Iraq, riding the waves of Gulf politics?
by Cyril Widdershoven

An Iraqi oil official stated last month that Iraq exports, at the meantime, almost 2 million barrels per day (bpd) of oil in the framework of the oil for food agreement. The source added that Iraq signed about 100 contracts with 40 Arab and foreign countries in the 7^th phase which lasts for 6 months of the oil for food program which has been extended this week. It states to export 350 million barrels of oil, which is equal to 1.94 million barrels of oil daily. Not only these developments are proponing Iraq again into the front of oil politics. As the world oil market tightens, the leverage of producers such as Iraq grows. If the market becomes as tight in the next period, as the Department of Energy (US) forecasts, Iraq could pose a concern. Iraq is currently producing at an all-out level, that is already damaging the oil field structures. Until now, Iraq’s leader has been periodically threatened to suspend oil exports, which would in the situation we are in now, become a major threat. The safety margin is disappearing that other producers could replace Iraqi oil. If Iraq would cease exporting oil in October 2000, oil prices would shoot up sky-high. That could feed inflation, deflate confidence of stock market investors and encourage an increased emphasis on changing the US policy towards Iraq.

One other development is the ongoing repairs on the Syrian-Iraqi oil pipeline, closed since 1982. This will be completed in two months, enabling the resumption of exports of Iraqi oil via Syrian ports. Mohammed Mahdi Saleh, Iraqi trade minister, told Reuters, after a meeting with the Syrian Oil Minister Mohammed Maher Jamal that repair of the pipeline’s section in Iraq had already been completed and that work was expected to be finished on the Syrian side within two months. Oil industry sources said the pipeline, intended to pump crude from the Iraqi Kirkuk oilfield to the Western Syrian Mediterranean port of Banias, would have an initial capacity of 300,000 bpd. This would increase gradually to a level of 1.2 million bpd. Syria and Iraq already signed a deal in July 1998 to reopen the oil pipeline and to build a new 1.4 million bpd parallel link after both states began a process of reconciliation following nearly two decades of animosity, such as Syrian support for Iran in the Iran-Iraq war 1980-1988. 

Iraq will soon increase oil exports by 700,000 barrels per day, reopening the previously damaged Khor al-Omaia oil terminal. However, illegal Iraqi oil exports depend on Iranian cooperation to find their way to the open waters of the Persian Gulf. As a result, Teheran will soon use its newfound leverage to influence decisions on production and prices at the upcoming meeting of the Organization of Petroleum Exporting Countries (OPEC). If Teheran gets its way, the price of oil will hover at the comparatively high price of about $28 per barrel.

Rafid al-Diboni, director general of Iraq’s state-run Southern Oil Company, told the Al-Ilam newspaper on 7 June that two of four loading quays at Khor al-Omaia oil terminal have been repaired and will resume operations “soon.” Located just west of Iraq’s main oil terminal at Mina al-Bakr, Khor al-Omaia was virtually destroyed in the 1980-88 Iran-Iraq war and damaged again in the 1991 Gulf War. According to the US Energy Information Administration (EIA) repairs began in 1993. When the terminal is fixed, its capacity will near 1.2 million barrels per day (bpd). With tow of four loading quays reportedly repaired, Khor al-Omaia should be able to boost exports by 600,000 to 700,000 barrels each day. With current Iraqi production around 2.6 million barrels, such an increase would put Iraq’s output near 3.2-3.3 million bpd – close to pre-Gulf War levels. 

Iraq clearly timed its announcement in advance of the next OPEC meeting in Vienna, in two weeks. There the cartel will decide whether to raise production and lower prices, now at about $28 a barrel. Baghdad probably made its announcement in the hope of swaying the cartel not to raise production quotas; the Iraqi regime is not subject to quotas because of UN sanctions dating back to the Gulf War 1990/91, and Baghdad favors limiting production and propping up prices. Oil smuggling accounts for nearly all of the country’s revenues beyond the ceiling set by the UN oil-for-food program.

Iran is effectively threatening to single-handedly affect the world price of oil. At the June 21 meeting, OPEC members will have to deal with the threat of increased Iraqi production. Whether Iraq’s claim is true or false, it must be dealt with as a legitimate possibility. A 700,000 bpd increase by Iraq would equal half of the increase – 1.4 million bpd – that OPEC members agreed to in March.

But Baghdad is not in control of its own shipments. Iraq’s arch-rival, Iran, controls routes to the Persian Gulf. US Navy Vice Admiral Charles Moore, coordinator of the US-led Maritime Interdiction Force, has said that Iran facilitated Iraqi oil smuggling. Two months ago, Teheran suddenly ceased cooperation and began seizing tankers. But on June 1, the Iranian regime apparently resumed its tacit cooperation with smugglers, allowing them to traverse coastal waters. On June 7, new evidence emerged to show cooperation between Iran and Iraq. The Los Angeles Times reported that Iran has opened its protected sea-lanes again to dozens of ships carrying illegal shipments of Iraqi oil. A wave of oil laden ships moved into Iranian waters in what a senior US official likened as a jailbreak. Besides the obvious boost to Saddam’s finances, the Clinton administration is worried about the diplomatic implications of Iran’s turnaround. The oil laden ships have flown under a number of flags, including those of Russia, Honduras, Belize, Panama and several Middle Eastern countries as well. To avoid the UN blockade, sanctions-busting ships have loaded contraband oil in the Iraqi port of Abu Flus, then sailed through the Shatt al-Arab waterway to the Gulf.

Iran has already demonstrated its willingness to use Iraqi smuggling to its own political benefit, in both relations with OPEC and with the United States. Iran opposed OPEC’s March decision to increase production and stabilize prices. Teheran began seizing tankers shortly after the last OPEC meeting, where it withdrew from the cartel’s agreement.

The cartel’s success has depended upon forging a strong political consensus among competing members. Saudi Arabia and Venezuela, along with non-member Mexico, spearheaded the production cuts of March 1999 that, in turn, led to the highest oil prices since the Gulf War. But since Iraq and Iran distanced themselves from the cartel’s March decision, OPEC has begun to fracture. The cartel’s ability to secure consensus has been severely damaged.

Not only Iraqi exports are being suspected of breaking the international rules. Growing attention has been focused the last months on the interest of several Middle Eastern states, such as Egypt and Algeria, of cooperation in the E&P sectors of Iraq. Last month’s meeting between Egyptian and Iraqi trade officials has already resulted in extensive cooperation, largely focusing on possibilities after the UN Security Council sanctions will be waived. Algeria’s state-run oil company Sonatrach is also targeting Iraq. Sonatrach chief executive Abdelhak Bouhafs stated at the world gas conference in Nice that Sonatrach is expanding operations on a project-by-project basis. “We are …in discussions with Iraq, which are well advanced.” This will become a major political-economic concern for the future of UNSC sanctions and resolutions. Arab cooperation will be fragmentized and under immense domestic pressure. The West will have to find a new approach to cope with the new constellation.

For Iran, the situation becomes extremely attractive, largely due to its growing influence in the Gulf region and its tacit cooperation with Iraq.

Iran will come to Vienna ready to throw its weight around. Iraq wants to export as much as possible – that is a given. But Iran effectively controls the level of Iraqi exports. Therefore, the announcement of a potential increase in Iraq’s export capacity effectively gives Iran considerable more influence in negotiations with OPEC. It also allows Teheran to speak with the weight of two countries’ export capacities behind it. This has an increased impact in the new geopolitics of oil in the region. The future will show where both parties will go, but this Iranian-Iraqi coalition is becoming an increased worry for OPEC and international oil importing countries. As Patrick Clawson of the Washington Institute stated “Both the United States and its Persian Gulf allies have reason to avoid an oil crisis, especially one engineered by Saddam Hussein.” In the current situation it is even more worrying. Two so-called rogue states are playing an intimate game, how to play international oil prices for national, regional and international gains. Iran and Iraq are important producers, the world should expect more to come out of this volatile corner.

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Reprinted as submitted.