Monday, October 20, 2008

Iraq’s Deteriorating Oil Infrastructure

As Iraq’s Oil Minister Hussein al-Shahristani moves forward with his plans to open up the country’s oil and natural gas wealth to foreign investors, the Financial Times reports that he also needs to pay attention to the country’s aging petroleum infrastructure, which is in great disrepair. The U.S. Army Corps of Engineers and the state-run South Oil Company did a survey of the oil pipes in Basra and found that they could fail at any moment due to lack of maintenance. The pipes are underwater, and connect Basra’s oil storage facilities to the fueling terminals that ships dock at to pick up petroleum. The pipes carry up to 2 million barrels of oil each day. Fixing them could cost up to $5 billion. American officials have noted that the government has not been quick to deal with the problem, which means it could be years before it is ever taken care of.

The pipes are not the only issue facing the Basra oil facilities, the largest and most important in the country as it is the only access point to the Persian Gulf. The entire port needs to be completely redeveloped if the Oil Ministry’s plans of increased production is to be realized. The channel needs to be widened, the waterway needs to be dredged, new pipes need to be installed, and larger storage facilities need to be built to name just a few improvements. The border between Iraq, Iran and Kuwait also needs to be re-negotiated for this expansion to happen, a very touchy matter in the region. Without these steps, there won’t be enough room for ships to dock at Basra to take in the increased production of oil.

Oil Minister Shahristani told the Financial Times that he has plans to do all of these renovations. Many analysts doubt this will happen however. It may be beyond the capabilities of the Ministry to negotiate new deals with foreign companies, expand production, and renovate Basra all at once. Another issue is that U.S. aid is coming to an end for Iraq. In total, the U.S. has allocated $2.7 billion to Iraq’s oil infrastructure over the last five years. The Americans now want the Iraqis to take responsibility for their country, but it has not had a good record with spending its budget.

The amount of money the Oil Ministry has been appropriated has increased recently, but the amount of money it has actually been able to spend, and what it has spent it on has been erratic. In 2005 the Ministry spent a total of $160 million, $111 million of which was on investment in infrastructure. By 2007, it only spent $36 million, only $1 million of which was on its capital budget, the rest went to operating expenses such as salaries. In 2008, because of booming petroleum prices, the government allocated $2 billion for the Oil Ministry. Overall, Iraq has allocated $10.5 billion for its oil industry from 2005-2008, but only $300 million of it has actually been spent up to April 2008 according to the United States Government Accountability Office. These problems go back to the lack of training and competence amongst Iraqi officials, a situation made worse by a massive brain drain of professionals and bureaucrats from the country, and an old paper based government system that takes up to 6-9 months to okay any money to be spent on projects. Iraqi officials say they can make do in the meantime since they have kept up production through three wars and United Nations sanctions that contributed to the deterioration of the oil infrastructure.

United States Government Accountability Office’s Figures On Iraq’s Oil Ministry’s Spending

2005: $160 million total spent
  • $49 million operational budget
  • $111 million capital budget
2006: $191 million total spent
  • $48 million operational budget
  • $143 million capital budget
2007: $36 million total spent
  • $35 million operational budget
  • $1 million capital budget
January-April 2008: $52 million total spent (Note Iraq’s budget was not approved until February 2008)
  • $13 million operational budget
  • $39 million capital budget

Note: The U.S. GAO said that using Iraqi dinars is a better measure of average growth than using American dollars, because the Iraqi currency has greatly increased in value against the dollar in recent years, which would skew the numbers.

Annual average growth rate 2005-2007 in Iraqi dinars: -56% decrease in total spend
  • -22% decline in operational spending
  • -92% decline in capital spending

Iraq’s Oil Minister has very ambitious plans for the future of Iraq’s natural resources. He wants to invite international energy companies back into the country, and double oil production within the next few years. This is doubly important as oil provides 90% of the country’s revenues. Iraq needs to deal with its aging infrastructure first that has suffered greatly. The inability of the government to spend its budget however will be a major impediment. Until then, Basra, Iraq’s only seaport, is facing the threat of a pipe rupture that would set back the country’s plans even further.

Iraq’s Oil Ministry’s Plans Seem To Be Falling Apart


Iraq Signs Natural Gas Deal, As Half Of Oil Plan Is Dropped

Iraq Moves Ahead With 2nd Part Of Its Oil Plan

Analyst On Iraq’s Oil Plans: Don’t Expect Much Until A New Oil Law Is Passed

SOURCES

Dombey, Daniel, “US warns on aging Iraqi oil pipelines,” Financial Times, 10/14/08

Hoyos, Carola and Dombey, Dan, “Baghdad pipe plan remains a dream,” Financial Times, 10/14/08

Sheridan, Mary Beth, “As Iraq’s Oil Flows Freely, Profits Are Stuck in Bureaucracy,” Washington Post, 10/17/08
- “Iraq Opens Bidding on Oil Field Contracts,” Washington Post, 10/14/08

Special Inspector General for Iraq Reconstruction, “Quarterly and Semiannual Report to the United States Congress,” 7/30/08

Susman, Tina, “Iraq too dangerous for many professionals,” Los Angeles Times, 10/5/08

United States Government Accountability Office, “Iraqi Revenues, Expenditures, and Surplus,” August 2008

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