With oil being Iraq’s main source of income, both Iraqi and
American officials were desperate to get the industry up and running again
after the 2003 invasion. The oil business consists of three sectors: upstream,
midstream, and downstream. Upstream consists of the oil fields and wells, and
gas and oil separation plants. Midstream is made up of refineries, and gas
processing plants. Downstream is the distribution networks, terminals, and
service stations. Iraqis and Americans both believed that earning money was
what Iraq needed the most so the reconstruction effort focused upon the
upstream, and getting exports going as quickly as possible. This was eventually
derailed by the insurgency, and the neglect of the other elements of the energy
industry led to problems for the rest of the economy and shortages for the
population.
The first problem Iraq’s oil industry ran into in 2003
wasn’t war damage, but rather the looting that took place afterward. The oilfields, wells, etc. were hardly touched by the invasion. Starting in May
after Saddam Hussein’s government fell, they, along with other facilities, and
the Oil Ministry were stripped. There were stories that the Ministry was the only building in Baghdad protected right after the end of hostilities, but
the troops did not show up until after most of the building had already been
ransacked. Before the war U.S. advisers had also pointed out places that were
important to Iraq’s oil sector that needed to be protected, but the military
said they didn’t have the personnel to take care of them. Originally, the
Americans were worried that Saddam would set fire to his oil wells, similar to
what that he did in Kuwait during the Gulf War. Instead, it was the Iraqis
themselves that ended up causing $1.7 billion in damages. That just added to
the costs of rebuilding the industry.
The Americans attention then turned to putting the Oil
Ministry back together. They appointed Thamir Abbas al-Ghadban as the interim
Oil Minister. He, along with U.S. advisers decided that getting oil production
and exports going would be their main task. They wanted to get the country back
to its pre-war levels, thinking that exports would bring in new cash that could
then be used on the mid and downstream parts of the industry later on. Unfortunately,
the Coalition Provisional Authority (CPA) decided that oil production and
exports would be the main measurement for success, to the detriment of the
other sectors of the industry.
The U.S. and Iraqis were immediately successful with their plans.
First, Iraq was able to sell 7.5 million in oil that had been placed in storage
in Turkey during the invasion. In June, exports started as well. In May,
production was down to just 300,000 barrels a day. That went up to 675,000
in June, 925,000 in July, and then quickly shot up, reaching the 2 million
barrel mark in October. Exports went from 0 in May to 1.149 million in October.
Those numbers gave great hope that Iraq was on its way to recovery, and would
be quickly pumping as much oil as it did before the war. Unfortunately, that
was not to be.
In the summer of 2003, insurgents started a concerted effort
to take down the oil industry. From June to November for instance, there were
13 attacks upon pipelines and facilities. In December 2004, the northern
pipeline to Turkey was shut down due to attacks. In June 2005, there was
another large wave of operations targeting oil infrastructure. Militants also
went after Oil Ministry employees, reconstruction companies, and their workers.
The violence was so bad that it shut down all work in some areas. It also
limited the ability of U.S. officials to travel throughout the country, and
many ended up just staying in the Green Zone. That meant oversight was severely
restricted. This trickled down to all levels. First, production and exports
were cut. Supplies were delayed arriving at sites, while Iraqis were
intimidated and killed. That led to a high turnover in the work force. All of
that resulted in skyrocketing costs. Huge amounts of money were then put into
securing the oil infrastructure, taking away funds from other tasks.
From June 2004 to June 2005, the oil sector stagnated. An
October 2004 State Department report found that security had led to rising
costs and delays in work on petroleum. The Oil Ministry reported 186 attacks
during 2004, causing $6 billion in damages, and 138 oil security and workers
being killed. By that time, the U.S. and Oil Ministry were spending most of
their time doing repair work rather than advancing any of their other goals.
On top of that, the U.S. suffered from some very poor
planning. An early case was the Al Fatah Bridge in northern Iraq. It was
accidently bombed by the Americans during the invasion. This was no ordinary
bridge. It included 15 oil and gas pipelines that connected the Kirkuk field to
the Baiji refinery, and also the northern pipeline to Turkey. As a result of
the bridge being knocked out, Iraq was losing $5 million dollars a day, and
helped retard exports. In June 2003, the U.S. decided to fix the Al Fatah
Bridge, and put in new pipes. It was estimated that the work would cost $5
million over 2-4 months. Bechtel and Kellogg, Brown & Root (KBR) were given
the job. Immediately, the plan ran into problems. First, Bechtel said it
couldn’t start work for two months. Then the Americans decided to build the
pipes underground instead of suspended from the bridge. Wilbros. Inc. and Laney
were given a $50 million contract to do the work, with an additional $10,000
deal going to Fugro Inc. to do a soil survey before the drilling was to begin.
That was over ten times the original estimate. Fugro came up with a bad
geological report, and recommended that KBR do more pre-planning. That
suggestion was ignored, and KBR went ahead anyway. In October 2003, the
subcontractors on the job said they wouldn’t start until they were provided
with more security. That delayed work until January 2004. They found the soil
to be poor, and they couldn’t do any drilling just as Fugro warned. The
companies went ahead anyway, and wasted five months of drilling with no
success. In August 2004, the contract was cancelled, one year after it had been
issued. KBR claimed it ran into unplanned problems, but it was really because
it ignored the Fugro report. The Special Inspector General for Iraq Reconstruction
audited the matter, and found that $75.7 million had been spent completing only
28% of the work, before the job was abandoned. Because all the businesses
involved received cost-plus contracts, they were paid even though the project
was never finished. Bad management, and the lack of oversight led to this
fiasco. KBR seemed to be able to operate on its own in this case, and there was
no contracting official that noticed the Fugro survey that could have saved
millions.
Another famous case was that of the Qarmat Ali water
treatment plant. During the sanctions period, neglect and the lack of funds
meant that pressure in many of the wells was allowed to dissipate, and there
was not enough to pump oil. Water had to be injected into the fields to solve
the problem. The Qarmat Ali water treatment plant was seen as the solution for southern Iraq. KBR was given a $225
million contract to rehabilitate the plant. In August 2004, most of that work
had been done with six out of eight water injection pump stations working.
Qarmat Ali however, kept breaking down, because its old pipelines, which KBR
did not include in its original contract, had cracks and leaks. It took another
deal with KBR to repair all these, and that didn’t happen until 2006. This
created a major drag on southern oil production, as there was never enough
pressure to meet all the pumping requirements. If the management authorities or
KBR had done an adequate assessment of the area they would have included those
pipes in the original work order, and saved a huge amount of time and money.
The affect of the Al Fata Bridge, the Qarmat Ali water
treatment plant, and others was that the U.S. decided to reform its management
rules. First, it decided to move away from KBR. In late 2004, American
officials issued a “cure notice” saying that it was going to end KBRs work,
because of cost overruns. It then started shifting jobs to Parsons Iraq Joint
Venture, which had been working on the oil sector in northern Iraq. By the
spring of 2005, Parsons was getting the majority of contracts. Then it began
using foreign companies working with the Oil Ministry’s state-owned businesses
to do most of the rebuilding. This ended up reducing costs, and more projects
being completed. By the spring of 2005, the U.S. had given 82 contracts for the
oil sector worth $781 million.
All the emphasis upon maintaining oil production and exports
led to neglect in other fields. Iraq’s refineries were one such example. The
Americans decided they didn’t have the money to renovate them, and suggested
that the Iraqis do it instead. One U.S. estimate predicted that rebuilding all
of the country’s refineries would cost as much as $7 billion. Baghdad didn’t
have those types of funds either, and were just as focused upon exports as the
U.S. was. The result was chronic fuel shortages. On top of that, insurgents
went after the facilities, and there was a lack of storage
capacity for refined products. This trickled down throughout the economy as the
Electricity Ministry didn’t have the necessary fuel to run many of its power
plants. The result was chronic power outages. The CPA was forced to import
massive amounts of fuel to meet demand. It also instituted a rationing system.
To this day, Iraq still does not have the refining capacity it needs, and
Baghdad is still making large fuel imports as a result. It is still caught up
in boosting exports as well, leaving its refinery plans to largely fallow.
Rebuilding Iraq’s oil industry proved to be a daunting task.
When the Oil Ministry was put back together and petroleum production restarted
it seemed like Iraq would quickly recover. The insurgency had other plans.
Their operations led to stagnation in exports, and money being diverted away from
important projects to security instead. The lack of oversight led to more
waste. By 2005, the country was heading towards civil war, and it seemed like
any further progress in the sector would have to wait until major fighting was
over. That’s exactly what happened as real progress was not made until 2009
when international oil companies returned to the country in two auctions. That
was quite a change as planners originally thought that the entire effort could
be done in just months, and oil would end up funding most of the rebuilding.
Instead, it ended up being a huge cost.
SOURCES
Agence France Presse, “Oil ministry an untouched building in
ravaged Baghdad,” 4/16/03
O’Hanlon, Michael Livingston, Ian, “Iraq Index,” Brookings
Institution, July 2012
Special Inspector General for Iraq Reconstruction, “Hard
Lessons,” 1/22/09
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