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Area (

24,001,816 (July 2002 est.)


Iraqi dinar (IQD)



Formerly part of the Ottoman Empire, Iraq became an independent kingdom in 1932. A "republic" was proclaimed in 1958, but in actuality a series of military strongmen have ruled the country since then, the latest being SADDAM Hussein. Territorial disputes with Iran led to an inconclusive and costly eight-year war (1980-88). In August 1990 Iraq seized Kuwait, but was expelled by US-led, UN coalition forces during the Gulf War of January-February 1991. Following Kuwait's liberation, the UN Security Council (UNSC) required Iraq to scrap all weapons of mass destruction and long-range missiles and to allow UN verification inspections. Continued Iraqi non-compliance with UNSC resolutions during the past 12 years resulted in the US-led invasion of Iraq in March 2003 and the ouster of the SADDAM Hussein regime. Coalition forces remain in Iraq, helping to restore degraded infrastructure and facilitating the establishment of a freely elected government.

During the first three months of military occupation, despite the appointment of General Jay Garner at the head of the Office of Reconstruction and Humanitarian Affairs and then of Paul Bremer to supervise the political transition and reconstruction efforts, little has been achieved in terms of either maintaining security for the civilian population or re-establishing vital supplies. As Iraqi households were rapidly running out of food, the second half of May proved especially critical in this regard. Nonetheless, behind the curtain an intense debate is taking place with regard to the issue of reconstruction and on the exploitation of Iraqi oil reserves. The expectation is that US companies will take the lion's share of both reconstruction contracts and exploitation rights, but both the Russians and the French claim the validity of existing contracts and the payment of outstanding debts. How this will be settled is unclear yet. Some officials in the Bush administration invited the creditors to waive Iraq's debts to help the reconstruction, but given the huge windfall expected once Iraqi oil production restarts in earnest, such position never had many chances of being accepted. Russia, France and Germany have indicated that will not forgive the debts, but only reschedule the repayments, which could also be capped at a certain percentage of Iraq's oil revenues. Overall, Iraq's debts, including war reparations, are estimated to amount to US$350-US$400 billion. 
With the approval of the US-sponsored resolution at the Security Council, during June international bickering around Iraq subsided, without disappearing altogether. There were unconfirmed reports that the Bush Administration has issued instructions to keep French companies out of the reconstruction business. However, most of the attention was focused in June on Russia, whose government officials repeatedly stated that they have been assured that there would be no discrimination against Russian companies in the reconstruction. Despite that, acting Iraqi oil minister Ghadbhan cancelled a maxi-contract with Lukoil, which threatened retaliation. Moreover, the fate of Iraqi foreign debt, owed mainly to Russia, France and Germany, is still not clear. At the beginning of June Paul Bremer called for more generosity by creditors, saying that the moratorium on service repayments, which they have offered, is not enough. During September the efforts of the US Department of State to involve more countries in its Iraq campaign yielded very little results, despite the support of a growing number of top brass. The Pentagon and vice-president Cheney are known to be contrary to the involvement of other countries and will not be too displeased by this lack of developments, but President Bush appears increasingly worried that Iraq might still be a bleeding wound by the time the campaign for next year's US presidential elections gets under way. For this reason, he requested in September US$66 billion for Iraq, significantly more than expected. The key countries targeted by the Department of State, namely India, Pakistan, Turkey, Germany and Russia, are all asking for rewards that have so far been judged excessive by the Bush administration. The positive development in September was that after much vocal protest, the Arab countries started cooperating openly with the Iraqi Governing Council and the newly appointed government. Not only did the Arab League let Iraq take part in its meetings, but Iraq got back its seat within OPEC. Now that an Iraqi interim government is in place, the IMF and the World Bank will be keener to start lending money.

The Iraqi economy has been steadily declining since at least 1991 and by 1999 was estimated to have fallen by 75%. Of course the latest war and the current virtual paralysis of economic activities have made the situation worsen further. The fact that the state used to control so much of the economy makes the political chaos all the more important in terms of negative impact. About 45% of the Iraqi workforce is directly employed by the state. Such schemes as the distribution of dollars to state employees by the occupation authorities are not much more than palliatives. The production of oil almost stopped during the war and is not expected to restart for at least another month and probably longer. The oil fields have been subjected to extensive looting and it will take time and money to repair them. Efforts to repair oil extraction and transport facilities began to produce results only during June, causing acute shortages of oil to hit the Iraqi internal market, to the point that officials in the oil industry stated the need to start importing oil from abroad. There were fears that petrol shortages would cause unrest and contribute to complicate the political situation. However, the oil industry has been paid much greater attention than the rest of the economy and by June the US administration and the Iraqi officials working for it could claim at least some relative successes. The main achievement was the restart of oil exports through Turkey on 22 June. By the end of June production had reached 800,000 barrels a day, up from 310,000 barrels a month earlier. In the first half of August exports averaged 545,000 bpd, up from the 385,000 bpd of July but still well below the 800,000 target. About two-thirds of the northern production are being pumped back into the ground because the pipeline does not work and there are no storage facilities. In September overall production reached 1.6 million bpd, up from 1.35 million bpd in August, or about 70-75% of pre-war levels, with exports reaching 900,000 bpd, which again is short of the original expectations. Some analysts, however, expected more rapid improvements in 2004. Because developing the southern fields should be rather quick, given the presence of infrastructures in place and the low-level technology required, the increase in production is expected to continue even beyond the capacity levels of before the war. Saudi Arabia has already declared its intention to reopen the Iraqi pipeline that runs through its territory. On the other hand, in the present political conditions, maintaining some semblance of a state in Iraq will be much more expensive to the US than it was to Saddam Hussein and even if the US$150 million that Iraq was earning every week from oil at the end of September were multiplied by three or four, it would still be far from enough. As a result, the budget for 2004, which is expected to range between US$13-14 billion, will still largely be funded through foreign aid. 
It has now been accepted that sufficient electricity production is not going to be reestablished in the short term and efforts are being made to start importing electricity from neighboring countries. Iran has already signed a contract, while Turkey seems to be about to sign a second one and Syria is negotiating another. The hopes that the northern oil fields would have given their contribution were quashed after they were sabotaged just a couple of days after their reopening. More guards are being recruited to help guarding the pipelines, but they might not be enough. Some experts say that to bring production to the 3.5 million bpd which was the original target will take as much as US$30 billion, which might not be easy to gather. Western oil companies are reported to have told the Bush administration that they are not going to make large investments in Iraq for the foreseeable future. Production is mostly concentrated in the North, where the disruption and looting caused by the war has been less severe. By mid-July, the Iraqi oil industry was still struggling to reach the targets set for June, as sabotage of the pipelines and administrative confusion prevent the full exploitation of this potential. Iraq has only been able to export oil stored in Turkey and in Iraq itself, while freshly pumped oil is being absorbed by internal consumption and smuggling. Even according to the most optimistic estimates, oil exports will not be able to contribute to Iraq's recovery before the end of 2004. The first budget was presented in August and covers the remainder of 2003. By far the single largest sector will be social expenditure, at US$1.35 billion. The budget is based on assumed oil rents of US$3.45 billion, which are expected to contribute 88% of all revenues. This in turn, is based on the expectation that oil production will reach 2.8 million barrels per day by March 2004, which is not unrealistic.
Towards the end of September a set of economic reforms was announced, including the freedom for foreign investors to buy Iraqi companies, except in the oil industry, but including banks. Foreign investors will be free to transfer their earnings abroad. The central bank will become independent, while a new, modest tax rate of 15% will be imposed on both individuals and companies. The custom rate will be just 5%, except for food and medicine which will be exempt. Earlier expectations that oil revenue would have been enough to fund the reconstruction are now giving way to concern that American taxpayers might have to pay at least part of the bill. Paul Bremer, the boss of the CPA, for the first time in August hinted that reconstruction could cost as much as US$100 billion. US$13 billion should be needed for the electrical grid and another US$16 billion for the water system. For the next year, the UN estimates a need for US$20 billion as a bare minimum and Iraqi revenues are not expected to exceed US$15 billion at best. The US$5 billion gap should be covered by donors. Inevitably, the US will have to contribute more money than it expected. The oil industry rehabilitation plan approved by the CPA and oil ministry already calls for the US to contribute US$1 billion, which had not been budgeted before the war. The Bush administration budgeted just US$2.4 billion, which moreover it is unable to spend because of the widespread insecurity. Only about US$250 million have been spent so far. 
The Iraqi power supply system appears to be a major problem for the American occupiers. Damaged by previous wars and lack of maintenance, the CPA has not been able to restore it in such a way to bring energy supply back to pre-war levels. Worse still, it seems resigned to not being able to do so. The building of new power stations is likely to take years and in the meanwhile the insufficient power supply will greatly hamper the economic recovery. Most of the telephone network is also in need of repair, while banks remain closed. Although trade businesses are reopening, many of them are reported to be on the verge of bankruptcy. The dinar, however, recovered from its low of 4,000 to a dollar during the war, to stabilise in June at 1,400. At least something has been done to help the moribund Iraqi agriculture. Production of grain is expected to be half that of 1990 this year and the distribution network has collapsed. The UN are launching the largest food aid program in the world to help the Iraqis, with a budget of US$1.3 billion. More importantly, the World Food Program will buy this year's harvest from Iraqi farmers, helping them to earn enough to sow the land for the coming year. 
One issue which is being raised is currency reform. At present there are three currencies in circulation, the dollar, the Iraqi dinar and the Northern Iraqi dinar. With inflation running at an estimated 70% a year, the need is felt for creating a single currency which would make it easier to stabilise money supply and fight inflation. 
The CPA claims that imports of medicines have increased sevenfold, that 1,000 schools have been rebuilt and that the irrigation ditches in southern Iraq are being cleaned up, but Iraqis are more concerned by the continuing lack of electricity and sometimes water. At present the CPA estimates that there is a 30% shortfall in electricity production. Just to meet demand investments of about US$2 billion will be needed.

Although the Baath state has been thoroughly defeated, the US-British military occupation is spread rather thinly throughout the territory, mainly because of security concerns. The CPA is becoming somewhat more efficient now, but the start was quite disastrous. The decision to privilege military personnel over civilian reconstruction specialists has proved particularly ill advised. Although a decrease in the looting activity was reported as the end of June approached, patrolling by American troops remained limited, both due to the insufficient number of troops available and to the unwillingness to risk even modest casualties. The about 30,000 Iraqi policemen taken back into service were not enough. Even the announced formation of a small Iraqi army to guard the country's borders will have no short-term impact, as will the formation of a 6,500-strong militia. Washington sources increasingly acknowledge that the Iraqi post-war plans were based on expectations which completely failed to materialise. It is reckoned that it will not be possible to reduce the level of troops committed to Iraq for several months to come at least, a fact that is pushing Pentagon expenditure in Iraq to around US$4 billion a month, roughly twice as much as it had been forecast. Some sources even claim that Bremer already asked for 50,000 more troops, to help secure the country. It is generally accepted that with current troop levels and given American wariness to risk losses, maintaining security throughout Iraq will not be possible. This left much room of action for several militias that have sprung up, mainly composed of Shiite Islamist militants, but also of neighbourhood associations which are trying to maintain security locally. Northern Iraq, of course, remains under the control of the Kurdish militias, as it has been for many years now. Following the attacks to the UN compound and the Jordanian embassy and a number of US civilians killed, plus the attacks to the pipelines and the US military, security became more than ever the primary concern of the US occupation administration during August. Unable to increase the level of US troops for reasons of internal policy and also because of objective overstretching of available resources, the Bush administration tried hard to convince more countries to send additional contingents, with little success.
There are several factors that are feeding the political instability. First of all is the fact that most parties and factions based in Iraq oppose to various degrees the military occupation. Also, there is tension between exile groups which are coming back to Iraq with the support of the US, and indigenous groups, which feel they are being overtaken by newcomers who know little of the reality of Iraq. Last, but no less important, is the fact that the internal opposition is by no means united. The centre stage in the first few weeks after the fall of Saddam's regime has been taken by Shiite religious groups, which moved quickly to occupy as much ground as possible. However, there are strong currents of secularism in Iraqi society and tensions might arise soon, especially if the Shiite parties tried to monopolise the political scene. At present, however, the competition is mainly among Islamic groups which claim to represent the Shiite community, a situation which has already led to clashes and even the killing of Abd al-Majid al-Khoi, a moderate Shiite leader. 
After more than two months of occupation, the political situation actually appeared to be worsening by the end of June. The US managed to alienate virtually all Iraqi Arab political forces, including the exiles whom they brought back to the country, by postponing the establishment of a proper Iraqi interim administration until after the political elections, which in turn are not expected before a year.
In the areas inhabited by Sunni Arabs, there appears to be starting a guerrilla insurgency, which could develop in a serious annoyance for the US occupiers. 
The political groups rooted among the Shiite majority have so far adopted a cautious approach. Despite not hiding their distaste of the Americans, they have refrained from armed opposition and are focusing on consolidating their hold on the population. In the short term, Shiite parties and their Iranian patrons have no interest in an open confrontation, but the potential threat to American interests will remain. Disappointed by the bickering and ineffective exile parties, the Americans appear to be turning to others in order to find some interlocutors. In particular there is a clear effort to establish links with the tribal chieftains, hoping that this could allow the maintenance of order without committing troops. The tribal chieftains are building up their militias, in a situation that could soon resemble the power-sharing deal with the warlords in Afghanistan. On the other hand, plans to rely on selected former Baathist officials are proving more difficult to implement that initially foreseen. Not only the majority of the population rejects these officials, but few have accepted to serve under the conditions imposed by the US, which include a clear and unequivocal rejection of the Baathist ideology. The presence of an armed opposition to the American occupation and the fact that several Baath leaders are still at large clearly represent a powerful disincentive for former Baathists to join the Americans, not least because of fears of assassination. 
By July the CPA had decided to take another path and it established the Interim Governing Council (IGC), made up of 25 Iraqis of different backgrounds. The establishment of the council itself can be seen as a concession from Paul Bremer, the head of the CPA. The potential contributors to the planned international fund to rebuild Iraq stated clearly that they would not even agree to meet until an interim government composed of Iraqis was in place. The IGC has the power to nominate ministry heads and form commissions to recommend policies concerning the reform of the Iraqi state. Even the composition of the IGC shows that Americans are moderating their earlier ambitions to reshape Iraq in their own image. Although pro-US Iraqi returnees from exile are still over-represented in the IGC, compared to what seems to be their actual following among the population, anti-US factions are fairly well represented too, including seven Islamists and a Communist. During August the Iraqi Governing Council (IGC) that they have established is slowly winning some support. The UN recognised it and although the Arab countries mostly refused do so, most Arab neighbours are accepting to deal with it on an provisory basis. 

Forecast 2003

It appears likely that US military presence in Iraq will continue for the foreseeable period, as the Pentagon is reported to be planning the establishment of permanent military bases in the country. This will inevitably not please the Syrians and the Iranians, who however will mostly try to maintain a low profile in order not to attract the wrath of the Bush administration on them. In the case of Iran, however, the situation is made more complex by the intricacies of factional conflict within its ruling elite and Islamic hardliners within it might want to push their Iraqi allies towards a more confrontational path against the US, hoping to keep the Americans busy for some time. The US will also continue lobbying a number of countries to convince them to send troops to maintain order in Iraq, a task on which few are keen. 

Any government that invested large resources in paying those debts, rather than rebuilding Iraq, would find it difficult to consolidate its legitimacy. Once the most immediate task of restarting the economy will have been addressed, there is little doubt that wide-ranging economic and structural reforms will be attempted. The banking sector in particular is considered to be completely unsuitable for a "liberal" economy, which is what most people expect Iraq to become over the next few years. It is likely that the dollar will substitute the dinar as the Iraqi currency. The transition from a state-controlled economy to a relatively free-market one will be characterised by all the problems that have been met in (for example) Eastern Europe, with the additional drawback of a post-war situation and (possibly) continuing political turmoil, but with the advantage of a rapidly growing oil revenue. The Iraqi agriculture, on the other hand, might recover quickly, as much of its decline was due to the sanctions and the difficulty to maintain the level of inputs such as fertilizer and seeds. As far as the oil sector is concerned, there was talk to expand production to as much as 6.5 millions in the near future, although this will be subject to which level of investment will be achieved and how quickly. In any case, despite the limited damage caused by the war to the oil production facilities, the acting oil minister, Ghamir Ghadhban did not expect production to reach pre-war levels (2.5-3 million barrels a day) for at least a year, while the 2 million barrels target could be reached by the end of 2003. Production was officially expected to reach about half that level by the end of June, although many were more pessimistic and did not expect this target to be reached before mid-July. Since domestic needs stand at about 550,000 barrels, there was supposed to be soon a modest surplus for export. Oil refineries restarted production at the beginning of June, contributing to reduce the long queues for fuel. However, continuing looting and sabotage activity are hampering the efforts to bring the oil industry back on its feet. The original expectation, that oil revenues would have contributed almost all of the US$41 billion required for the reconstruction within the first two years of occupation, now look wildly optimistic. Apart from claims that the reconstruction will cost much more than US$41 billion, over the next year oil revenues are not likely to exceed by much the US$13 billion of 2002. According to a study, bringing oil production back to the pre-1991 level will take at least 18 months and require US$5 billion of investment. Moreover, due to damage to the oil fields, the price of Iraqi oil is now going to be lower than it used to be, because of higher sulphur content. On this basis, it is estimated that oil revenue will probably not exceed US$5 billion in 2003 and US$15 billion in 2004 and not necessarily will it be possible to spend this whole amount on reconstruction.

The political future of Iraq is very difficult to predict at the time of writing. The occupying coalition forces do not seem to have confronted yet the issue of how to secure the country for the civilian population. As a result, warlords and militias are likely to continue to rapidly expand their hold over vast regions of the country, offering at least some semblance of security to the local population. Because most of these militias are politically aligned, conflicts are likely to arise in the medium and long-term if this situation persists. At the same time, complex political negotiations will be required to determine the future of the Iraqi state, both in terms of coalition governments and in terms of institutional reconstruction. The role to be played by the Kurdish parties and exile politicians on one side and the relationship with occupation forces on the other will likely prove the most contentious issues. The IGC will have to struggle to maintain the confidence of the majority of Iraqis, while many forces do not recognise its authority. 

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Update No: 006 - (27/10/03)

A new resolution, and some lingering problems
During October the Bush administration relaunched on a large scale it efforts to pacify Iraq. On the one hand it created the so-called "Iraq stabilization group", on the other it succeeded in pushing through the Security Council of the UN a new resolution. The Iraq stabilization group reduces the influence of the Pentagon and in particular of Mr. Rumsfeld over the decision-making on Iraq, a development which in the view of many should contribute to make things better. The new resolution assures that the US will not be permanently stationed in Iraq and that the multinational force will leave once Iraqi rule is re-established. The US gain some legitimacy for their occupation of Iraq with this resolution, although the practical effects are likely to be limited. In terms of contributing a military force, the only country which could send a sizeable force and posed the condition of a UN sponsorship is South Korea, which however probably saw it more as an excuse than as serious issue. 
In terms of aid to reconstruction, the Bush administration stands to gain somewhat more from the improvement of the international climate over Iraq. Japan in particular is promising a relatively substantial sum, with a few other countries offering sums in the range of some hundred million dollars. Still, what has been achieved on the financial front is very much short of what is needed to fill the gap between what the US are ready to provide and what is actually needed. Moreover, the Bush administration suffered a defeat on the home front, as the Senate decided to transform part of the resources requested for Iraq into loans, rather than grants as originally requested by the administration. Politically this is going to cause some trouble to the US among the Iraqi population. Moreover, it will make more difficult to argue that existing creditors should cancel their debts from Iraq, as the Bush administration has been insistently "advising". 

Tension arises between Iraqi government and US
The focus of Iraqi internal politics remain limited to the struggle of the US-appointed government to legitimise itself and to the difficult relationship of Iraqi political groups with the Americans. The hostility of some Shiite groups to the US is clearly increasing and during October the first significant violent incidents took place, which does not bode well for the future. The government and the Iraqi governing council seem to be achieving some degree of support among the population, which is eager to see the reconstruction start. However, in order to legitimise themselves they are beginning to collide with US interests in Iraq. The possible future deployment of Turkish troops represented in October the first instance of a clash between the occupation authorities and the ruling Iraqi body. The deployment of Turkish troops is very unpopular and the government had to express its opposition to it. The drafting of a new constitution is giving rise to other instances of attrition, as the Iraqis claim that much more than the six months granted by the occupation authorities will be needed to produce a new constitution. 

Slow improvement is not enough
Although the conditions of living of most Iraqis were finally showing some signs of improvement in October, the Food and Agricultural Organisation (FAO) and the World Food Program (WFP) claim that 13 million Iraqis still need food assistance. Chronic malnutrition of millions of people is reported. 
A typical paradox of the current situation in Afghanistan is the fact that thousands of workers are being imported from India and Bangladesh to work within the US military bases, while the unemployment rate among Iraqis has now reached an estimated 50-60%. Security reasons are cited as the reason for this choice, but this explanation was not enough to prevent massive demonstrations of unemployed Iraqis in front of American bases. About 500,000 of those who are employed work in inefficient or very inefficient state-controlled enterprises, while another 1,000,000 work in the state bureaucracy, which gives an idea of the size of the problem. The privatisation plan of the new government, sponsored by the Americans, would in the short term have a very heavy social impact. The World Bank estimates that in 2003 the Iraqi economy will shrink by 22%, after having lost 21% in 2002 and 12% in 2001. The average income is now estimated at between US$450 and US$610, down from US$3,600 in 1980. State food subsidies are worth about US$2 billion and it is expected that in 2004 US$10.6 billion of US$12 billion worth of oil revenue will be spent in salaries and subsidies. Just US$1.4 billion will be spent on reconstruction, even that assuming oil prices do not fall below the target level, cutting the expected oil revenue. The fact that state salaries have been increased up to 40-fold might have helped gain some popularity, but did not help the reconstruction effort. The lack of institutional capability will limit reconstruction expenditure to no more than US$5 billion in 2004 and US$8-9 billion in subsequent years, according to the World Bank, whatever the international community will decide to contribute. By October, reconstruction had barely started and even the telephone network is only 50% active even in Baghdad. 
The privatisation program allows foreign investors complete freedom, including full repatriation of profits, but there is increasingly a consensus among analysts that lack of security and uncertainty with regard to the future will prevent international oil companies to invest in Iraqi oil fields before 2005. 

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Iraq will offer licenses to six foreign banks

Six foreign banks will be licensed to operate in Iraq within the next five years but two will be put on a fast track to assist in the country's reconstruction, Iraq's central bank governor said, The Financial Times reported on October 24th.
Speaking to the newspaper at the Iraq donors conference, Sinan al-Shabibi, also said he was preparing for negotiations on Iraq's debt, which he estimated at US$120bn (102bn Euro), though resolution of the issue at the Paris Club has been postponed until next year.
Members of the US appointed Governing Council and the Iraqi cabinet tried to sell Iraq to donors and investors recently by highlighting that the country was being developed as the most open business environment in the Middle East. Most sectors have been fully opened to outside investment, provoking an angry reaction from some Iraqis.
Shabibi, however, told potential private-sector investors that the banking sector would be gradually privatised. "The banking sector is prone to crisis during a transition to the private sector," he said, adding that banks applying for licenses should put up a minimum capital of US$25m and concentrate on high-technology and e-banking services.
In a brief interview, he said a decision had been taken to issue licenses quickly to only two banks and insisted that the move should not suggest any favouritism towards any financial institution. Proposals would have to be submitted and evaluated, he said. A list of companies attending a parallel private-sector conference included Citigroup and several European banks.
The need for greater political and physical security overshadowed the appeal for funds in Madrid. But the message of Iraqi officials was that starting the reconstruction process was vital to improving security. "A lot of security problems have to do with unemployment," said Shabibi. "Companies don't have to wait until conditions of security exist. They have to contribute to bringing the security."
For the Iraqi delegation, the stakes at Madrid are much higher than raising grants and boosting interest in investing. Facing concerns over the lack of legitimacy of the Governing Council and the risks involved in agreeing contracts with an un-elected body, Iraqi officials said it was through a strong presence at such conferences that they sought to gain international recognition.
Several council members have been shuttling between capitals. "We want to engage politically with the world," said Iyyad Allawi, recently, president of the Governing Council.
The Iraqi delegation, comprising of officials from various parties and political leanings who often contradict each other, put on a united show. But, once the funds are raised, the Iraqis' dilemma will be to find a coherent and transparent mechanism to implement projects.

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Iraq may re-route oil via south to boost exports

Iraq is preparing to increase oil exports by re-routing supplies around sabotaged pipelines, according to European oil executives who met Iraqi officials in London recently, the Financial Times reported on October 6th.
Private talks held at a London hotel left western buyers of Iraqi crude more confident that exports would soon recover closer to pre-war levels. But the pan to divert oil from the Kirkik field, in northern Iraq, through a strategic pipeline to the south confirms fears that the damage inflicted on the pipeline to Turkey is greater than previously admitted. It also helps explain the surprise decision taken by Open oil ministers recently to cut production quota, partly due to worries that rising Iraqi productions would force international prices down.
Iraq increased production to an average of 1.45m barrels per day in September - up 500,000b/d from August, but well below pre-war production of 2.8mb/d.
"It's hard to estimate exact production because they are pumping some excess oil back into the ground, but it would be quite significant if they reversed the flow of this strategic pipeline," said Leo Drollas, an analyst with the Centre for Global Energy Studies. "The September figures are in line with the recovery pattern, but if they want to go to 1.8mb/d from the south, they would have to bring oil down from the north."
Sabotage has badly hit the supply of oil from the Kirkuk region, which before the war accounted for close to 50% of Iraqi exports.
Reuters quoted oil ministry sources in Baghdad warning that alternatives to the pipeline running to Turkey would not be operational for 6-12 months.
Nevertheless, oil executives meeting officials in London said Iraq was confident about increasing export volumes by using new routes. The message was "back to business as usual," said one oil executive.
"They (Iraqi officials) look more relaxed," said another oil executive, who met Mohammed al-Jibouri, the head of Somo, the marketing arm of the Iraqi oil ministry. "But privately they acknowledge serious problems with Kirkuk oil."
A pipeline to the south could enable exports either through Saudi Arabia or Iraq's Gulf ports. A more remote option, the Iraqi officials told companies, would be to use the Iraq-Syria pipeline, a move that would be unattractive to a US administration putting pressure on Damascus over its support for militant Palestinian groups and alleged possession of weapons of mass destruction.
The London meeting is believed to be the first round discussions among Iraqi oil officials and western oil companies outside the Middle East since the war began in March.
Previously, Somo officials have met oil company representatives in Dubai, Kuwait City and Baghdad.
Among the oil companies at the London meeting were ChevronTexaco, Total, Repsol YPF, Cepsa and Vitol. Oil industry insiders say the event shows a growing confidence in Baghdad about oil exports.

Iraq's Ministry of oil may get cash injection

Iraqi and US led occupation officials are discussing a plan to transfer funds from coalition coffers to the country's oil ministry with means to solicit oil-field repair work on its own, the Wall Street Journal Europe reported on October 2nd.
So far, almost all repair work has been parcelled out directly by the Pentagon through a no-bid contract awarded to Houston-based Halliburton Co's Kellogg, Brown & Root unit. The plan to provide Iraq's oil ministry with funds of its own could become a new source of business for companies such as KBR and others already competing for two new Pentagon contracts expected to be awarded late in October. 
"There has to be an allocation of funds" directly to the oil ministry, said a senior official with the US-led occupation authority in Baghdad. The money could help pay for ministry salaries and routine operational costs as well as repair projects, the official said.
Iraq's newly appointed oil minister has said he is ready to sign short- and medium-term contracts with foreign companies, but his ministry lacks sufficient funds to pay for them. The fund-transfer plan, if approved, would be a first step in any eventual contract-bidding process initiated by the ministry.
Still, large Western companies aren't likely to rush in just yet. The security situation across the country remains dire and companies may be reluctant to sign deals with the Government Council, the interim government appointed by the occupation authority. That could harm their chances for deals with a permanent government. With phones still out through much of Baghdad, even making contact with the ministry is a challenge. One US official involved in oil-field repair work in Iraq said the ministry may not be ready to solicit bids until early next year.
It isn't clear how much money would be involved. The cash would come from the Iraqi Development Fund, the United Nations-sanctioned reconstruction fund controlled by the occupation authority. The Development Fund is expected to be financed primarily by Iraqi oil sales, once exports ramp up.
At the start of the war, the US Army Corps of Engineers awarded a no-bid oil-field repair contract to Halliburton's KBR that is valued at roughly US$1.39bn (€1.19bn) and rising. The contract has drawn fire in Washington because US Vice President, Dick Cheney, was Halliburton's chief executive before he stepped down in 2000 to run for office.
The Corps of Engineers is expected to award two competitively bid contracts to companies later in October. KBR and California-based Fluor Corp and Parsons Corp have said they are bidding for the contracts, each valued at as much as US$500m. Those companies could also begin courting the Iraqi oil ministry directly. San Francisco-based Bechtel Group Inc, which won a US$680m contract to rebuild Iraq's non oil infrastructure, has already said it won't bid on the contracts but will pursue work directly with the Iraqi oil ministry.
Meanwhile, the senior Occupation Authority official said Iraq has sold about US$1.6bn in oil exports since their resumption in June. Recently Iraq has increased in production to about 1.9m barrels a day and is exporting between 1m and 1.2m barrels a day, he said. That rate may not be sustainable, however, as infrastructure sabotage continues and power at oil fields remains unreliable. Before the war, Iraq produced about 2.5m barrels of oil per day and exported about 2m barrels each day.

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Large Polish firms forming Iraq contracts consortium

The Polish Ocean Lines (PLO) will join Poilen, a consortium founded by the PKN Orlen petroleum corporation to bid for Iraq reconstruction contracts, PLO shipping, logistics and trade chief Krzysztof Lewinski has told PAP News Agency. Poilen's registration is under way at the moment. It will consist of five companies, including PLO, Lewinski said. The consortium's umbrella partners will be Orlen and Polimex-Cekop.
PLO will take care of logistics and transport on Iraq projects, Lewinski said. He added that the Poilen companies decided to team up to raise their chances of obtaining Iraq contracts.
The Poilen consortium is not PLO's only operation in the Middle East. The company is also a shareholder in the Dubai-based Polish Ocean Lines Middle East enterprise together with firms from the Arab Emirates. The company's mission is representing Polish interests in the Middle East. It will also cooperate with Poilen.

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