IRAQ: REBUILDING THE OIL EXPORT SYSTEM

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP97R00694R000600080001-6
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 33
• Document Creation Date: December 22, 2016
• Document Release Date: March 23, 2011
• Sequence Number: 1
• Publication Date: May 1, 1986
• Content Type: REPORT

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i
Directorate of Sacrpt
Intelligence
Oil Export System
Iraq: Rebuilding the
-S*Cret_
GI 86-10031
May 1986
Copy 3 4 5
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Intelligence 25X1
Iraq: Rebuilding the
Oil Export System
This paper was prepared by
of Global Issues, with a con
OGI. Comments and queries are welcome and may
be directed to the Chief, Strategic Facilities Branch,
OGI,
Secret
GI 86-10031
May 1986
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Summary
Information available
as of 1 April 1986
was used in this report.
Iraq: Rebuilding the
Oil Export SystemF_~ 25X1
Iraq is steadily rebuilding its capabilities to export more oil to help
overcome problems created by the continuing war with Iran, the loss of key
Persian Gulf oil export facilities, and the need to offset falling oil prices.
The program reflects Iraq's shift in emphasis from postwar reconstruction
plans to preparations for continuation of a protracted war with Iran. It
concentrates on projects that can generate revenue most quickly, using
countertrade and other arrangements to minimize actual cash outlays,
especially in the near term. Key elements of the strategy are:
? New pipelines to expand oil exports and permit more secure export routes
and more flexible oil operations.
? Additional production capacity to replace oil and gas production capabil-
ities lost because of the war.
? Continued exploration to maintain reserve levels.
? Limited new downstream petroleum activities to meet immediate refin-
ing and gas needs.
The cornerstone of Baghdad's plan is a series of crude oil pipeline projects
designed to provide secure export outlets on the Mediterranean and Red
Seas. Expansion of the capacity of the Iraq-Turkey line in 1984 and
completion of a pipeline link to Saudi Arabia's East-West pipeline to
Yanbu al Bahr in 1985 have already more than doubled Iraq's export
capacity from that in the early years of the war. This export capacity,
however, is only 30 percent of its prewar level. The Iraqis also have greatly
increased the trucking of crude and product exports through Jordan and
Turkey.
The oil price decline this year is forcing some adjustments but will not de-
rail Baghdad's plans to rebuild the export system. Oil exports are
Baghdad's financial lifeline and the expansion program is vital if Iraq is to
have any chance of outlasting Iran in the war. Petroleum equipment and
services companies are facing a slack market and are likely to be
accommodating to a variety of financing arrangements offered by Iraq.
Baghdad is likely to deal with the impact of falling prices largely by cutting
imports of some consumer goods and industrial goods and services not tied
to the oil program. There will be some pressure, however, to postpone
maintenance and keep low inventories of spare parts, both of which would
have longer term effects. As a result, we expect some operational problems
to develop as equipment in older fields breaks down, and repairs are put
off.
Secret
GI 86-10031
May 1986
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at: ret
Iraq's recent military setbacks at Al Faw in the south and east of Karkuk
in the north have not yet forced Iraq to alter its rebuilding program. The
southern Iraqi portions of export pipeline projects are nearly complete, but
they are only 50 kilometers from the fighting; the northern export pipeline
project is far from the war zone. Because revenues from these projects are
critical to Iraq's war effort, Baghdad will continue to push them even if
they are endangered by the fighting. As the contribution of these facilitates
to Iraq's financial position grows-or if Iraq's campaign against oil export
targets in Iran escalates-Tehran will be inclined to shift its tactics to
specifically target them. In both areas, Iraq has taken exceptional mea-
sures to fortify and defend oil facilities, making another disruptive Iranian
attack difficult to carry out. Moreover, well-defended population centers
would have to fall before most of the facilities could be captured.
If serious war damage or disruption can be avoided, completion of
Baghdad's rebuilding program would renew the flexibility of Iraq's export
system and give Baghdad the capability to export crude at near prewar
levels by 1990:
? In 1984 exports were increased by about 300,000 barrels per day (b/d) to
more than 1 million b/d through the Turkish line-the primary Iraqi
export route after the loss of Persian Gulf outlets in 1980 and the closing
of the Iraq-Syria pipeline in 1982.
? In 1985 exports began through the 500,000-b/d pipeline link to Saudi
Arabia's Red Sea port at Yanbu al Bahr.
? In 1987 Turkish pipeline capacity will reach 1.5 million b/d with
completion of a 500,000-b/d expansion.
? By 1990, upon completion of the second phase of the Iraqi-Saudi
pipeline, capacity of Red Sea outlets will be 1.6 million b/d and total
Iraqi oil export capacity will be more than 3 million b/d. Temporary
facilities may even allow Baghdad to approach these levels by mid-1987.
Much of Iraq's ambitious program is hostage to Saudi willingness to
provide access to the Red Sea. Although the Saudis have stretched out
some project activities with delayed decisions, we believe the large Saudi
stake in Iraq's efforts to stop the spread of Tehran's Islamic fundamental-
ism will make Riyadh generally accommodating on these issues.
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Despite the uncertain environment, Baghdad's new oil program is creating
major opportunities for Western oil equipment, service, and construction
companies. In fact, Iraq may be one of the larger foreign markets for
petroleum development services and equipment over the balance of the
1980s. We expect more than $3 billion in new projects to be started under
the revised program, mostly on a barter basis. Western gains will largely be
at the expense of the Soviets-who have been a major foreign actor in
Iraq's oil industry-because they lack the sophisticated instrumentation
technology in which Iraq is interested. Although we expect US companies
to participate in some new projects, especially in technology-dominated
exploration work, we believe West European firms-with solid technology,
lower costs, and low government financing-are likely to get the large
drilling and construction contracts.
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War Damage and the Oil Revenue Problem
1
Export Facilities Destroyed or Closed
1
Crude Processing Limited
4
The Rebuilding Program
9
Creating Export Routes
9
Developing New Oilfields
11
Exploring for More Oil
11
Developing Downstream Facilities
12
Financing the Program
14
Foreign Participation in the Oil Program
16
Outlook and Implications
17
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Figure 1
Major Iraqi Oilfields and Installations
Iraq-Turkey Pipeline
1.0mi1llon barrels/day cj
Karkuk
a
JembOr
Saudi Arabia
Developed oilfield
Undeveloped oilfield
Oil pipeline
Oil flow direction.
on major pipeline
Oil terminal
Ar Rumaylah
0 100 Kilometers Iraq-Saudi Arabia /
i Neutral Zone
0 100 Miles
Khawr Cl
3.2 mon 7 4 Amsye
closed by Iraq-Ira .wal) sa6r:
Kuwait Q B kr l
Persian
Gulf
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Iraq: Rebuilding the
Oil Export System
Iraq had one of the most sophisticated and well-
developed oil production, distribution, and export
systems in the Persian Gulf when the Iran-Iraq war
broke out in 1980 (figure 1). Plans had been complet-
ed to raise crude production capacity from about 3.7
million barrels per day (b/d) to more than 6 million
b/d by 1990, and large-scale development of natural
gas resources was under way. Because of redundan-
cies built into the system, export facilities had the
capacity to handle up to 5 million b/d of crude.
The war with Iran has caused much disruption to this
system, and plans have been dramatically changed. In
the first year of the war, the delivery system was
substantially damaged, oilfield facilities were at-
tacked, and most long-term development plans were
put on hold. As the war has persisted, Baghdad has
had to redirect its oil development strategy and focus
on ways to adapt to the wartime environment, espe-
cially to raise oil export earnings to finance the war.
This paper assesses Baghdad's response to the impact
of the war on the country's oil sector, including efforts
to rebuild the oil export system and redirect export oil
flows to more secure routes. It also looks at Iraq's
present oil exploration and oilfield development pro-
gram, the foreign role in the oil industry, prospects for
Iraq's oil development plans, and the contribution of
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In early 1980, Baghdad began implementing a mas-
sive oilfield development program to solidify a lead-
ership role within OPEC. Key features of the plan
included:
? Raising sustainable oil productive capacity to more
than 6 million b/d by developing five major south-
ern oilfields.
? Using Brazilian, French, Italian, East European,
and Soviet companies to provide technical services
in the development program.
? Resolving technical problems at Karkuk and Ar
Rumaylah oilfields to prevent a drop in existing oil
production levels while moving to discover new
fields.
? Promoting two large-scale natural gas development
projects in the northern and southern parts of the
country. These gas delivery networks were to pro-
vide energy to domestic users and to avert wasteful
flaring of large volumes of oil-associated gas.
as the fighting continued, the war itself put a hold on
oil sector development projects that were put in
motion as part of Iraq's 1980 long-term oil program.
the new oil program to the war effort.
War Damage and the Oil Revenue Problem
During the first year of fighting, major portions of the
Iraqi oil system were damaged, destroyed, or taken
out of operation. The most significant damage was to
oil export systems, especially the loading facilities
located in the Persian Gulf. Some oilfield production
facilities also were substantially damaged. Moreover,
Export Facilities Destroyed or Closed
Baghdad lost nearly two-thirds of its export capaci-
ty-some 3.2 million b/d-when its offshore Persian
Gulf oil terminals at Khawr al Amaya and Mina al
Bakr, both fed from onshore facilities at Al Faw, were
heavily damaged during air and naval commando
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Iran: War Damage and the Need To Establish New Oil Export Outlets
In its efforts to restrict Iran's oil revenues, Iraq has
attacked Iranian production and export facilities.
The Iraqi air campaign against the Iranian oilfacili-
ties has had a negligible effect on production facili-
ties, and, of nearly 100 attacks on Khark Island, only
a handful have caused sufficient damage to even
temporarily halt exports. An attack on 15 August
1985 and a subsequent attack on 19 September 1985
inflicted substantial damage to the loading terminals
at Khark. In each instance, however, alterations in
loading procedures or repairs to equipment limited
interruptions to exports to only a few days. An Iraqi
air attack at the onshore Ganaveh control manifold
in late January caused the most significant disrup-
tion to oil exports from Khark since the war began,
but normal flow rates were restored after 16 days.
Since the war began, Khark Island's export capacity
has dropped from 9 million b/d to 4 million b/d as a
result of the cumulative damages from Iraqi attacks.
The reduced capacity, nevertheless, is still more than
enough to support present Iranian exports of around
1.5 million b/d.
The Iraqi attacks have raised Tehran's concerns over
the risk of a prolonged cutojjfof exports from Khark.
Tehran has responded by planning increased redun-
dancy and flexibility through expanded oil opera-
tions.a Activities planned or under way include
projects to increase both storage and tanker loader
capabilities:
? Installation of three single point mooring buoys off
the coast of Ganaveh, east of Khark, should be
complete by early summer, adding nearly 2 million
b/d to export capacity.
? Proposed new pipelines to deliver oil to new export
facilities at Taheri under consideration could in-
crease export capacity by nearly 2 million b/d
within two years.
? Purchases of additional storage tankers for the
shuttle operation will enable Tehran to export more
crude, or to sustain exports at current levels in the
event of an extended disruption to Khark or
Ganaveh.
? Further repairs to Khark Island loading facilities
might be planned.
These projects could raise the total capacity of Iran's
export facilities to about 7 to 8 million b/d-well
above the current export level of about 1.5 million
b/d and the capacity of Iran's oil production facili-
ties, which we estimate at about 3.2 million b/d. Iran,
however, is also planning measures to boost its
production capacity, which has eroded from more
than 6 million b/d since the revolution. Iran, for
example, is discussing possible plans to revive the gas
injection project at the Gach Saran oilfield, which
would significantly boost oil production there. F_
Proposed production increases would give Tehran the
option to at least double its current export levels in
just over a year. Moreover, the completion of new
export facilities will make it less likely that Iraq can
force Iran to the bargaining table by reducing oil
revenues and contributing to internal pressures
arising from economic discontent.
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attacks in the early months of the war.
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before operations can be resumed,
the Khawr al Amaya facility will have to be complete-
ly rebuilt and the Mina al Bakr terminal will require
major restoration (figure 2).
In addition, Mediterranean exports were cut. Iranian
air raids against the Karkuk Crude Processing Plant
Number 1 in October 1980 were able to halt briefly
more than 1.1 million b/d of Mediterranean exports
through Iraq-Turkey and Iraq-Syria pipelines. Even-
tual closure of the Syrian line by Damascus in April
1982 limited Iraq's export capacity to about 700,000
b/d through Turkey, less than one-seventh of its
prewar export capacity.
Crude Processing Limited
Iraq's refineries took a hammering from Iranian jets
in the early stages of the war. Iraq lost at least 90
percent of its more than 300,000-b/d refining capaci-
ty when Iraqi refineries in Al Basrah, Ad Dawrah,
and Khanaqin were badly damaged. As a result, Iraq
was compelled to import almost all of its oil products.
The country's national gas gathering program-de-
signed by Snamprogetti in the 1970s for startup in
1982 to make economic use of flared gas-also suf-
fered as a result of the war. Although northern
portions of the gas project involving Jambur, Karkuk,
and Bay Hasan oilfields were commissioned in March
1984-two years behind schedule-the southern por-
tion, primarily intended for the export of gas as LPG,
Oilfield Losses
Most of the important producing fields near the
Iranian border in the southern region-such as Abu
Ghurayb, Buzurgan, and Jabal-e Fowqi-have been
shut in since early in the war. Iran also controls a
portion of the giant southern Majnun oilfield and all
of the Naft Khaneh production facilities as a result of
military operations begun in March 1984. We esti-
mate that total shut-in southern capacity is probably
more than 50 percent of a prewar regional capacity of
slightly more than 2 million b/d.
The Oil Revenue Pinch
During the first several years of the war, Baghdad's
unwillingness to curtail its ambitious development
program, combined with large military expenditures
Iran's destruction of Iraq's Persian Gulf oil export
terminals forced Baghdad to develop new oil trade
patterns. In 1980 some 90 percent of Iraq's 2.5
million b/d of oil exports was shipped through the
Strait of Hormuz, with 15 percent going to Asian
customers, about 15 percent to the Americas, and 60
percent to European and African purchasers. The
remaining 10 percent of Iraqi exports found its way to
market through several Mediterranean ports. In
1985, however, nearly all of Iraq's crude exports-
about I million b/d-flowed through the Mediterra-
nean Sea port of Ceyhan. This dislocation of export
operations caused Asian customers to switch to other
suppliers to save on transportation costs and forced
Baghdad to find new customers. European purchases
increased to about 75 percent of Iraq's oil sales and
the share going to the Americas rose to nearly 20
percent. Only after Iraq began exporting from the
Saudi Red Sea terminal at Yanbu in late 1985 was it
able to regain a direct foothold in the Asian market.
Although exports to Asia from Yanbu were minus-
cule in 1985, the Iraqis are hoping to sell some 20
percent of their exports to the Japanese in 1986,
according to industry press reports.
and the loss of oil revenues, reduced Iraq's foreign
exchange reserves from an estimated $35 billion to an
estimated $3 billion in 1983. According to our esti-
mates, the loss of oil flows from Iraq's Persian Gulf
export terminals alone cost Baghdad about $19 billion
in hard currency revenues in the first year of the war.
Financial aid from Iraq's Gulf neighbors-estimated
to have totaled $30 billion between 1980 and 1983-
could not be sustained at those high levels, especially
as the oil market weakened. The continuing war and
dwindling aid forced Baghdad to assume a greater
financial burden and take a longer term view of its
war effort. The financial pinch also led to moves to
escalate the war against Tehran by attacking Khark
Island and Ganaveh export facilities in an effort to
increase economic pressure on Iran and force a settle-
ment of the war.
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Figure 3
Major Iraqi Oil Trade Partners, 1980
Th. United States Government has not rocoen,=ea
the incorporation of Eetoo.. Lab ., and Lithuania
into the $o-t Union Other houndaryrepre.entahon
Oil export figures represent
thousands of barrels per day
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Figure 4
Major Iraqi Oil Trade Partners, 1985
The United State, Govemment has not recognsaed
the incorporation of E,tonia. Lsta,., and Lithuania
into the Soviet Union. Other boundary representation
Oil export figures represent
thousands of barrels per day
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December-calls for a 56-inch line parallel to the
East-West pipeline from pump station 3 to a new port
20 kilometers (km) south of Yanbu.
Iraq's oil export capacity was reduced by more than
85 percent by early war damage to Gulf loading
facilities and the closing of the Syrian line to the
Mediterranean by Damascus in April 1982. Until
recently, the only export systems available were the
Iraq-Turkey pipeline and a fleet of tanker trucks
hauling limited quantities of crude and products
through Turkey and Jordan. A proposed pipeline
through Jordan has been long discussed, but it has
little momentum. Several other pipeline projects, how-
ever, are under way or planned that could virtually
eliminate Iraq's need for a Persian Gulf outlet and
enable Iraq to export crude at near prewar levels.
Creating Export Routes
Iraqi-Saudi Pipelines. The key to Iraq's rebuilding
strategy is the construction of export pipelines
through Saudi Arabia to an export terminal on the
Red Sea. The 500,000-b/d, 48-inch, first phase of the
Iraqi-Saudi pipeline, IPSA I, connects southern Iraq's
Az Zubayr and Ar Rumaylah oilfields with the Saudi
East-West pipeline at pump station 3 (figure 5). Here
Iraqi crude is stored in two 1-million-barrel tanks
before being shipped in batches of up to 2 million
barrels of oil to the Red Sea port of Yanbu al Bahr
(Yanbu). Iraq's Red Sea exports have averaged about
350,000 b/d since the line became operational in
September 1985. Aramco is responsible for the opera-
tion of the line and has established the Iraqi Pipeline
Department within the company to handle this re-
sponsibility,
Italian and Turkish companies for additional expan- 25X1
Iraq-Turkey Pipeline. In early 1984, Baghdad in-
creased exports through the Iraq-Turkey pipeline-its
sole outlet at the time-by some 30 percent from a
rated level of about 700,000 b/d by using flow
enhancing chemicals. In late 1984, work was complet-
ed enlarging the line's rated capacity without flow
enhancement to 1 million b/d. This expansion project
included the construction of five new pump stations
and sections of pipe parallel to the existing line. In
October 1985, Iraq and Turkey awarded contracts to
IPSA I is only a temporary arrangement until the
second phase of the project, IPSA II, is constructed.
The second phase-officially approved by the Saudis
in February with construction scheduled to start by
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Figure 5
New Iraqi Export Pipeline Projects
Leba)on
Mediterranean BEIRU
Egypt
Saudi Arabia
2nd Saudi East-West
Pipeline u/c ,
Saudi Cta- PiPeU1,.
_Saudi Phase
'Iraqi
Iraqi Alternate Plan
o Use of second East-West Pipeline with at least one
planned pump station and connecting 12-mile
pipeline from Yanbu' al Bahr to four export buoys at
new terminal site
? Expected completion: 9 months after approval Iraqi-Saudi
(possibly mid-1987) Spurline
o Total Iraqi export pipeline capacity: minimum 2.5
million b/d
Boundary representation is
not necessarily authoritative.
Saudi Approved Plan
o Connects spurline to Iraqi -Saudi Phase 11
Pipeline with six pump stations and new
terminal facility 12 miles south of
Yanbu' al Bahr.
o Expected completion: late 1989
o Total Iraqi export pipeline capacity: 3.1
million b/d
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Developing New Oilfields
Early in the war, fighting in the south and the closure
of the Syrian export line forced Iraq to rely almost
entirely on the northern Karkuk oilfield and its
existing export pipeline link to the Mediterranean
through Turkey. Although recent completion of
IPSA I has helped relieve Iraq's reliance on Karkuk
by expanding production of export crude in the Az
Zubayr oilfield, Baghdad is proceeding with the de-
velopment of several oilfields to ensure the availability
of crude for an expanded export system and increas-
ing domestic needs:
? Plans call for the East Baghdad field to begin
producing at a rate of 30,000 b/d by 1988, accord-
ing to US Embassy reporting. An ultimate produc-
tion capacity of 200,000 b/d is planned, although
delineation of the
reservoir, which lies in a complex geological struc-
ture, has not been completed. Snamprogetti of Italy
won the contract for initial development. The oil-
field's heavy crude initially will go to the Ad
Dawrah refinery near Baghdad, but a pipeline
joining the field to the Iraq-Turkey pipeline is under
consideration.
? The Sgfiyah oilfield straddles the Syrian border in
northwestern Iraq. Half of the field, 30 km long and
10 km wide, is on the Iraqi side,
only 140 million barrels of the field's
estimated 818 million barrels of reserves are located
in Iraq. The oilfield was discovered in Syria in 1959
and has been extensively produced by Syria since
1968. Development has been assigned a high priori-.
ty to counter Syrian depletion of the field. Iraq
plans to drill 35 to 40 production wells and to begin
producing the field at a rate of 30,000 b/d by 1987,
? With Soviet assistance, the West Qurnah oilfield is
in the initial stages of development and is estimated
to have potential reserves of almost 5.2 billion
barrels of oil. delineation
and development of this southern oilfield, located 25X1
near the operating Ar Rumaylah oilfield, will re-
quire construction of dams and roads in marshland.
The field is well placed to support either expanded
exports through the Iraqi-Saudi line to the Red Sea
or increased domestic refinery operations. Produc-
tion is targeted to begin at 50,000 b/d by 1988. On
the basis of available information on the develop-
ment scheme, however, we believe that the reservoir
will be developed to support a substantially higher
oil production plateau, possibly in excess of 300,000
b/d. Also, substantial associated gas will be used
domestically. The field also will provide feed gas to
the Al Musayyib 1,200-megawatt power plant some
500 km to the north near Baghdad.
All three projects are under way, and we believe
development of these oilfields is likely to increase
Iraq's productive capacity by about 300,000 b/d, or to
more than 3.5 million b/d by 1990 (figure 6). F_
Exploring for More Oil
The long-term health of the reinvigorated Iraqi oil
system requires continued replacement of oil reserves
through exploration. Revenue shortages, and the war
itself, have forced Baghdad to cut back exploration
efforts and to move oil prospecting activities into
areas away from the fighting, according to press
reporting. Iraqi Deputy Oil Minister Chalabi told US
diplomats that Baghdad's oil development program
will keep only eight seismic crews busy, down from a
prewar level of 22 crews. Other exploration activities
involving foreign firms are planned during the next 25X1
several years:
? Seismic surveys will be conducted by Japanese
crews over about 40,000 square km in Northwest
Iraq and another 150,000 square km in the South-
west. The survey program, which will require three
years to complete, includes reprocessing seismic
data already in the Oil Ministry's possession.
? Exploration activities in Iraq's Western Desert are
planned by Royal Dutch Shell and the Japanese
National Oil Company,
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Figure 6
Iraq: Projected Production and
Export Capacity Increases, 1986-90
minimum : - -
With early
Yanbu
capacity
Scheduled
capacity
? Exploratory drilling at West Baghdad well sites-
selected on the basis of the reevaluation and re-
interpretation of the oilfield seismic data by a US
oil company-is nearly complete,
Developing Downstream Facilities
Operation of Iraq's refining facilities is gradually
returning to normal after suffering war damage and
delays since early in the war. Damage to the refineries
at Al Basrah and Ad Dawrah cut refining capacity
below domestic demand for petroleum products. Do-
mestic consumption in 1981, for example, was about
210,000 b/d, compared with product production of
only 190,000 b/d. Iraq was forced to import oil
products until expansion of the Bayji refinery was
completed by a Czechoslovak/Japanese consortium in
early 1982. Since then, Iraq not only has been able to
meet domestic demand but has also exported products
at rates as high as
100,000 b/d. Moreover, Iraqi oil officials say develop-
ment plans include expanding existing refinery capac-
ity and building a new grassroots 150,000-b/d domes-
tic refinery at al Hindiyah, according to the US
Embassy.
Budget constraints have knocked most of Baghdad's
ambitious gas development plans off track. Iraq has
been promoting two large-scale natural gas develop-
ment projects in the northern and southern parts of
the country since early 1978. Although delayed more
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Figure 7
New Iraqi Oilfields, Pipelines, and Exploration Areas
Saudi Arabia
0 100 Kilometers Iraq-Saudi Arabia
0 100 Miles Neutral Zone
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than a year because hard currency was diverted to
support the war effort, the northern gas processing
plant and natural gas treatment center are operation-
al, The continuing war,
however, has prevented completion of the southern
portion of the gas program including construction of
the 190-billion-cubic-feet-per-year Ar Ratawi
NGL/LPG fractionator northwest of Al Basrah,
which will use West Qurnah feed gas.
Meanwhile, domestic gas requirements are expand-
ing-such as the need for feedstock for the Al
Musayyib power station now under construction-and
regional shortages could occur. To date, gas availabil-
ity has depended on oil production because Iraqi law
allows only associated gas to be produced. As a result
of the oil production constraints caused by the war,
Iraq has decided to change this law and promote
development of certain northern gasfields, according
to US Embassy reporting. Additionally, Baghdad
plans to build a gas treatment plant at Karkuk, and
an 800-km reversible flow pipeline to transport natu-
ral gas liquids to southern fields and to supply some
18 power stations and cement plants along the way.
This will enable Iraq to send 400 million cubic feet
per year of southern gas to Kuwait-through a pipe-
line now under construction-and still meet domestic
Financing the Program
Even with the priority given to rebuilding the export
system, funds are clearly limited. Program spending
for the Iraqi oil industry is now under constant review,
and funds are allocated
strictly on an annual basis with oil development plans
adjusted as needed. Even top priority projects-creat-
ing new export outlets-are subject to delays based
upon changing financial constraints. Project pay-
ments-rarely made in cash as in prewar years-
often involve either two-year payment deferrals, pay-
ments in crude oil and supplier credits, or counter-
trade crude oil deals, according to US Embassy
reporting. Indeed, before the war Iraq was considered
quite unsophisticated in arranging international fi-
nancial packages, but,
it is now considered very skillful in arranging complex
financial deals to keep projects moving with limited
funds.
The Iraqis have proved to be tough bargainers on
project costs, as they demonstrated in negotiating
work on their most important recent project-the
Iraqi-Saudi spur line. In spite of the high priority
attached to building a pipeline that restored a capa-
bility to export from its blocked southern oilfields
and despite pressing its case with the Saudis for
several years, Iraq delayed awarding pipeline con-
struction contracts at the last minute until costs were
revised downward and financing plans were resubmit-
ted.
Startup of the Iraqi-Saudi line on 19 September 1985
culminated more than four years of effort by Iraq to
expand its oil export outlets at the lowest attainable
Another 15 months was spent overcoming
March 1984.
numerous political and technical problems-includ-
ing questions of ownership and procedures for storing
and shipping Iraqi crude through the Saudi East-
West line-before a design contract was awarded in
Construction bidding was closed on 11 August 1984,
but the Iraqis' dissatisfaction with the project costs,
reportedly more than $700 million, caused them to
further delay the project and led to a second call for
bids by mid-September 1984. Finally, in October
1984 construction began on the project at the reduced
price of $508 million, 30 percent below the initial
price proposal. Iraq paid construction costs through a
combination of foreign credits, Iraqi dinars to cover
local costs, and at least $49 million worth of bartered
oil used as a downpayment.
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Despite the recent sharp decline in oil prices, Iraq's oil
rebuilding program will continue to receive strong
financial support from the present regime. Nonethe-
less, Iraq already has delayed or canceled many
projects that have high costs-to-earnings ratios or that
require large quantities of manpower; the oil develop-
ment projects currently under way or planned for the
near term tend to be those that will increase Iraq's
hard currency earnings outlook. Of the major projects
under active consideration, only the financing of the
second phase of the Iraqi-Saudi pipeline has yet to be
arranged. In our opinion, this will not prevent the
project from proceeding. Several contractors are well
positioned to do the field construction work-some of
which has already been completed in conjunction with
a Saudi project-and other contractors are making
strong bids to participate, according to US Embassy
reporting. Indeed, we expect the Iraqis to drive a hard
bargain during negotiations and to minimize costs-
at the price of higher interest rates on the credit
payments-as they have done successfully in the past.
The tight revenue situation will certainly force Bagh-
dad to consider a number of adjustments. Given the
weakness in the oil construction engineering and
services market, we do not believe Iraq's previous-or
likely future-rescheduling of contractor payments
will prevent completion of ongoing projects. We be-
lieve, however, that Baghdad will choose instead to
cut imports of some consumer and industrial goods
not tied directly to the oil program if it is necessary to
keep the export rebuilding effort moving ahead. Two
aspects of the oil program are, however, vulnerable in
our opinion: stocking the proper inventory levels of
spare parts and regular maintenance of oilfield equip-
ment. If Iraq cuts corners in these activities-such as
stocking gaskets, seals, valves, wellheads or repairing
metering instrumentation-increased equipment
downtime could create serious problems that would
degrade system performance over the next several
years.
The Soviet Role in Iraq's Petroleum Industry
The USSR has participated in oil projects in 25
countries, but Iraq has been by far the largest
recipient of Soviet oil industry foreign aid. Moscow's
entry into the Iraqi oil sector was helped in the 1960s
by the increasingly radical policies of Baghdad,
which began to press Western companies for more
favorable participation and financial arrangements.
According to press accounts, the USSR was on hand
with financing, training, production, and marketing
expertise when the Iraqis began nationalizing West-
ern-owned assets. It also offered a market for Iraqi
crude when traditional outlets were threatened by
Western embargoes in retaliation for Iraq's expropri-
ation of foreign-owned oil industry assets. Moscow's
first big break into a major non-Bloc oil industry
came in 1969 when Iraq accepted Soviet credits of
$120 million, after years of protracted Iraqi negotia- 25X1
tions with Western partners on compensation issues.
Iraq has remained the centerpiece of Moscow's oil
development foreign aid program, accounting for an
estimated 40 percent offunding provided for this
purpose. Our analysis indicates the $1.2 billion Iraqi
contract in 1983-which we estimate includes $1
billion in credits-to develop the West Qurnah oil-
field in southern Iraq was the largest of its type ever
acquired by the USSR. It culminated more than 20
years of Soviet efforts to establish the USSR as the
primary supplier of equipment and services for a
major oil producer. Although the contract represent-
ed a major achievement for Moscow in an area where
competition from the West is stiff, recent disagree-
ments with Baghdad over financial and equipment
issues have led the Soviets to seek bids from several
Western firms to finish this project.
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Table 1
Iraq: Soviet Extension of Credits and Grants
for Hydrocarbon Development Projects
a Estimated.
b S=Under survey
UC =Under construction or implemented
C=Completed
Amount Extended a Amount Drawn Status b
(million US $) (million US $)
41.9
30.8
Foreign Participation in the Oil Program
Iraq's ambitious rebuilding effort will require consid-
erable involvement of foreign companies. Iraq, like
other Middle East oil-producing countries, relies ex-
tensively on foreign technical support for engineering,
design, drilling, and construction in the oil industry.
This situation has been accentuated by Iraqi war
losses and mandatory military duty. Approximately
70 percent of the oil sector's labor force, including
high-level engineers and technicians, has been con-
scripted into the military,
Some researchers estimate that by 1984
about 40 percent of Iraq's labor force consisted of
expatriate workers, most employed by Western firms.
In fact, 75 percent of the foreign companies doing
business in Iraq are Western,
Western companies have consistently been called
upon to carry out Baghdad's most sensitive projects
since the start of the Iran-Iraq war. French, Italian,
Japanese, Turkish, US, and West German companies
all have had prime roles in the design and construc-
tion of export pipelines through Turkey and Saudi
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Arabia. US and Japanese firms are involved in seis-
mic interpretation, and Brazilian and French firms
have been responsible for designing and constructing
oilfield facilities.
East European countries, and most notably the Soviet
Union, have long been active in the Iraqi oil sector.
This is especially true in southern Iraq, where the
Soviets have been heavily involved in the operation of
the Ar Rumaylah oilfields. East European countries,
such as Poland and Romania, are providing several
hundred technicians to operate production and refin-
ing facilities throughout the country.
Iran's recent military gains so far pose little direct
threat to Baghdad's rebuilding program. The capture
of Al Faw in the south gives Tehran control of key
onshore facilities that feed Iraq's Persian Gulf export
terminals, but these have not been used in more than
five years. The fighting is nonetheless only about 80
km away from such projects as the Iraqi-Saudi pipe-
line, development of the West Qurnah field, and
construction of a gas pipeline from Kuwait. In the
north, the much smaller attacks are some 160 km
from the well-defended Karkuk oil facilities; conse-
quently, Baghdad does not seem to question its ability
to complete expansion of the Iraq-Turkey pipeline. As
the success of Iraq's oil program becomes more
apparent, however, Tehran may begin to specifically
target these facilities. Also, if Baghdad's military
position deteriorates further, we believe Iraq might
escalate its campaign on Iranian oil exports, which
could provoke Iran to increase its level of effort to
disrupt Iraq's rebuilding program. In both areas,
however, Iraq has taken exceptional measures to
fortify and defend oil facilities. Defensive perimeters
have been established around facilities, guard posts
have been built a few hundred meters apart, and
aerial surveillance is conducted along important pipe-
line routes. Well-defended population centers would
have to fall before the facilities could be captured.
The Iraqi rebuilding program is important to Iraq's
staying power in the war. Although the program has
increased Iraq's revenues and contributed to Bagh-
dad's ability to continue the struggle, oil revenues
play dominant roles in limiting progress.
alone will not swing the balance in Iraq's favor or add
significantly to Baghdad's options. It also will not
affect prospects for a settlement, because military and
political factors, especially Tehran's intransigence,
Even if the war continues to grind on and Iraq's
Persian Gulf oil outlets remain blocked, we believe
Baghdad's rebuilding program will be successful:
? By mid-1987, we expect Iraq to succeed in raising
export capacity at least to 2 million b/d with the
completion of the Turkish pipeline expansion.
? By the end of the decade, we expect Iraqi export
capacity will probably reach 3 million b/d-60
percent of prewar export capacity-with the com-
pletion of the second phase of the Iraqi-Saudi
pipeline project. If the Saudis agree to rush con-
struction of a temporary IPSA II, Iraq could reach
this level as early as mid-1987.
? Moreover, with the December 1985 signing of the
West Qurnah contracts by the Iraqis and the Sovi-
ets, we expect nearly 300,000 b/d of new oil
productive capacity to be available by 1990. This
and other gains would provide Baghdad with more
than enough capacity to fully utilize the rebuilt
export system if sufficient customers can be found.
On the other hand, although projects involving the
refining and gas portions of the rebuilding program
continue to be carried forward, we believe they are
unlikely to be completed by the end of the decade.
We believe Baghdad will aggressively market oil as its
export capacity expands despite OPEC guidelines and
weakening world oil prices. Qassim Taqi, the Iraqi Oil
Minister, has repeatedly argued that Iraq's OPEC
quota should be at least 2.3 million b/d-about 1
million above its current quota-given the country's
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Baghdad's relationship with the Organization of Pe-
troleum Exporting Countries has always been uneasy
and frequently strained (figure 8). Even though Iraq
was a catalyst in OPEC s creation in 1960, Baghdad's
view often did not get widespread support within the
organization. From the beginning, Iraq's extreme
views on controversial issues particularly those con-
cerning the need for production quotas and the need
to set oil prices-caused discord within OPEC. Al-
though Iraq's viewpoints have tended to gain support
over time, we believe Baghdad continues to find itself
out of step with the OPEC mainstream-if one exists.
The concept of production quotas created great fric-
tion between Iraq and other organization members. A
high Iraqi priority for OPEC was development of an
agreed program not only to decide the level of total
production but also to allocate it among members.
Baghdad never ceased to press its view on the need for
individual country quotas based on criteria that take
into account oil reserves, development plans, and
historical market position. In contrast, Saudi Arabia
traditionally opposed any policy for setting national
quotas limiting oil production, especially because its
large financial surpluses would result in a much
lower quota if revenue needs were a criterion for
allocation. The softening oil market of 1982 and the
need for stronger OPEC actions to control prices led
to eventual adoption of this idea.
reserves, past production levels, and development
needs. Also, Iraq's Deputy Petroleum Minister recent-
ly told US diplomats that Iraq will increase its oil
exports as quickly as possible with or without approv-
al. We expect Iraq to offer oil on competitive terms in
the form of barter, countertrade, and netback pricing
arrangements, or simply with straight discounts. Even
so, Iraqi exports at Yanbu and Ceyhan have fallen
below the amount of crude available for export in
Baghdad's marketing policy is likely to lead to retalia-
tion by its competitors within OPEC, cutting into
Iraq has always tended to be lumped in with so-
called OPEC hawks, especially on oil pricing issues.
There were clear signs of Iraqi delight over the 1973-
74 price increases, particularly since Baghdad was
about to embark on a very large production expan-
sion program. In the latter part of 1976, in a firm oil
market, Iraq was again clearly on the side of the
hawks calling for annual price increases of 15 per-
cent, and for 26 percent by the end of the year. At the
same time, the Iraqis have been flexible in their own
pricing policies and responsive to demand pressures.
If this meant cutting their price, then prices were cut
as exemplified in mid-1974 and early 1975. In fact,
Iraq consistently was accused by OPEC members of
secretly discounting prices, an accusation vehemently
denied by the Iraqis. In general, during OPEC s first
18 years, Baghdad was always a force to contend with
but had little weight in OPEC and few allies.
In recent years, Iraq has been the only OPEC member
to significantly expand its export capacity-albeit
from an artifcally low base-and has been one of the
main violators of assigned quotas. Riyadh's recent
drive to expand exports has put Iraq in the same
camp as Saudi Arabia, however, and both are draw-
ing criticism from Iran, Libya, and others for spur-
ring the decline in oil prices.
Iraqi sales gains. Even the Saudis may eventually opt
to rein in Iraqi exports. Iran obviously has a keen
interest in preventing any Iraqi gains in market share
and Tehran has threatened to match Iraqi gains on a
two-for-one basis-especially in the Japanese market,
Tehran's largest customer.
The additional oil supplies from Iraq and Iran will
add to downward pressures on oil prices-in the
absence of further Gulf disruptions. Even if Baghdad
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Figure 8
Iraq as It Relates to OPEC
1980 Production
Base=27 million b/d
U Saudi Arabia.
^ Iraq
Iran
Kuwait
Others
1985 Production
Base= 16 million b/d
1980 Exports
Base=23 million b/d
1985 Exports
Base=14 million b/d
19 Secret
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Table 2
Major Iraqi Petroleum Projects
Project Description Lead Construction Cost Scheduled Comment
Contractor Contractor (million Comple-
US $) tion
Iraqi-Saudi 500,000 b/d; 48-inch Brown & Root Saipem; Spie 508 May 1986 Limited oper-
Phase I 'diameter (US) Capag (Italy) ations started
in September
1985.
Iraqi-Saudi 1.6 million b/d; 56-inch Brown & Root NA
Phase II diameter (US)
1,500 24 to 36 Riyadh for-
months mally ap-
from start proved Febru-
ary 1986.
Construction
scheduled to
begin by De-
cember 1986.
Iraq-Turkey 500,000 b/d; 46-inch Saipem (Italy) Saipem (Italy), 485 June 1987
expansion diameter Kututlas, Tekfen
Iraq-Jordan Up to 1 million b/d, 56- NA
(Aqabah) inch diameter
500/ 12 to 24 Under discus-
1,100 months sion since ear-
from ini- ly 1983.
tial work
Iraq-Kuwait (gas) 400 million standard NA C. F. Braun 50 Less than Kuwait fi-
cubic feet, 40-inch 12 months nanced and
diameter from ini- built.
tial work
East Baghdad 30,000 b/d first phase Compagnie Fran- Snamprogetti 60-80 1988 Oil to be pro-
caise De Petroles (Italy) cessed at
(CFP) Dawrah; gas
to be supplied
to Dawrah
power plant.
30,000 b/d peak SCOP (Italy) Technipetrol 10 1987 22? API
production crude to be
processed at
Mosul.
West Qurnah 300,000 b/d peak Technoexport NA
production (USSR)
600 1990 Western
firms to sup-
ply one-fourth
of the
equipment.
West Baghdad Exploration; 31,000 sq Mobil (US) Limex (Drilling) NA Disappointing
km results from
five wells.
Majnun Projected 65,000 b/d Petrobas (Brazil) NA Delayed by
production rate war.
Nahr Umr Projected 11,000 b/d Petrobas (Brazil) NA Delayed by
production rate war.
Halfayah Projected 92,000 b/d AGIP (Italy) NA Delayed by
production rate war.
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Table 2 (continued)
Project Description Lead
Contractor
West Baghdad Reevaluate existing data Mobil (US)
and conduct exploratory
Northwest Region drilling Japan National
Southwest Region Exploration Co.
Western Desert Royal Dutch
Shell
Hindiyah 150,000 b/d grassroots Italian-US, Japa-
refinery nese-Romanian,
Czechoslovakian
companies
Trans-Iraqi Gas Phase I-Musayyib TSMPE
Pipeline power plant supply line.
Phase II-Baghdad to
Karkuk connecting line.
is successful in raising export volumes to 2 million b/d
once the Turkish pipeline upgrade is completed, it
would still need to keep its annual average price at
about $18 per barrel just to hold oil earnings steady.
This may be tough to achieve if the market remains
weak, as many forecasters are predicting for the next
several years.
In trying to maximize exports through its new pipe-
lines, Baghdad is likely to aggravate already tender
relations with OPEC and other Gulf producers. Bagh-
dad's relations with Riyadh could become more
strained if Riyadh denies the Iraqis permission to rush
construction of Phase II of the Iraqi-Saudi pipeline.
Iraq's relations with both Kuwait and Saudi Arabia
will also be further tested if the Kuwaiti and Saudi
crude production from the Neutral Zone exported on
Baghdad's behalf for war relief funds stops while the
Construction Cost Scheduled Comment
Contractor (million Comple-
US $) tion
NA At least
10
1,600 1991 Feedstock
may come
from the
Iraqi-Saudi
pipeline. Proj-
ect to be ten-
dered in 1986.
NA 300 1987 Soviet financ-
ing problems
led Iraq to of-
fer the project
to West Ger-
man and
French
bidders.
Baghdad needs to maintain good relations with Ri-
yadh because the Saudis control Iraqi access to the
Red Sea, which eventually will account for more than
50 percent of Iraq's export capacity. Without Saudi
accommodation to Iraqi goals, the major portion of
Iraq's rebuilding program could be lost. The Saudis,
in turn, have a high stake in Iraq's efforts to hold off
the spread of Tehran's Islamic fundamentalism and
are likely to be accommodating to Baghdad's finan-
cial needs.
Pressures from friends and foes notwithstanding,
Baghdad is likely to press ahead with its export
expansion and Iraq will remain a strong market for oil
equipment and services throughout the rest of the
decade (table 2). Although the Iraqis are interested in
fighting continues.
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the technical expertise of US companies-especially
the exploration and seismic reevaluation capabili-
ties-high project financing costs put US firms at a
disadvantage. This is especially true in areas such as
drilling and construction, where foreign financing
costs are one-third to one-fourth of US financing
costs, primarily because the United States does not
subsidize its overseas oil programs. In addition, prob-
lems posed by Arab boycott rules may prevent US
company participation in some oil development pro-
jects, just as they prevented several US companies
from taking part in the 1985 Baghdad Trade Fair. As
a result, we expect the role of US companies to be
limited to a few projects with small project staffs of
US personnel. US oilfield supply and service compa-
nies will continue to face strong and effective competi-
tion from European businesses for Iraqi contracts.
The Soviets and the East Europeans are likely to see
their role in Iraq's oil industry erode over the next few
years. We believe Baghdad will provide greater access
to Western oil companies-limited since nationaliza-
tion in 1975 to providing technical support-in the
hope of obtaining rescheduled financing arrange-
ments, buyers for its crude, and Western expertise. In
our view, shortcomings in Soviet equipment and a lack
of Soviet experience in enhanced recovery at fields
typical of those in Iraq will lead the Iraqis to increas-
ingly turn to Western petroleum engineering compa-
nies capable of providing such expertise.
We would expect any regime in Baghdad to push the
oil export system rebuilding effort as long as Iraq is
engaged in war with Iran. If the present regime were
replaced by one willing to seek accommodation with
Tehran, however, Baghdad might shift to a less
confrontational policy. Such a strategy could entail
cooperation in supporting oil prices by restraining
production, perhaps even dropping plans for further
export expansion. A new regime influenced by Tehran
also might be inclined to impose stronger austerity
measures to live within the limits of a scaled-back
export program and to reverse the trend toward
greater Western participation in oil projects.
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