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Death by sanctions - from the FT energy review

 Profiles THURSDAY APRIL 15 1999

IRAQ: Death by sanctions
Did Washington spike the sector's recovery programme?

If the United Nations sanctions imposed on Iraq eight years ago were lifted
tomorrow, the Iraqi oil sector would require tens of billions of dollars of
rehabilitation to generate the funds needed to rebuild the ravaged country.

Sanctions, of course, are not about to be lifted, despite the erosion of
support, especially in the arab world, for measures that hurt the Iraqi
population far more than the regime they are supposed to target.

So, as Iraq grapples with life under sanctions, it finds that its oil
industry, which dominates its economy and used to account for virtually all
foreign exchange revenues, has gradually sunk into a lamentable state with
oil wells watering out and capacity dropping.

Sanctions deprived Iraq of all oil exports until Baghdad agreed at the end
of 1996 to an exemption allowing it to sell $2bn worth of oil to buy food
and medicine every six months. Last year the UN security council agreed to
increase the oil-for-food deal up to $5.2bn.

Because of the damage inflicted on the oil industry in the past seven years
due to the lack of spare parts and given the slump in oil prices, Iraq has
not been able to lift six-month export sales beyond $3bn.

While before the Gulf war total production stood at 3.07m barrels a day,
production today is estimated at about 2.5m b/d, 550,000 bpd of which is for
domestic consumption.

According to a report by experts at Saybolt Nederland BV, which was
contracted by the UN, the predicted decline in the overall oil production
capacity of Iraq has been in the range of 4 to 8 per cent.

It says production is being lost to wells that are watering out and the
ability of the industry to treat crude oil prior to export is limited
because crucial spare parts have yet to arrive and be installed.

A significant number of wells have ceased production in the north and south
due to the lack of water removal facilities, and about 20 per cent of wells
are irreparably damaged. The others could be returned to production if
appropriate spare parts were provided.

The UN security council has agreed to a $600m allocation for Iraq to spend
on spare parts, with the first $300m approved six months ago, but approval
of contracts and delivery have been exceedingly slow. So far only $10m to
$15m worth of spare parts have arrived in Iraq.

Saybolt predicts that an increase in production levels is unlikely before
March, 2000. Although the US has now speeded up approval of contracts,
diplomats say Washington last year was deliberately delaying approval of
parts that could restore the industry rather than give it a temporary
ability to raise production.

The Iraqi regime, which has always objected to the oil-for-food deal on
grounds that the US and Britain want to substitute it for a lifting of
sanctions, never ceases to make plans for its industry in the post-sanctions

The government wants to raise production to 3m bpd six months after the end
of the embargo and to 3.5m bpd within two years.

With tens of billions of dollars needed to revive the oil sector, the
government has tried to win political support for an end to the embargo by
dangling the prospect of huge potential oil deals.

Iraq's oil industry was nationalised in the 1970s, but the government has
started to offer production-sharing agreements in discovered fields. In 1997
it signed a deal with Russian companies to develop the West Qurna field.

Chinese companies won a contract to develop the Al-Ahdab field and France's
Total and Elf Aquitaine are believed to have been in talks with the
government to develop two fields in the south of the country.

These deals, however, can only go into effect and help develop the Iraqi
industry when the sanctions are lifted. Not surprisingly, Russia, China and
France have tried to push for an end to sanctions, leading to severe splits
among the five permanent members of the UN security council.

The US and Britain continue to oppose a lifting of sanctions and will not
allow any funds to fall into the hands of the Iraqi regime. According to UN
resolutions, the sanctions can only be removed when Iraq is declared free of
weapons of mass destruction.

The controversial UN arms inspectors' commission, Unscom, however, says that
after seven years of inspections Iraq has not yet complied with disarmament

Instead of looking at a lifting of sanctions, the US is trying to find ways
to allow Iraq to increase its oil sales and alleviate the suffering of the
population, but under the strict rules of oil-for-food in which all export
revenues are scrutinised by the UN and all contracts approved by a UN

The paralysis on Iraq policy in the security council, which deepened
following last December's four-day US and British air raids, has led members
to agree to form a panel to look into the state of disarmament and how arms
inspectors may be sent back to Baghdad.

Iraq refuses to let them in, since it it was their negative report to the UN
security council which triggered the US and British raids in December. Other
panels are studying the humanitarian situation in Iraq and the accounting
for Kuwaiti prisoners of war captured in Iraq's ill-fated 1990 invasion.

Where UN policy on Iraq goes from here will depend on the recommendations of
the panels, in particular the disarmament group, which report back in April.

But whether their results lead to an easing of sanctions, raise Iraqi
production and allow reinvestment in the Iraqi oil industry is far from

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