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Analysis: Iraq oil in '07, bleak as '06

By BEN LANDO, UPI Energy Correspondent

WASHINGTON, Dec. 28 (UPI) -- Iraq has a lot of oil, more than any other country in the world except two.

But its oil sector suffered decades of misuse by Saddam Hussein, leaving it badly in need of repair.

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U.N. sanctions after Saddam invaded Kuwait in 1990 further hampered development.

Then came the U.S.-led invasion and occupation, going on four years next March, and the reverberations of militia and insurgent attacks.

Various factions are fighting over control of the country, as well as its oil, and there's a struggle between the central and regional governments over which side will oversee future development of Iraq's 115 billion barrels of crude reserves.

The security situation in the country is bad and getting worse, keeping investors from putting any people or resources on the ground that may not survive.

And even if oil companies or investors in Iraq's oil sector did decide to move in, there is no law telling what they can and cannot do, and what benefit they will or will not receive.

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This is the state of Iraq's oil and, with 96 percent of its budget funded by oil revenues, Iraq itself.

Behind closed doors, Shiite, Kurdish and Sunni political leaders -- among others, including officials of McLean, Va.-based BearingPoint, contracted by the United States -- are negotiating a federal oil law.

Beyond those doors, beyond the walls of what is known as the Green Zone, a protected area in Baghdad and the only safe location aside from the semi-autonomous Kurdistan region in the north, about 1.9 million barrels of Iraqi oil is pumped daily.

This is below the 2.6 million barrels before the war; it's a tally only steady in that it can never be gauged or predicted.

"We're where we were two years ago as far as production goes," said Erik Kreil, an analyst with the Energy Information Administration, the data arm of the U.S. Energy Department.

"Oil production really went up negligibly" in 2006, he said. "A whole year has gone by and production went up approximately on average 100,000 barrels a day."

Iraq is pumping oil basically at capacity and mostly from the Shiite-controlled fields in the south since attacks have rendered the north mostly useless.

There are no meters at the pumps so you "really never now for sure what's produced," Kreil said.

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Iraq exports about 1.6 million barrels a day, and an estimated smuggling ring is so entrenched the Iraq Oil Ministry says $700 million a month is taken from its rightful coffers.

Attacks and a spotty if not non-existent electricity supply have created a bottleneck in Iraq's refining capacity and forced it to import petroleum products like gasoline. (Smugglers are also getting their hands on whatever gas supply there is and basically starving Baghdad.)

Iraq's Oil Ministry said it lost $11 billion and 651 days of oil exports from the start of 2004 to mid 2006 because of attacks on its oil pipeline from Kirkuk in the north to Ceyhan, Turkey. It was once a major avenue for Iraq's sales.

From Jan. 1 to Nov. 29 of this year alone, Iraq Pipeline Watch, a joint project between the Institute for the Analysis of Global Security and Threat Resolution Ltd., counted 94 attacks on "pipelines, oil installations, and oil personnel."

Security is so bad that passing an oil law may not have much of an impact, at least not at first.

"They're not there yet," said Alex Turkeltaub, a managing director of the Frontier Strategy Group, a consultant focused on the energy industry.

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He said 90 percent of his clients "think it's going to get a lot worse before it gets a lot better."

"I do not see a source for substantial production increases in the coming year," he said.

Yet, an oil deal that the three main factions in Iraq agree on could set the stage for reducing ethnic tensions, rebuilding Iraq's oil infrastructure and increasing the country's wealth.

But the oil deal is virtually stuck now. The Kurds want regional control over all future oil contracts, which they claim is allowed by the Iraqi constitution, passed in 2005.

Sunnis, with no oil reserves, want central control so revenues won't stay in the regions.

Most Shiites back the Sunni plan, eyeing a controlling stake in a strong central government.

"All of the markers are negative" in 2006 said Robert Ebel, chairman of the energy program at the Center for Strategic and International Studies.

Next year isn't shaping up to be much better.

"I don't see much hope unless President Bush and his new secretary of defense come up with a brand new idea that Iraqis will like," Ebel said.

But on the ground, he said it will take both an acceptable oil law and change in security conditions, basically those supporting violence in Iraq to decide to work together for the betterment of the country.

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If not, "it'll be the same all over again."

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