Thursday, September 20, 2012

Rebuilding Iraq’s Oil Sector In A War Zone 2003-2005

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.


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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