At last, an Iraq oil rush delivers $15B ...


February 3, 2008 | By MARTIN FLETCHER

The gaunt 52-year-old Iraqi army private stands on top of a rudimentary guard post fashioned from huge, sand-filled hessian sacks, brandishing a rifle.

The post stands in a strip of featureless brown desert, broader than a motorway, which is flanked by deep ditches, great earthen berms and chain-link fences covered in coiled razor wire that stretch away to the horizon in two almost impenetrable parallel lines.

"If bad people come in here we'll shoot them," declared Abdullah Abdullah Mustafa proudly.

There are Iraqi army guard posts like Private Mustafa's almost every mile along this extraordinary new construction. They appear to be guarding wasteland, but Mustafa and thousands like him are actually helping to protect the very lifeblood of their country.

Buried beneath the surface are the pipelines that carry Iraq's liquid gold - crude oil - from Kirkuk's giant oilfields 50 miles down to Baiji, and then up to Turkey for export to the energy-hungry West.

The US Army Corps of Engineers began building this $30 million Pipeline Exclusion Zone (PEZ) between Kirkuk and Baiji last July, and will finish it next month. It has already reduced dramatically the number of attacks by those Sunni insurgents who have been waging a second, less-noticed war over the past four years - not against US troops or Shias but against the oil industry on which Iraq's entire economy depends.

As a result, that industry is displaying unmistakable signs of recovery for the first time since the US invasion of 2003. Exports have risen almost to pre-war levels, and with Iraq sitting on 113 billion barrels of proven reserves - the third largest in the world - that is welcome news not just for Baghdad but for a world reeling from record oil prices.

The PEZ is only one measure taken by the US and Iraqi authorities to secure the Kirkuk to Baiji pipelines. They have also replaced Sunni and Shia soldiers with more aggressive, trustworthy Kurds such as Private Mustafa, and removed the 3rd Strategic Infantry Battalion which was, say US army officers, "deeply corrupt." Its locally recruited members were almost certainly working with the insurgents - telling them when the oil was flowing, helping them to steal it, even staging fake assaults on their own positions to conceal their duplicity.

Since August there have been just two attacks, both in areas where the PEZ was unfinished, said Lieutenant-Colonel Kevin Hudie, of the 6th Field Artillery, who is in charge of oil infrastructure security for the Kirkuk region.

The results of this improved security are startling. The pipeline to Turkey was operational just 17 days in the first seven months of last year, and every day but five in the last quarter. Two-thirds of the 48 million barrels of oil exported from Kirkuk last year were exported in those last three months alone. A second $100 million PEZ will be constructed this year to protect the 13-mile line from Baiji to Baghdad.

Kirkuk accounts for roughly a third of Iraq's oil production. Fuelled by its recovery, Iraq is producing an average of 2.4 million barrels a day - just below its pre-war level of 2.6 million - with the Oil Ministry confidently predicting an output of 3.5 million by next year. That would match the level Iraq last achieved in 1979, just before the Iran-Iraq War. "It's an ambitious goal, but it's possible," said a US official closely involved with the industry.

Thanks to rising oil production, the International Monetary Fund believes that Iraq's battered economy will grow 7 percent this year. And with oil prices near record highs, the US Special Inspector for Iraq this week forecast a $15 billion windfall for a country whose $48 billion budget for 2008 was calculated when oil, which accounts for 90 percent of its revenues, fetched a mere $55 a barrel.

The tragedy is that the recovery has taken so long. At the time of the US invasion, Vice President Dick Cheney and other senior US officials boldly predicted that production would exceed three million barrels a day within eight months, generating more than enough money to rebuild Iraq. They underestimated the desperate state of Iraq's oil infrastructure after 23 years of war, sanctions and post-invasion looting. "It was held together with bits of string and chewing gum," said one US official.

The Bush Administration also failed to foresee the virulence of the insurgency. They and other criminals have routinely tapped into the pipelines to steal oil, hijacked tankers and diverted huge amounts of oil from production facilities. Last July the US Government Accountability Office reported that 100,000 to 300,000 barrels of oil worth $5 billion to $15 billion went unaccounted for each day. The previous month the Pentagon calculated that as much as 70 percent of fuel processed at the Baiji refinery, Iraq's biggest, was lost to the black market. A US report in 2006 said that insurgents, aided by corrupt officials, were raising $25 million to $100 million a year from oil smuggling.

Corruption remains a serious problem, but with the security situation now slowly improving, Iraqi officials are raising their sights.

Up in Kirkuk, which sits on reserves of 11 billion barrels and where even the air smells of gas, Mr Abdullah exudes optimism. "We're getting wiser and more secure and in control of the situation."

From The Times of London.