from Follow the Money

A consequence of saying no to China’s (oops, CNOOC’s) bid for Unocal?

October 2, 2005

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Or just the natural result of expectations that China's demand for imported energy will soar in the future? 

Probably a bit of both.

China clearly has no particular desire to export democracy, or even its own particular form of government.   That also makes it an attractive partner for the Islamic Republic.

Listen to Ali Akhbar Vahidi Aleagha, the deputy managing director of Iran's Petroleum Engineering and Development Co, as reported in Slate

[Aleagha had] been locked in talks all day with executives from the Chinese petroleum company Sinopec. He sounded like a man who had just come home from his dream date. "China and Iran are perfectly matched for each other," he gushed in almost accentless English, honed while studying engineering at Imperial College London. China needs energy and has lots of hard cash to spend, he said; Iran needs hard cash and has plenty of energy to sell. "It's a win-win situation."

It is interesting that Iran's other big potential partner, India, voted against Iran in the IEA - and may have put its gas deal with Iran at risk as a result (or maybe not).  Was India's vote the quid pro quo for the US government's decision to lift sanctions on the export of US nuclear technology to India? 

The weak hand of oil importers vis a vis Iran is not entirely divorced from tight global oil markets, and the tightness of oil markets is not entirely divorced from the Iraq's still relatively limited production.  Post Saddam Iraq still produces less oil for export than pre-Saddam Iraq.

And that makes this LA Times story about the limits on the US effort to rehabilitate Iraqi oil fields all the more disheartening.  It seems like the US hired Halliburton to build a plant to produce clean water to inject into Iraqi oil fields (water injection keeps oil field pressure up, and thus helps push oil to the surface), but not the infrastructure needed to transport the clean water to Iraq's fields.  

Despite the United States' spending more than $1.3 billion, oil production remains below the estimated prewar level of 2.5 million barrels per day and well below a December 2004 goal of up to 3 million barrels per day.

Interviews and documents from whistle-blowers show problems with at least three projects deemed crucial to Iraq's oil production:

-  Qarmat Ali water treatment plant. This massive pumping complex is needed to inject water into Iraq's southern oil fields to aid in oil extraction. Under a no-bid contract, KBR was instructed to repair the complex at a cost of up to $225 million, but not the leaky pipelines carrying water to the fields. As a result, the water cannot be delivered reliably, raising concerns that some of Iraq's oil may not be recoverable.

-  Al Fathah pipelines. As part of the same no-bid contract, the U.S. gave KBR a job worth up to $70 million to rebuild a pipeline network in northern Iraq despite concerns that the project was unsound. In the end, KBR built fewer than half the pipelines, and the project was given to another contractor. The delay has aggravated oil transport problems, which have forced Iraq to inject millions of barrels of oil back into the ground, a harmful practice for the oil fields and the environment. A government audit is being conducted based on a complaint by a whistle-blower.

-  Southern oil well repairs. A $37-million project to boost production at dozens of Iraqi oil wells was canceled after KBR refused to proceed without a U.S. guarantee to protect it from possible lawsuits.

It is striking that although the reconstruction of the northern oil infrastructure has been hampered by security issues, the southern oil fields — which account for most production — have been attacked only a few times since the conflict in Iraq began but still face serious problems. (Emphasis added)

Does Patrick Clawson really think this is evidence that US funds were never really needed to rebuild Iraq,  given Iraq's oil revenues?  It seems to me that a bit more investment in Iraq's oil fields (specifically transporting water from the processing plant to the fields) was needed to create the conditions that would enable Iraq to pay its own way - and at key points, those funds were not available. 

Read the entire LA Times story.

Want an out-of-the-box geopolitical risk to worry about?  How about the possibility that Shi'a militias end up fighting among each other in the south, temporarily reducing Iraq's oil production.  Probably not all that likely, but not entirely inconceivable either.  It is not clear to me how disputes inside each sectarian community over the appropriate allocation of Iraq's oil rents will be resolved.

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