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Oil and Iraq: Opportunities and Challenges
(February 6, 2003)

Iraqi oil revenues will be central to financing humanitarian assistance and security activities in that country during and after any military campaign. If de-politicized, the existing UN oil-for-food program provides a ready-made structure to ensure that Iraqi oil funds are used to protect and rebuild the country. While considerable resources are available, they will not be enough to provide for the many tasks required to stabilize and rebuild Iraq. Worse, a number of factors could further limit available oil resources.

In 1989, the last full year prior to the Persian Gulf War, Iraqi oil revenues totaled $14.5 billion and already constituted 99 percent of Iraq's export earnings. Iraq's two lengthy wars, first against Iran (1980-1988) and then subsequently Operation Desert Storm and its aftermath, have taken a heavy toll on the diversity of the Iraqi economy, which prior to 1980 relied on oil for only 39 percent of gross domestic product.

The availability of oil revenues during conflict and immediately thereafter is not assured and will depend on effective policy. Oil production has been dropping since 1979, most precipitously over the last several years at 100,000 bpd annually. War and its aftermath could further limit Iraq's production. If not planned for in advance, the challenges faced by Iraq's oil industry could leave Iraq's population of 23 million largely dependent on international donor aid and could portend a humanitarian crisis of unprecedented proportions. This would further delay reconstruction and significantly add to its cost.

With high unemployment and a quickly growing population, Iraq's economic base is considerably worse off than it was before Saddam took office and during the first few years of his rule. The pre-Saddam Iraq that many hold in their memories is not the Iraq of today, nor will it be the Iraq of tomorrow, even under the best of circumstances.

The key challenges to Iraqi oil potential include:

Preventing further damage to Iraqi facilities. Oil experts acknowledge that Iraq's oil sector is being held together by "band-aids." War, sanctions, and political manipulation have all seriously challenged Iraq's highly skilled oil industrialists. Further damage could result either from Iraqi sabotage or a U.S. bombing campaign.

Saddam may try to undertake a "scorched earth strategy," as he did in Kuwait in 1991. While such orders may be given, it is unlikely that Iraqi troops or oil technocrats would carry them out. The consequences are of such magnitude, however, that it would be wise for planners to consider this low probability/high cost scenario in their contingency planning.

Damage could also result from a U.S. military campaign. Key processing facilities can take many months to repair or rebuild. Their destruction could delay the restoration of oil production in the immediate aftermath of hostilities, possibly leading to intermediate-term damage to the country's overall oil production capacity. Isolating the industry from domestic turmoil. Iraqi oil facilities will be dangerously exposed to domestic hostilities during conflict and its immediate aftermath. Local parties may try to grab control of key oil production installations in order to gain leverage in deliberations over their future use or to create political opportunities in a post-Saddam Iraq. This will be especially true if the benefits of oil revenue are not shared equitably among Iraq's communities. Putting the industry at further risk, localized looting of valuable equipment needed to sustain oil operations is possible.

If a large-scale, prolonged U.S. occupation of Iraq becomes necessary, or if the United States appears to be taking over Iraq's oil sector, guerilla attacks against U.S. military personnel guarding oil installations are likely.

Overcoming technical challenges. Sustaining Iraq's oil production capacity will require proper maintenance of its fields during the period of hostilities and its immediate aftermath. Failure to keep oil fields operating can severely damage future production. Sudden shutdown without adequate mothballing or shutdown procedures could lead to long-term reservoir damage. Iraq has severely tested the resilience of its fields by sporadically shutting down oil exports for political reasons over the past two years. Attention must be given to geological considerations of operations and maintenance of Iraq's fields during a military campaign. Otherwise Iraq is at risk of experiencing a significant loss of production capacity that will jeopardize its future oil revenue stream after hostilities cease.

Iraq will also face high technical hurdles to reaching production of 3.5 million bpd. Even without a war, Iraq's infrastructure is likely to be damaged and billions of dollars will be required to rehabilitate it.

Crafting a viable and credible public diplomacy campaign. Western anti-war activists, the Arab public, average Iraqis, and international media have all accused the United States of planning an attack on Iraq not to dismantle weapons of mass destruction but as a camouflaged plan to "steal" Iraq's oil for the sake of American oil interests. Therefore, any efforts to secure Iraq's oil installations and its future production must be clearly and credibly presented as actions taken to protect the country's wealth on behalf of all segments of the Iraqi population.

Information about oil production, repairs, future investment, oil exports, and sales must be made transparent and involve both international and Iraqi oversight. The United States should develop a strategy for demonstrating that any military or administrative involvement takes place in conjunction with Iraqi nationals and with international cover, and is designed only to protect the resources of the Iraqi nation. A mechanism should be developed to ensure that all proceeds and activities involving Iraq's oil industry are transparent, public, and remain in the ownership of Iraq's treasury. A model for this exists in the UN's current oil-for-food program and the availability of records on earnings, proceeds, and expenditures.

Retaining Iraq's professional sector personnel. Sitting atop Iraq's oil industry is a layer of political appointees from Saddam's inner circle and family who should be tried as war criminals. But this layer is thin. The vast majority of professionals and technicians can be vetted and relied upon to assist with the protection, maintenance and repair, and reconstruction of Iraq's oil and gas industry. Comprehensive involvement of Iraq's oil technocracy is extremely important for technical, moral, political, and social (as well as public relations) reasons. Many senior members of Iraq's oil elite are nationalistic in their attitudes, and they will be sensitive to the nature of U.S. and coalition aims for nation-building in Iraq and to their treatment of its revenue streams.