Aaron C. Davis / The Washington Post – 2011-07-05 01:54:43

http://www.washingtonpost.com/world/middle-east/iraq-struggles-to-boost-oil-production/2011/06/17/AGTko3gH_story.html

RUMAILA OIL FIELD, Iraq (June 23, 2011) — Here in Iraq’s southern desert, efforts to boost oil production have pushed the country’s dilapidated oil infrastructure to the brink.

Rusted pipelines are running full and are in danger of rupturing on the floor of the Persian Gulf. Rickety pumps seize and spring leaks in the heat. The entire network meant to get oil from fields to tankers is maxed out and prone to backups that cause permanent damage to wells.

Iraqi leaders travel here to use the backdrop of roaring flames from oil-well flares to illustrate a dramatically different point. By the numbers, Iraq’s oil industry is red-hot. Production is on pace to be the best in more than 20 years, since the beginning of the Persian Gulf War of 1991, and the money is rolling in. In the first five months of 2011, rising exports and high oil prices have all but erased Iraq’s full-year deficit of more than $12 billion.

As Iraq has bogged down in so many other areas, it has gone full throttle when it comes to oil. Its trajectory to raise oil profits has been audacious and at times dangerous.

Pushing its systems to capacity is the first phase of an outsize plan to increase production fivefold, and by 2017, to rival Saudi Arabia as the largest exporter of oil in the Middle East.

Iraq’s announcement of that plan two years ago attracted little attention, other than skepticism from most industry watchers. But in hot pursuit of that goal since, Iraq has been moving quickly and in some ways recklessly.

Despite pleas from the United States and other international observers, for example, it has not yet signed contracts for how to contain a spill or conduct emergency repairs should its roughly 35-year-old pipelines burst underwater.

Scientists believe the 31-mile pipeline used most heavily to send oil to offshore loading docks has in places nearly entirely disintegrated, leaving only an outer ring of concrete tunneling oil in the right direction.

The pipeline, considered a top terrorist target in the region, is so fragile that Iraq has not dared conduct a pressure test to see how much it can handle. But it has continued to pump nearly all of its growing exports through the line.

More than a dozen multibillion-dollar contracts that Iraq signed with international oil companies also now appear to have been done in haste. Nearly all are in need of renegotiation, less than two years after they were signed, Iraqi officials and industry analysts said.

Iraq structured most of the deals in such a way that it could be impossible for most companies to realize the profits they were counting on unless Iraq reaches its goal on paper to rival Saudi Arabia. New deals are likely to have to include better terms for oil companies at the expense of country profits, Iraqi officials and industry analysts said.

Iraqi officials still have high hopes that their country might one day rival their southern neighbor. But Iraqi officials have begun to acknowledge the dream remains far out of reach. Iraqi Oil Minister Abdul-Kareem Luaibi this month began inching toward acceptance of an industry consensus that Iraq might be able to accomplish half of Saudi Arabia’s output, or less, over a much longer time frame.

“The Iraqi government bit off more than it could chew. It was proposing to do in seven years what it took the Saudis 70 years under a much more benign set of circumstances,” said Raad Alkadiri, a country risk specialist for PFC Energy who returned recently from Iraq. “You can put on paper the biggest project you like, but that requires a much more functional administrative process than exists right now.”

Iraq’s lowered sights on oil typifies a problem still common across the country. With Iraq’s government and security situation still evolving, marrying Iraqis’ grand ambitions, intense national pride and nascent capabilities remains no easy task for its leaders. The timeline for progress in almost every arena continues to slide invariably to the right.

But a forced revision on oil comes on no bigger stage. It diminishes any hope that Iraq could soon tilt the needle lower on worldwide oil prices. Markets analysts, who had remained skeptical of Iraq’s production promises, have yet to build most of them into expected future oil prices. But with the second-biggest reserves in the world, Iraq remains a wildcard capable of easing global demand and reducing prices.

Iraq has already signed a contract with an Australian company to replace its most dangerous underwater pipeline by the end of 2012. That alone will not increase production because the old pipeline is scheduled to be retired when the new one is complete. But a second new pipeline and pumping station could come online by 2013.

Under a best-case scenario, analysts say, Iraq could hit 4.5 million barrels per day by the end of 2013, and then it would probably take several more years to significantly increase production further.

Still, such an increase would be no small feat and could continue to have profound effects domestically for Iraq in coming years.

In recent years, as the global recession plunged nearly every government budget into the red, rising oil profits put Iraq on a different path. In each of the past five years, it forecast a year-end deficit but ended up instead with a perennial surplus.

Iraq is producing nearly 2.7 million barrels per day, up 15 percent from this time a year ago.

The ambitious goal it set was to reach 12 million barrels per day by 2017. Luaibi said this month that Iraq may eventually plateau at a much lower volume, of about 7 million or 8 million, and for twice as long.

US officials have even lower expectations. In its latest forecast, the US Energy Information Administration predicted Iraq’s output will remain below 4 million barrels per day at the end of the decade.

Even in that scenario, however, the corresponding rise in profits could swell Iraq’s annual budget to well over $100 billion.

Iraqi parliament member Ahmed al-Alwani, who heads the branch’s economics committee, said any increase in production now amounts to Iraq having more income than it ever had previously. The problem is, he said, at least for the next decade or so, no amount will ever be enough to pay for rebuilding Iraq.

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“Everyone focuses on the revenue and how much money [oil] can bring in, but the needs are even much greater,” he said.

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