Special Inspector General For Iraq Reconstruction’s “Hard Lessons” Chapter 13 “Restarting Oil Production”

Iraq has the third largest oil reserves in the world. That led many in the Bush administration to believe that the country could pay for its own rebuilding after the 2003 invasion. Deputy Secretary of Defense Paul Wolfowitz for instance, told a House subcommittee that Iraq would largely finance its own reconstruction shortly after the start of the U.S. invasion with its oil revenues. Vice President Dick Cheney stated that Iraq could reach or surpass its pre-war production levels by the end of 2003 with only minimal investment. Both views proved wildly optimistic. They were unaware of the fact that Iraq’s petroleum industry was old, in desperate need of repair, and some of it was in decline after years of sanctions. That meant when the Coalition Provisional Authority (CPA) was created to run Iraq, one of its first priorities was to fix the energy sector, and get it up and running again, rather than relying upon it to fund the reconstruction of the country.

Before 2003, Iraq’s oil industry faced a number of major setbacks, which it was just recovering from. In 1980, it was producing an average of 2.514 million barrels a day. The next year, Saddam Hussein decided to attack Iran, and output dropped to 1 million barrels a day. It wasn’t until the last two years of the war that it was able to bounce back, hitting 2.079 million barrels a day in 1987 and 2.685 million by 1988. By 1990, production was slightly down to 2.040 million barrels a day, and again Saddam went to war, this time invading Kuwait. International sanctions were slapped on the nation, and Iraq went down to only 305,000 barrels a day in 1991. It stayed below one million barrels until the Oil for Food Program was started in December 1996. That led to output reaching 1.155 million barrels in 1997, and then peaked at 2.570 million barrels in 2000. Right before the U.S. invasion, Iraq was right around that level with 2.548 million in January 2003, and 2.483 million in February. The country’s refineries were declining during this period as well. By 2003 they were obsolete, and only able to process 55% of every barrel of oil they received. That meant it was not producing enough fuel and cooking gas to meet demand, and had to trade with Jordan and Turkey to make up the difference. Overall, despite Iraq’s export numbers, it was facing major problems. Sanctions cut off supplies of spare parts so the infrastructure began to decline, there was widespread corruption, and smuggling going on. The last two were due to Saddam placing the oil industry at the behest of his regime. The government manipulated the Oil for Food Program, so that it could undermine the sanctions, and earn money for Saddam and his inner circle. The authorities also worked with gangs to illegally export oil. All together, that meant that the petroleum business fell into a state of disrepair after 1991 since Baghdad did not care about its development or upkeep just what it could do for Saddam.

Rusted pipes at a pumping station in 2003 showed the poor state of Iraq's oil infrastructure when the U.S. invaded (AP)

Before the war, the Bush administration seemed ignorant of the state of Iraq’s oil industry, and focused upon what Saddam might due to his fields if the U.S. invaded. War planners were afraid that Iraq would repeat what it did during the Gulf War, and set its oil fields afire. Preparing for such an event was the only concrete planning the Americans did before the invasion, tasking Kellogg, Brown & Root (KBR) with dealing with any potential damage the regime might cause to the petroleum infrastructure. That catastrophe didn’t happen, as there were only nine fires. The real problems started afterward as the fields and facilities were stripped during the looting. The Oil Ministry was also ransacked before American soldiers arrived to guard it. Since Washington’s planning for post-war Iraq was so poor it was no surprise that U.S. forces were not ready for what happened. It wasn’t just that the U.S. did not prepare for the looting that took place after the fall of Saddam, it was that it did nothing while it went on. The military had no orders to deal with it, so let it go on for days with devastating affects, which the Americans would later have to pay for.

Instead of Iraq’s oil paying for the country’s rebuilding, the industry ended up requiring billions to be rebuilt. Before the start of hostilities, the Council on Foreign Relations estimated that $5-$7 billion would be needed to refurbish the energy sector, and another $20 billion to increase production. After the invasion, the Army Corps of Engineers found $1.7 billion in damages done from the war and looting. Those early studies quickly put an end to the hopes that Iraq would pay for its own reconstruction. Instead, the oil industry would become a major project itself.

The first step to getting the oil sector back on track was to put the Oil Ministry back together, and appoint U.S. advisers to it. In May 2003, Thamir Abbas al-Ghadban, who had been the director of planning in Saddam’s era, became the interim Oil Minister. At the same time, Philip Carroll, the former CEO of Shell was appointed to head an advisory board to the Oil Ministry. Together they decided to keep the petroleum business under state control, and made the top priority to get production going again after it had ended with the invasion. In June, 8 million barrels of Iraqi oil, which had been placed in storage in Turkey was sold, and a contract was signed for new exports. In July, the Army Corps of Engineers, the Oil Ministry, the Coalition Provisional Authority (CPA), and KBR came up with a plan to restore capacity to pre-war levels. The Ministry did most of the actual construction using state-run enterprises, while KBR did the buying and importing of parts, supplies, and equipment. The problems they ran into were that there was still looting going on, there was not a steady supply of electricity, and the infrastructure became an early target of the insurgents. 

Iraq’s exports and production did make a recovery, despite some who questioned its ability to do so.  In October 2003 for instance, analysts predicted that the country was nowhere near returning to its pre-war levels. Interim Minister Ghadban however, told a conference in Geneva of oil executives that the oil industry would be repaired and back up to capacity by the spring of 2004. He turned out to be right. From April to July Iraq was only producing a few hundred thousand barrels a day. By August however, it reached 1.050 million barrels, going up to 1.948 million by December, and surpassing 2 million barrels for seven months in 2004. This came despite constant attacks by militants, which shut down pipelines, cut exports, and cost millions in repairs and security. It was due to the diligence of Iraq’s oil workers that the state-run companies were able to get things running again despite the violence.

One part of the industry that did not make a come back after the invasion was the country’s refineries. The Oil Ministry wanted to get them back and running as well. By April 2003, the Dora refinery was processing 40,000 barrels a day, but it had a capacity of 110,000. By the fall, Iraq’s three refineries were mostly shut down because of power shortages and attacks. The result was a fuel crisis. The CPA was forced to import supplies just as the former regime had, and became a major job of KBR. The U.S. went from $24 million in fuel imports to $871 million in just a few months. The refineries were never upgraded, and continued to operate at a fraction of their capacity. This is still an issue that the country faces to this day, as it still has to buy large quantities of refined products from other countries.

As the insurgency took off in the second half of 2003, so did the targeting of the oil infrastructure. In June, there were seven bombings upon three pipelines. From that month to November, lines and facilities were attacked 13 times, which led to cuts in output. That forced the CPA to sign a $50 million contract with a subsidiary of a British security firm to protect the industry. The company ended up getting paid $104 million in two years for its work. The Coalition went on to create the Task Force Shield to oversee the training and control of the new Oil Protection Force, which proved to be badly managed. The new security unit proved too lightly armed to deal with insurgents, and was quickly taken over by militias, and infiltrated by militants, which undermined its purpose. It would take years and millions in investment to adequately protect the infrastructure, but it still comes under sporadic attack to the present day.

The aftermath of an attack upon an oil pipeline in Salahaddin, Aug. 2003. Iraq's oil infrastructure became an early target of the insurgency (Reuters)

Rather than attempting to take over Iraq’s oil industry, the U.S. was mostly concerned with putting it back together and getting it back to its pre-war output levels after the 2003 invasion. The Americans were ill prepared for the state of Iraq’s petroleum infrastructure, and the attention it garnered from the insurgency. Amazingly, they and the Iraqis were able to get production going again although it faced many ups and downs. Today, oil fuels the Iraqi economy. It took years of work and a large infusion of funds for that to happen. Oil did not prove the immediate reward that the Bush administration initially believed. That was just one more example of how the White House’s best-case scenario for postwar Iraq failed when it met reality. Instead of Iraq paying for itself, it turned out to be the largest and most expensive reconstruction efforts in American history.

SOURCES

Banerjee, Neela, “AFTER THE WAR: ECONOMIC LIFELINE: Widespread Looting Leaves Iraq’s Oil Industry in Ruins,” New York Times, 6/10/03

- “Barrels of Iraqi Oil Exported for the First Time Since the War,” New York Times, 6/23/03

Crocker, Bathsheba, “Post-War Iraq: Are We Ready?” Center for Strategic and International Studies, 3/25/03

Dickey, Christopher, “$1 Billion A Week,” Newsweek, 7/21/03

Index Mundi, “Iraq Crude Oil Production and Consumption by Year”

Iraq Survey Group, “Comprehensive Report of the Special Advisor to the DCIA on Iraq’s WMD,” 9/30/04

Kpytoff, Verne, “Black gold at the end of the rainbow,” San Francisco Chronicle, 10/25/03

Rupert, James, “Unlikely Iraq can top oil to pay its way,” San Francisco Chronicle, 11/5/03

Special Inspector General for Iraq Reconstruction, “Hard Lessons,” 1/22/09