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Western firms eye reconstruction in old Iraqi oil fields

Monday, Oct 28, 2002,Page 12

Energy companies have started to position themselves for a role in the revival of Iraq's huge but dilapidated oil industry, according to a new report by Deutsche Bank. Oil field services companies like Schlumberger Ltd and the Halliburton Corp could be the early winners, it says, but the prospects for oil companies themselves are less clear.

"We expect to see oil service contracts to rehabilitate old fields, but anticipate long, drawn-out negotiations on new fields," the report says.

Industry experts and the State Department have said that oil revenues would likely fund the rebuilding of Iraq, which has reserves second only to Saudi Arabia's. That would make repair of the industry a priority either for a new regime or for Saddam Hussein's government, if it satisfies UN weapons inspectors and sanctions on Iraq end.

"People talk like we're going to invade, the government is going to fall and ExxonMobil is going to get a contract right afterward, and it's a lot more complicated than that," said Amy Myers Jaffe, senior energy adviser at the James A. Baker III Institute for Public Policy at Rice University. "The repair of oil export facilities and the prioritization of which facilities will get rebuilt first are the building blocks for Iraq to re-establish its production capacity."

Western energy companies have demurred from discussing the business possibilities in a post-Saddam Iraq, concerned that such talk would reinforce Baghdad's contention that the current conflict is driven by oil. But while industry experts say that such planning is not top priority at oil and gas companies, the companies are beginning to explore the prospects Iraq may hold.

"It's very clear that if there is a return of Western oil companies to Iraq, clearly companies like Schlumberger will benefit," said Christian Lange, director of investor relations for the New York-based company. "Everybody is looking at what the situation in Iraq may be and how they may individually benefit from what may happen, and we're not unique in that regard."

Deutsche Bank emphasized that its report was not a recommendation to buy shares of companies that might someday enter Iraq. "The report is a way of saying `Watch this space,'" said Adam Sieminski, senior oil strategist with Deutsche Bank and an author of the report, "and the oil service work could be near."

The report, based on information from American government agencies, the United Nations and industry sources, points out that the Persian Gulf War and the subsequent years of difficulty in getting parts and services under UN sanctions have left the Iraqi oil industry tattered. Over two years, it says, "rehabilitation of under-invested and bombed facilities" could add at least 1 million barrels a day in production. Iraq now produces about 3 million barrels a day.

The cost of reconstruction -- and the possible revenues to oil-field services companies -- would be around US$1.5 billion, according to the report.

But when, and whether, those revenues begin to flow remains uncertain, Sieminski said. It could vary immensely, depending on whether Saddam acquiesces to strict weapons inspections, or the US invades and ousts him quickly, or the conflict drags on and does further damage to the oil sector.
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