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MARGARET WARNER: U.S. officials at this week’s international donors’ conference in Madrid are pleading for tens of billions of dollars to help rebuild Iraq. That raises the key underlying question: When will Iraq be able to finance its own reconstruction through oil revenues? Iraq is believed to have the world’s second-largest oil reserves, after Saudi Arabia, with an estimated 112 billion barrels.
Two thirds of Iraq’s production comes out of the southern oil fields near the city of Basra. Much of the rest comes out of the Kirkuk region in the North. Iraq’s actual oil production has been declining for years. Its peak was 3.5 million barrels a day in July 1990, just before Iraq invaded Kuwait. Last year, Iraq was producing only about 2.1 million barrels a day, earning them roughly $10 billion through the U.N.’s oil-for-food program.
Joining me now are Amy Jaffe, the senior energy adviser for the James A. Baker Institute for Public Policy at Rice University; Yasser Elguindi, director of oil and energy at Medley Global Advisors; and Vijay Vaitheeswaran, energy correspondent for the Economist and author of a forthcoming book on the world’s energy future, “Power to the People.” Welcome to you all.
As we approach this large question about when Iraq can start picking up some of its own costs, let’s start with the basics on the ground. Amy Jaffe, what are they … what are the Iraqis producing right now in the way of oil?
AMY JAFFE: Well, their production is running something like 1.5 million barrels a day. We’re seeing exports around a million, 1.1 million barrels a day. So the kinds of revenues we’re going to see this year are going to be somewhat limited around the same kind of $10 billion to $12 billion level that we’ve seen in the past recent years.
MARGARET WARNER: Do you agree with that, Mr. Vaitheeswaran because I have seen some lower estimates that this year … I think Rumsfeld said last year he thought they’d only make about $2 billion.
VIJAY VAITHEESWARAN: There’s a lot of variability in the numbers. I think what’s happening, fundamentally I agree with Amy, I think she’s right, but we’re going to see a lot of static in the numbers coming out of Iraq, in part because sabotage, various other factors are leading to very highly unpredictable output, but also because it’s in the interests of the U.S. authorities perhaps to build up some expectations to talk up the numbers. So I would treat numbers coming out with some skepticism and also look over a period of three months or six months for a rolling average, not just a peak reached on a given day.
MARGARET WARNER: Mr. Elguindi, how bad really is … in how bad a shape is the Iraqi oil industry? We know about the sanctions and the war and now we keep hearing about sabotage. How bad is it?
YASSER ELGUINDI: Well, I mean the thing we have to keep in mind is that there is bad news, but there’s also some good news. I mean, in terms of production, you’ve had consistently upward trajectory both in production and exports. You haven’t had a month lower than the month before. But the uncertainty which exists is going to continue for the time being, and until we can get a real handle on the sabotage, as Vijay mentioned, as well as on this just general security, it’s going to be problematic and will continue to wreak havoc on the markets.
MARGARET WARNER: Well, Amy Jaffe, what I’m trying to get at here is: How much of whatever they end up earning has to go back into rebuilding and repairing the energy infrastructure versus being free for Iraq’s other needs? What’s your sense of that?
AMY JAFFE: Well, you know, the dollars that come in from oil are going to be greatly stretched. They’re projecting something that something like 2 or 3 billion dollars is needed over the next year just to do the initial repairs to Iraq’s industry, and that isn’t even going to take us back to some of the numbers you cited at the beginning of the program. I mean, we’re talking about $5 billion or $6 billion just to repair the existing industry, not even to expand it to a higher level. And then, of course, the call in Iraqi society is huge. Prior to the U.S. campaign, the United Nations was spending something like $7 billion or $8 billion a year just trying to keep up with the needs for food and medical aid. So, really, the oil revenues are going to be a very small part of what it takes to put this country back on its feet.
MARGARET WARNER: Mr. Vaitheeswaran, what’s your sense of what Iraq should be aiming for here to become self-sufficient? What would constitute a flourishing oil industry for them again? Would it be to try to get back to, say, the 1990 levels? Give us some context here.
VIJAY VAITHEESWARAN: Sure. Well, the main challenge is, first of all, to get back on its feet, to return to the levels that were achieved under Saddam Hussein. That itself is quite a challenge; it will take billions of dollars of investment and reinvestment. The longer-term strategy … some people had hoped … let’s remember, there was talk of an Iraqi oil renaissance, maybe a bonanza, maybe Iraq could double its output, some people were suggesting before the American- led invasion to 6 million, maybe even challenge Saudi Arabia and defeat OPEC, the cartel. Those fantasies, in my view, were always overdone. And, frankly, the amount of money that’s going to be required over the next ten years runs in the tens of billions of dollars to try to get Iraqi output up to well beyond the levels under Saddam Hussein, especially because of the point that Amy made, that the money that comes from oil, there is going to be a number of competing interests for that. And a state-run oil sector will have to hand over much of that money for the basic needs of the Iraqi people, as well as for political needs of the new Iraqi government. This is not a private sector oil company that can reinvest along lines that would be dictated by the needs of the business. And that’s why the real question mark is: Can Iraq attract foreign investment from the big oil companies? This is a political issue. It’s a very nationalistic country. How this will happen, when it’ll happen, if it will happen, I think will dictate the pace of Iraq’s expansion.
MARGARET WARNER: Mr. Elguindi, what is your view on that point? One, what Iraq should be aiming for, what it’s going to cost in the way of investment to get to that point, and where the money will come from?
YASSER ELGUINDI: Those are all very good questions, and, unfortunately, I don’t think there are very many answers at this point. I think we should make sure we can walk before we can run. This is an industry, the Iraqi oil industry, which has been devastated by three wars, 12 years of sanctions and truly been under-invested in. I think to achieve prewar levels, around 2.8 million barrels a day sometime next summer is a realistic goal, assuming that there is no further deterioration in the situation. Beyond that, I don’t think it’s realistic to begin talking about foreign investment until you have a government in place. There’s no government in Iraq right now. The security situation, once again, doesn’t lend to an environment which is conducive to bringing in foreign capital. And it is a nationalistic country. They are a proud people, they want to maintain control over their natural resources, and inviting foreign companies might not be in their best interests. What’s going to happen when there is a government and they are going to have to start paying their civil servants, paying for an army, which they don’t have at the moment, paying to secure their borders, which they haven’t been able to do. Nobody can tell you what is coming into and out of Iraq at the moment. There are real problems, and I think maximizing an oil price might be in the oil industry’s interest in the near future.
MARGARET WARNER: Amy Jaffe, do you agree that really this will get down to political choices for the new Iraqi government when there finally is one?
AMY JAFFE: Well, there are going to be some very, very difficult choices for Iraq to make, and they’re not the first country that’s confronted these kind of challenges to really achieve a strong import of earnings, a flow of earnings from oil really is going to take something in the order of magnitude of $40 billion or $50 billion of investment.
MARGARET WARNER: You mean just in the oil industry itself?
AMY JAFFE: Just in the oil industry itself. And so then the question becomes, what’s the best way to accomplish that? So the timeline is very important. You have to have a constitution. That constitution then has to develop for a natural resources law. You have to establish that law and have everybody feel comfortable with it, and only then can you consider the question: Do we, don’t we, want foreign investment? Now, in a country like Russia, that process has taken ten years, and there are still foreign investors that say that the petroleum investment law in Russia is not adequate. So you’re talking about a really difficult, time-consuming process, even under the best of circumstances with a stable government, with authority over the whole country. You have security that’s manageable around the whole country; you know how you’re going to share oil revenues among different regions and different groups. There’s just a lot for the country to put together before you even get to the point of deciding and debating and then attracting foreign direct investment, should that be the choice you make.
MARGARET WARNER: Mr. Elguindi, I took your point about how the Iraqi government might not want foreign investors, but give us a sense of how the foreign companies feel. Are they eager to get in there?
YASSER ELGUINDI: Absolutely. I think if you look at how other areas are performing, the future really lies in the Middle East in terms of low-cost production areas. Companies now are having to justify their bottom line. Reserve base is not enough. So when you talk about areas for the future, Iraq definitely represents an important part of the world that foreign companies … the oil makers would like to be in. The question we really have to ask is: What role will they play, how will they participate? These are the real questions, and there are certain requirements that these companies are going to meet. Constitution, as Amy mentioned, is an important one, I think a very good first step; having a government in place, having laws that protect their interests and protect their investments. These are multibillion dollar projects that will take years and years and years to come to fruition. It’s not something that they take lightly and, yes, there will have to be guarantees.
MARGARET WARNER: All right, so that brings me to my final question for all three of you. Briefly, beginning with Mr. Vaitheeswaran — excuse me for mangling your name — right now the World Bank is saying it’s going to cost $55 billion in reconstruction for the country through 2007. The U.S., President Bush has committed the U.S. to $20 billion and they’re trying right now to get other countries to contribute more. How much, realistically, could Iraq be expected to contribute itself to that?
VIJAY VAITHEESWARAN: I think in the short-term, very little. The debate in the U.S. Congress, for example, about why these people have all this oil, it’s the second-biggest reserve, they should be paying for this themselves, I think it misunderstands the nature of the risk in Iraq. There are huge reserves, the second biggest in the world. But the risk in Iraq is not under the ground, as it is in the deep sea, where you don’t know if you’re going to find oil. All the risk is above ground, meaning politics, meaning the presence of the U.S. actually increases the risk factor; the lack of an authority, of a transitional government; nationalism; ongoing sabotage. So I think for quite some time, there’s going to be a question mark attached to foreign investment in Iraq, and that’s going to mean that they’re going to need money from the U.S. or the international community. That’s a sad fact.
MARGARET WARNER: All right. Mr. Elguindi, fairly briefly, how much do you think Iraq could realistically contribute to its own reconstruction in the next three or four years?
YASSER ELGUINDI: I think very little. As it was mentioned before, they’re going to have to focus on rehabilitating their one revenue stream at the moment, which is oil. They’re going to be reliant on the largesse of others for the time-being, and I’m not expecting them to contribute very much, to be quite honest.
MARGARET WARNER: Amy Jaffe?
AMY JAFFE: Well, you know, in their own budgets, they’ve figured in that in two or three years, they may be able to contribute something like $15 billion to $20 billion. So you’re talking about, you know, maybe 25 or 30 percent. And, you know, we’ve seen the Iraqi oil industry be incredibly resilient, I’d say much more resilient than some other nations that have had civil war or other kinds of war or problems that have effected their investments in oil. So, you know, I don’t think it’s fair to say that oil is going to mean nothing. I think that people have really unrealistic expectations that maybe the oil could take care of everything when really this is a place where the international community is going to have to show some responsibilities, and maybe it won’t have to show quite as much responsibility as in a country like Afghanistan, but we can’t discount other aspects of the Iraqi economy, as well. It’s a highly educated population.
MARGARET WARNER: All right, I’m sorry. We’re going to have to leave it there. But thank you, all three, very much.