ambassador in Iraq, said its leaders had agreed to the timeline that would require Prime Minister Nouri al-Maliki's government to set dates by the end of the year for completing six key tasks.

Five of the markers are clearly designed to mollify Sunni Arabs, the Muslim sect that makes up the bulk of the insurgency and is responsible for most American deaths in Iraq.

In addition to a law that would guarantee the sharing of Iraq's oil wealth, the timeline requires amending the constitution, turning an anti-Baathist organization into a reconciliation body, disbanding Shiite militias, setting a date for provincial elections, and "increasing the credibility and capability of Iraqi forces."

A new oil law could help Iraq's oil sector and its crumbling infrastructure by resolving how Iraq's Shiite, Sunni and Kurdish regions would share oil revenues and resources, and broker deals with international oil companies regarding desperately needed exploration and development.

Most of Iraq's known oil wealth is exported from the south, where majority Shiites predominate and where U.S. and Iraqi ground forces and ships work around the clock to protect Iraq's main offshore oil terminal near Basra from insurgent attacks.

In the other main area -- the Kurdish north -- the regional government already has signed agreements with small international oil companies, in defiance of the central government. Minority Sunnis, who mostly live in barren, war-torn central and western Iraq, worry they will be left with little or no control over the country's oil industry.

"The Kurds have submitted a draft Petroleum Act to be adopted that gives them the right to control oil, regardless of the government in Baghdad. The Oil Ministry has submitted another completely different draft that gives the authority to the ministry, not regions. It's the main issue of the conflict: oil and Kurds," said al-Chalabi.

Mustafa Alani, a senior adviser at the Gulf Research Center in the United Arab Emirates, also said he doubted that Iraq's deeply divided parliament will be able to pass legislation that resolves the regional dispute over Iraq's oil wealth.

But he said the U.S. timetable has left many Iraqis believing that Washington is now planning for a gradual withdrawal of its forces, meaning that fighting among Iraqis -- not a compromise in parliament -- could determine the fate of the oil industry.

"If the U.S. stepped up its forces and stayed, there would be more chance of success," Alani said. "But the U.S. must remember: this is a major oil producing region, not a Somalia. The impact of a cut-and-run strategy wouldn't stop at Iraq's borders."

Even if Iraq's Shiite-led government resolves the dispute, there is little sign of improvement in two other challenges to the oil industry: widespread attacks and corruption.

Recent SIGIR and Iraqi government reports have described corruption in Iraq such as oil smuggling as "pervasive" and "a virtual pandemic" -- one that threatens not only Iraq's capacity to fund new capital investment, but also to sustain and increase oil production.

The reports also said widespread insurgent attacks and vandalism on crude oil and product pipelines -- which stretch 4,340 miles across Iraq -- and the oil industry's dilapidated infrastructure have hindered domestic refining, forcing Iraq to import significant amounts of liquefied petroleum gas, gasoline, kerosene and diesel.

Smuggling includes sending imported oil products or stolen local crude to neighboring countries such as Turkey, Iran, Syria and Jordan, where they often sell for more than in Iraq.

A May 2006 survey found that 20 percent of Iraqis in 10 major cities have paid bribes to purchase gasoline on the black market.

The U.S. State Department estimated that about 10 percent of refined fuels are sold on the black market and about 30 percent of imported fuels are smuggled out of Iraq.

A recent report by the inspector general of Iraq's Oil Ministry said such smuggling is mainly done in boats at Iraq's southern ports and trucks at the western and northern borders, thanks to a lack of coast guards and border patrols, the corruption of customs officials and police, and the existence of illegal ports and anchorage areas operated by smugglers.

In some areas, it said, an Iraqi truck driver who pays $500 in bribes to police patrols to take oil to a smuggling outlet still makes a profit of $8,400.

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