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Syria - Pipeline's Global Intelligence Update - 03 November 2000

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Oil may once again flow in the pipeline connecting Iraq and Syria.
The pipeline could produce up to $1 billion in revenue for the
Syrian government. This would help stabilize the economy and
President Bashar al-Assad's political base but dampen his
government's appetite for economic reform.


Syria and Iraq have agreed to re-open the petroleum pipeline
between the two countries in November 2000. The Middle East
Economic Survey reported the pipeline, closed since 1992, would
open in the middle of the month and export about 200,000 barrels of
Iraqi crude per day. The opening would be a boon to Syrian
President Bashar al-Assad. Pipeline profits will help keep the
Syrian economy afloat and Assad in power.

The line reaches from Kirkuk, the heart of Iraq's northern
oilfields, to the Syrian port of Banias. The pipeline had a
capacity of over one million barrels per day (bpd), but Syria shut
it down in 1982 at the start of the Iran-Iraq war and it fell into
disrepair. Politically estranged for nearly two decades, Syria and
Iraq have fixed the pipeline and their bilateral relations over the
last few years. The biggest step was opening an Iraqi interests
section in Syria in February of this year the first diplomatic ties
between the two countries in 19 years.

Syria won't actually export Iraqi oil. Rather, Damascus will
receive about 200,000 bpd of Basra Light crude, to process in local
refineries. Syria will then export an equivalent amount of Syrian
Light crude. The kicker is that Syria will buy the Iraqi oil at
reduced prices, but will export Syrian oil at market prices.


For more on the Middle East, see:

Iraq won't maximize its profits on the deal, but simply finding
another export route for its oil is well worth it. U.N. sanctions
forbid opening the pipeline, but the Security Council is unlikely
to punish Syria.

How much Syria will pay for Iraqi oil is unclear, but Baghdad has a
similar arrangement with Jordan. Amman has no oil resources, and
imports 94,000 bpd from Iraq at sweetheart prices averaging about
$9.50 per barrel, according to the U.S. Department of Energy. Quite
a discount, when current oil prices hover around $30 per barrel.

A conservative estimate might put Syria's purchase price at $15 a
barrel. That leaves about $15 of profit for the Syrian government
per barrel of oil at current prices. This comes to nearly $1.1
billion in annual revenues, which will undoubtedly go straight into
Syrian government coiffeurs. This amount is about 5 percent of
Syria's gross domestic product (GDP), according to World Bank

President Assad is most likely to use the windfall to finance his
new job creation plan, announced in early October. The five-year,
billion-dollar plan is to create 440,000 jobs for unemployed youth
between the ages of 18 and 24. The plan seemed ludicrous when first
announced; Syria simply didn't have the money to fund it. But
Damascus may have the cash when the pipeline opens. This is good
news for Syria's youth and for Assad's somewhat tenuous hold on

Syria's economy definitely needs help. GDP has plunged by more than
20 percent since 1995. The country had two years of recession
caused by low oil prices and a severe drought. Growth should resume
in 2000, but only at a rate of about 2.2 percent. But the
population is growing fast about 4 percent a year and economists
estimate Syria needs an annual growth rate of about 5 percent to
make progress.


For more on Syria, see:

Low investment, an overvalued currency, government subsidies, and a
hard currency shortage have crippled the economy. Large, state-
owned corporations continue to control 40 percent of the national
wealth and strategic sectors of the economy, including oil,
electricity and banking. The Syrian government claims the
unemployment rate is 5 percent; some Western observers say the rate
is four times that high.

The existing economy relies primarily on oil exports, which account
for 55-60 percent of export earnings and one-third of GDP,
according to the U.S. Energy Information Agency. But production has
declined over the last 5 years; many of the fields have reached
maturity and further exploration is slow. Some predict Syria will
need to import oil within a decade.

The other major source of income for the Syrian government and the
one that keeps it in power is the profit from drug smuggling
through Syria and Syrian-controlled Lebanon. Syria cut back its
drug production in the mid-1990s under heavy U.S. pressure, but
Damascus still acts as a transit station for narcotics flowing to
Europe from Central Asia, as well as into Egypt and North Africa,
Israeli intelligence sources estimate the Syrian government rakes
in about $1 billion a year, according to the Jerusalem Post. Hafez
al-Assad used the money to enrich allies and buy off opponents; the
younger Assad is likely to follow his lead.

With oil money to keep the masses quiet and drug money to appease
his potential rivals, Assad may have bought his regime a measure of
stability. But that may be bad news for the Syrian economy in the
long term, as the money may allow Assad to postpone difficult but
desperately needed economic reforms.


(c) 2000 Stratfor, Inc.

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