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In the Pipeline: Iraq Oil Industry

As Iraq begins pumping oil for the first time since the start of the war in March, experts consider the future of the Iraqi oil industry and the efforts to restart its system.

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  • MARGARET WARNER:

    For more on the present state and the future of Iraq's oil, we turn to Robinson West, chairman of PFC Energy, a strategic advisory firm to oil companies and governments. He's a former assistant secretary of the interior. Christopher Flavin, president of the Worldwatch Institute, an environmental organization. Amy Jaffe, president of AMJ Energy Consulting, and project coordinator for energy research at the James A. Baker Institute for Public Policy at Rice University. And Falah Aljibury, an international petroleum consultant and analyst who advises the Iraqi oil industry.

    Welcome to you all.

    Amy Jaffe, first of all, just give us a good snapshot or assessment. What's the physical state of the Iraqi oil fields right now and their ability to produce?

  • AMY JAFFE:

    Well, we didn't lose a lot of capacity from the war, and that's the good news. There is the problem of the long-term disrepair of facilities, and that will have to be addressed. But we're in a good state of affairs. The problems really are more political than technical.

  • MARGARET WARNER:

    And Mr. Aljibury, I know you're talking to people on the ground there. What would you add to that in terms of the physical condition and the ability of these fields to start producing?

  • FALAH ALJIBURY:

    The physical conditions are those that were looted and they are being restored very rapidly. The U.S. Government is working very seriously and diligently to restore these fields to where they were before. The looted material have begun to being brought back by the workers since the workers recognize that this is for their own families' benefit, for their country's benefit, both for consumption and export.

    The only thing I could add more than what I have suggested before, and that is the security. That is the main issue, that the Iraqi technicians and Iraqi administrators are saying now that, regardless of the physical conditions in the fields are, there is security… their security is a major concern for people to move around and to bring this production in line.

  • MARGARET WARNER:

    Robin West, what do you think is the most important thing that should be done to get these fields back up and producing?

  • J. ROBINSON WEST:

    I think the most important thing, Margaret, is to get the Iraqis in charge of their operations, which they know very well. The Iraqis are well recognized in the international industry as being very competent, and so I think as quickly as possible, to get competent Iraq Iraqis in place running things, and then later on, to be able to bring the industry in, but to bring it in under terms which are international terms and which the Iraqis believe are fair.

  • MARGARET WARNER:

    But isn't this going to cost a lot of money, Chris Flavin, to– given the damage that had been done, not so much by the war, but as someone said earlier, but really by the years of economic sanctions?

  • CHRISTOPHER FLAVIN:

    There's damage to the fields that go all the way back to the Iran-Iraq war. There's never been repaired and there's just been a failure to invest over a long period of time. So there's a lot of additional investment to get up beyond the level of production that occurred before the war. The big question, though is: What is the new system going to be? There is no legal government in Iraq today. Technically, legally, the United Nations controls the oil supply, and the question of how we can get from where we are today to a system where you have a legitimate means of selling oil on the market remains to be answered.

  • MARGARET WARNER:

    So Amy Jaffe, how do we get from the current system– well, first of all, explain the current system right now. Who owns Iraq's oil right now? I mean is it the U.S. because it's an occupying force? Is it the U.N., which is running this program? There's no Iraqi government. Who's in charge?

  • AMY JAFFE:

    Well, I think the thing we all have to keep sight on and I think Secretary Rumsfeld and others have said this, is there has never been a question that the oil in the ground is owned by the Iraqi people and the country of Iraq, so that's the first principle.

    The second thing we have to keep in mind, because we tend to think of the United Nations as being an altruistic organization with the good of the public involved, but they are a concerned party because they have a tremendous amount of administrative positions and budget funding that comes from controlling these oil sales and the humanitarian for oil program.

    So really, you know, the question almost becomes one of: Who's going to collect a salary for producing and selling Iraq's oil? Is that going to be bureaucrats and technocrats in Iraq, or is it going to be bureaucrats and technocrats in the United Nations? I mean we set up the oil-for-food program to protect the oil revenue from going into buying weapons of mass destruction and military that could be used to threaten Iraq's neighbors, and that's why those sanctions were put in place.

    So really the first step is to really analyze: Why is the U.N. reluctant to lift sanctions? What sanctions are still necessary? What procedures are really still necessary to prevent or to protect this asset for the Iraqi nation?

  • MARGARET WARNER:

    Chris Flavin, you're shaking your head.

  • CHRISTOPHER FLAVIN:

    Well, there's another countervailing problem, which is that all of the man-on-the-street interviews in Iraq show clearly that there's great suspicion on the part of the vast majority of the Iraqi people, that despite the statements by administration officials that U.S. desires to control that oil. So I think that there are problems any way you go.

    But I think probably the most legitimate way to move forward, until we have an actual Iraqi government that can control things, is to have some kind of a new international system, some kind of a council set up to actually control, for the benefit of the Iraqi people, those oil supplies. Having U.S. generals, U.S. administrators do it is not going to work.

    I agree with Amy that there are certainly are possible concerns with the U.N., as well. We need a new system in place, and I think what the Bush administration has not yet come to grips with is that they're going to have to go back to the Security Council, negotiate this particularly with the Russians and the French and come up with something that is in fact in the long run interest of the Iraqi people.

  • MARGARET WARNER:

    Robin West, if…

  • FALAH ALJIBURY:

    May I add something?

  • MARGARET WARNER:

    Yes, go ahead, Mr. Aljibury.

  • FALAH ALJIBURY:

    I would like very much, to add to what has been said by Amy, and her colleague. This is not the state right now. This may have been a speculation prior to the liberation of Iraq, that the oil of Iraq is going to be taken by other powers. Certainly the present people administering Iraq and administering the ministry by themselves, by the highest ranking individuals are not seeing it this way. They are proceeding very rapidly in cooperation with the Army Corps of Engineers to bringing those fields into production as rapidly as possible.

    So there may have been a speculation in the past. The Iraqi officials haven't seen any such attempt at the present time as was described above. Let me please inform you about how the Iraqis and how the U.N. and how the legal system sees who possesses Iraqi oil at the present time. There is no doubt that Iraq possesses its oil. The legal entity designed by the Iraqi government, past Iraqi government was SOMO, State Oil Marketing Organization.

    Therefore, State Oil Marketing Organization is intact, presently responsible and recognized both by the end user, the buyer, and the United Nations as the entity responsible for sales.

  • MARGARET WARNER:

    Let me get Mr. West in here just to pick up on that. The White House is saying, or the Bush administration, that it's going to design a new program. If you were giving them advice on what to do, what would your advice be?

  • J. ROBINSON WEST:

    The first element would be to make sure that the Iraqi people have confidence in the system, that they know it's a fair, trustworthy system, that the money isn't being plundered by Washington. I don't think Washington has any intention of doing that.

    The second thing, which is terribly important in any aspect of oil, is that the system be transparent. They know where the moneys come from, where the money is going to go. One of the brutal facts of life is, wherever you go in the oil business in the world, with one exception, which is Norway– whenever oil dominates the economy, it is a recipe for a corrupt, mismanaged state.

    And if they don't get this right, first with oil sales and later with investment, if they don't get it right, I don't care how good everything else is, that they will fail because oil always corrupts governments.

  • MARGARET WARNER:

    And why?

  • J. ROBINSON WEST:

    The basic reason is that, if a government controls oil, large oil resources, they basically don't need the consent of the governed. They have the money. They don't need… America was founded on taxation and representation. They don't need taxation. They don't need the consent of people, and they do whatever they want. And government becomes not only a political prize, but it becomes a great commercial and financial prize. And this is what's happened in West Africa, in the Caspian and the Middle East and Russia, everywhere.

  • MARGARET WARNER:

    Amy Jaffe, as we've been discussing, and as we heard Donald Rumsfeld, we've heard the president say the U.S. insists that they're going to make this for the benefit of the Iraqi people. Nonetheless, don't U.S. oil companies stand to benefit to some degree? I mean before they had no access to getting involved in this industry.

  • AMY JAFFE:

    Well, actually, the truth is that Iraq, before it invaded Kuwait, was negotiating with some U.S. companies and other international companies to bring them in as investors.

    And you know, we don't know what the end of the story is going to be. From the kinds of reports and things that I've read, there's talk about having a constitutional convention in Iraq to set up a new framework for government and law. That's going to involve having a petroleum law. I mean we don't realize– we have one here in this country, too, that some of it is state by state, and some of it is federal. You have to have laws that govern how resources are produced and who owns them and how they're leased and produced.

    And that process is going to have to take place in Iraq, and you know, there are several steps that have to take place before we can even get to the stage where an American or Russian or Chinese oil company can consider whether or not they can participate.

  • MARGARET WARNER:

    Chris Flavin, but going back to your idea of what we do in the interim between now and when there's a really elected Iraqi government, which could be a year or more, are you saying that basically you don't think international oil companies will be willing to go into business in Iraq and help them sell the oil unless there's some kind of legal entity…

  • CHRISTOPHER FLAVIN:

    There needs to be legal title to the oil, and that does not exist currently — the U.N., if anyone, possesses that title because the previous Iraqi government was not allowed to sell it. So that that needs to be… there needs to be legitimacy confirmed on someone to sell it, but I think that the key point is the one we've just been focusing on, which is that we're going to have to go very delicately.

    And I think the administration should go absolutely out of its way to show that we're not allowing U.S. oil companies to control this process because, if that happens, then there's going to be an overreaction in the other direction and we will follow that sad history of other oil economies that are corrupt and that did not serve the interests of their people. I think that we could go the Norwegian route of having a mixed oil system. There's a state oil company in Norway, but there also are multinational companies involved and it's all managed in a very legitimate way.

    But we're going to have to be very careful to allow the Iraqis to get there. Otherwise, they're going to react against it and will go back to a very corrupt system.

  • MARGARET WARNER:

    All right, thank you all four, very much.

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