Saban Center Middle East Memo #4, June 17, 2004
by Gal Luft, Co-Director, Institute for the Analysis of Global Security (IAGS)
As the handover of Iraqi sovereignty approaches, the country’s oil industry, the pillar of its economic recovery, has been brought to a halt by attacks on two major pipelines and the assassination of a top oil executive. The impact of these attacks illustrates the fragility of Iraq’s oil-export sector, and further diminishes the ability of that sector to foot the bill for the country’s reconstruction, contrary to prewar expectations. Before the war there was a near consensus that the country’s oil industry, boasting the second-largest proven reserves in the world, would provide most, if not all, of the funds needed for reconstruction. In testimony before Congress in March 2003, Deputy Secretary of Defense Paul Wolfowitz said that “oil revenues of Iraq could bring between $50 and $100 billion over the course of the next two or three years,” based on the assumption that although Iraq’s oil infrastructure was in poor condition, production could quickly be restored to the pre-1990 level of about 3 million barrels per day (mbd). It was also thought that — assuming minimal damage to the oil fields during the war and a stable political situation thereafter — Iraq might be able to ramp up its production to as much as 6 mbd by 2010 and 7-8 mbd by 2020.
But a year after the fall of Saddam Hussein, and in spite of the fact that the war caused negligible damage to the country’s infrastructure (only ten wells were set afire), the prospects that Iraq will soon become one of the world’s leading oil-producing countries are growing dim. This shortfall points up a crucial but neglected aspect of the broader security failure in Iraq: the failure to secure Iraq’s oil infrastructure against insurgent attack.
A sabotage campaign against Iraq’s 4,300-mile pipeline system has crippled the country’s oil industry, hindering its ability to export crude. Iraq is producing around 2.4 mbd, of which 1.6-1.9 mbd are exported. However, these figures are currently declining. Data released by the U.S. Army Corps of Engineers show that crude production in May dropped to 1.95 mbd and exports are down to 0.86 mbd, the lowest level since last October.
These figures fall short of the coalition’s stated goals of 2.8-3 mbd. As a result, Iraq’s oil export revenues, which are considered critical to rebuilding its battered economy, totaled $8 billion in 2003 and are expected to climb to no more than $15 billion in 2004. This is much less than the revenues anticipated by the Bush administration prior to the war. A report by the Congressional Budget Office confirms that at least in the foreseeable future Iraqi oil revenues will be insufficient to cover the capital investment required to turn the country into one of the world’s major producers.
Although many pipeline attacks go unreported, officials in the Iraqi Ministry of Oil admitted that there have been more than 130 incidents since President Bush declared the end of major hostilities in April 2003. According to the Iraq Pipeline Watch <http://www.iags.org/iraqpipelinewatch.htm> at the Institute for the Analysis of Global Security, there were no fewer than 13 attacks on facilities in northern Iraq (primarily the pipeline running from Kirkuk to the Turkish Mediterranean terminal of Ceyhan). As a result of these attacks, Iraq has exported only around 14 million barrels through the northern pipeline since the war (even though the pipeline has the capacity to move that much oil in just a few weeks). For every day this pipeline is not operational, Iraq’s tottering economy loses $7 million. In addition, there have been no fewer than 33 attacks on oil and gas pipelines leading to the refineries around Baghdad, primarily near the Bayji refinery complex 125 miles north of Baghdad. In March, terrorists began hitting oil installations in the south near Basra as well, where more than two-thirds of Iraq’s oil is produced. In total there have been nine attacks in the south, the most severe of which was the April 24 bombing by three suicide boats in and around the Basra terminal zone, Iraq’s only offshore export outlet in the Persian Gulf. Though the terrorists failed to damage the facility, this attack alone cost the country some $40 million in lost revenue.
The U.S.-led Coalition Provisional Authority has made protecting the pipelines and restoring Iraq’s oil industry a top priority. An operation called Task Force Shield employs about 14,000 security guards deployed along the pipelines and in 175 critical installations, including 120 mobile patrols. This effort has brought down the number of attacks but has by no means solved the problem. Pipelines, pumping stations, and refineries are still attractive targets for insurgents, and the fact that the attacks have spread to the south means the problem is still far from resolution.
When it comes to pipeline sabotage there are two groups of villains: looters and saboteurs. The looters are petty criminals who puncture pipelines, then siphon petrol and sell it on the black market. Some of them are also involved in smuggling oil across the border to Syria, Iran, and Turkey.
The saboteurs, on the other hand, are economic terrorists with a politically motivated agenda. Their attacks aim to cripple the country’s oil production in order to wreak havoc and instability, intended to underscore the American failure to stabilize the country and increase public opposition to the occupation. A wide range of different groups appear to be behind the sabotage, although most seem to come from the Sunni Arab elements of Iraqi society — remnants of Saddam Hussein’s Ba’th party, tribal fighters, and Sunni fundamentalists, as well as foreign Sunni (Salafi Jihadist) fighters. This suggests that pipeline attacks are becoming an increasingly common strategy of Iraq’s multifaceted insurgency.
The saboteurs are tactically sophisticated. Their targets are carefully chosen and their explosives are well placed — aimed to damage the system at critical points such as junctions and to destroy custom-made parts that take weeks or even months to replace. The impact of an explosion often extends beyond the precise section attacked, especially because the Iraqi system is old and neglected, causing leaks and cracks down the line. This peripheral damage often increases repair times. The saboteurs also try to strike at pumping stations and pipelines carrying crude oil to refinery hubs or those lines that are being used for export. In a number of incidents, they have also targeted energy contractors and oil officials working to bring Iraqi oil back on-line.
The sabotage campaign carries strategic implications for Iraq’s future. It has already created an inhospitable investment climate for multinational oil companies, deterring them from sending labor and expensive equipment to Iraq. Some of these companies have already decided to halt operations in Iraq altogether or to divert investments to more stable energy-producing countries. A major investment conference in Basra to which all major oil companies were to have been invited in mid-April was cancelled because oil executives refused to take the risk. To make things worse, Libya’s decision to give up its weapons of mass destruction programs has made it a beacon for foreign investment and a major competitor for Iraq’s oil industry. Moreover, because of the repeated attacks, Iraq is no longer considered a reliable supplier, and international oil companies are reluctant to enter contracts if delivery is not guaranteed — despite a range of discounts and other incentives being offered by Iraq.
Oil terrorism has a corrosive influence on the morale of the Iraqi people and their attitude toward the occupation. Iraqis are growing increasingly vexed by the coalition’s slow progress in the reconstruction effort and its inability to guarantee a reliable supply of electricity. Unlike most countries where electricity is generated from coal, natural gas, and nuclear power, most of Iraq’s power is generated from oil. Without a steady supply of crude, power plants are unable to reach capacity and blackouts are frequent.
In Iraq, power and oil are linked in a chicken-and-egg type of relationship. Without oil there can be no power, but without power there can be no oil. Electricity is needed to operate pumping stations and refineries. It is also required to inject water into oil fields to maintain reservoir pressure. Without water injection, pressure in the fields would fall, causing output to decline rather than grow.
The sabotage campaign against Iraq’s oil could also affect the U.S. economy. Without Iraqi oil, the U.S. taxpayer will have to carry a heavier than anticipated burden of the reconstruction cost. In addition, oil terrorism in Iraq has contributed to the high risk premium that recently drove oil prices to the unprecedented level of $42 per barrel. Every dollar-per-barrel increase in oil prices costs the U.S. economy about $4 billion a year. Consequently, a risk premium of just $8 per barrel would create a loss of $32 billion per year. With American consumers paying higher prices at the pump and the global economy suffering from the vast range of ripple effects from higher energy prices, it would be both ironic and tragic if such developments were to further erode public support for the war in the United States and throughout the world.
Over the longer term, the sabotage campaign could have a lasting influence on Iraq’s future economic development. With very few other export products, Iraq’s economy will be oil-based for decades to come. To meet its growing needs for foreign exchange, Iraq must begin today to develop its reserves, especially those in the western desert. Vast parts of Iraq are unexplored. In fact only 15 of its 73 discovered giant and large fields have been developed. Under normal circumstances it takes 5-10 years to translate reserves into production. This means that investment in new capacity should begin as soon as possible so that sufficient revenues can be generated toward the end of the decade. Delays in the development of Iraq’s fields might subject the country to economic hardships in the future. An investment of roughly $5-6 billion will be needed to develop the oil sector upstream (exploration, production) and downstream (refining, export terminals, and distribution) to reach prewar capacity. An additional investment of some $35-40 billion would be needed over the next 10 years to boost production to a 5-6 mbd production level. If available, this money should be spent on the creation of new capacity, not on maintenance and damage repair. Every dollar spent on the latter is a dollar denied to Iraq’s main challenge of developing its reserves.
Perhaps the most disturbing aspect of oil terrorism in Iraq is that it may become a new model for Islamist terrorists who seek to destabilize the region. Moving 40 percent of the world’s oil across some of the world’s most volatile regions, pipelines are attractive terrorist targets. A simple explosive device can put a critical section of pipeline out of operation for weeks. By going after energy infrastructure, terrorists can weaken regimes that depend on oil revenues for their survival and at the same time deliver blows to the global economy. Hence, success in keeping Iraq’s oil off-line might encourage other groups operating in the region to do the same.
Most disturbing of all is the possibility that the strategy of pipeline sabotage will migrate across the border from Iraq to neighboring Saudi Arabia, home to one-fourth of the world’s oil reserves and 80 percent of the world’s spare production capacity. Over 10,000 miles of pipelines crisscross Saudi Arabia, mostly above ground. Disruption of Saudi production in an effort both to weaken the House of Saud and to deny oil to the West would surely send tremors in global energy markets and, under some scenarios, could cause catastrophic environmental damage.
Considering the cost in blood and treasure involved in the continuous disruption of Iraq’s oil production, and the potential implications for the global economy, the Coalition forces and Iraqi security services must greatly increase their efforts to combat both looters and saboteurs, even if it means a less benevolent occupation. Stretched to the limit, the Coalition clearly cannot deploy troops along every mile of Iraq’s pipeline system; however, in many cases technology can fill the void. Sophisticated surveillance systems to enhance infrastructure security, including unmanned aerial vehicles, electronic motion detectors, video cameras, and other sensors can be deployed in critical locations. New technologies for seismic sensing of underground vibrations can provide early warning when saboteurs approach the protected area. Such systems would be expensive, but by making possible the remote monitoring of much of the pipeline network can eliminate the need for large numbers of troops and instead allow the system to rely on smaller numbers of rapid-response teams.
Given the growing threat to offshore terminals, further steps should be taken to beef up security in and around them. This should include extending security zones surrounding the terminals, deploying naval forces and Marines in the vicinity, and changing their rules of engagement to a more aggressive posture. An Iraqi naval force and coast guard units should also be trained and deployed as soon as possible.
No less effective (and important) would be the recruitment of villagers and tribesmen living near pipelines. These personnel should be hired to keep an eye on the oil passing through their territory — a longstanding practice in Iraq to which the tribes would likely be amenable. There are many incentives the Coalition can offer in exchange for the tribes’ cooperation. Villages who live up to the task of protecting certain pipeline segments or critical installations should be financially rewarded and should be first in line to enjoy civilian projects and other perks.
The Coalition must also make a major effort to deter oil terrorists or looters. Because of the strategic implications of pipeline sabotage, acts of terrorism against Iraq’s network should be treated as acts of war rather than petty crime. Of greatest importance, the Coalition and the new Iraqi interim government should declare a strip of at least a half-mile on either side of the pipeline route to be a closed military zone, fenced off and out of bounds to unauthorized personnel. The rules of engagement should allow Coalition forces and Iraqi security personnel to open fire at anyone who enters this buffer zone. Those who come near the lines should know they put their life at risk. If caught, they should be subjected to severe punishment. To prevent innocent civilians who unintentionally enter the buffer zone from being hurt, this policy requires not only proper fencing along the pipeline routes, but also the placement of ample warning signs.
Finally, a massive public-education campaign is needed to communicate to the Iraqis the importance of infrastructure security to the rebuilding of their country. This will hopefully make the Iraqi people more willing to accept whatever hardships are necessary to protect the oil network, while tarnishing the saboteurs’ image and making them into enemies of the Iraqi people.
One effective way to reduce the numbers of looting incidents is to eliminate the need for refined petroleum products from the black market such as gasoline and kerosene. Increasing supply for these products, even if this requires importing them from neighboring countries, would reduce the incentive for criminals to siphon oil from pipelines in order to sell it on the black market.
Another challenge for Iraq’s oil officials is how to minimize the time it takes to repair damaged pipelines and resume operations following an attack. Once a pipeline is blown, it can take a few days before the fire is extinguished and technicians can safely approach the site. The pipeline must then be emptied and assessed for damage before the replacement of the damaged parts can begin. Even then, the length of repairs depends on the availability of parts. To shorten the time before operations resume, sufficient numbers of spare custom-made parts should be stockpiled and kept available to the rapid-response teams in charge of fixing the damage.
Iraqi oil-ministry personnel (with the endorsement of Coalition authorities) should encourage oil companies from countries that did not take part in the war — or even objected to it, such as Russia, China, and France — to tender contracts for Iraqi oil production and the maintenance of the Iraqi oil industry. Consortia of multiple firms may reduce the profit share of American and British companies, but will also reduce the risk burden by dividing it among many.
Finally, to avoid the danger of oil sabotage spreading beyond Iraq, fellow oil-producing countries such as Saudi Arabia, Kuwait, and the United Arab Emirates should also address the threats to their energy infrastructure. Though the oil monarchies in the Gulf claim to have robust security for their oil facilities, evidence shows that no system is foolproof and that terrorists elsewhere in the Gulf have also begun to target their countries’ oil networks. Saudi Arabia’s oil terminal at Ras Tanura, where one-tenth of the world’s oil is processed, was almost attacked by al-Qa’ida terrorists in 2002. A French oil tanker was attacked off the coast of Yemen in October that year. The attacks that killed six oil workers in May at the Red Sea port of Yanbu, one of the pillars of Saudi Arabia’s oil industry; the attack on an oil company compound in al-Khobar that killed 22 people; and the recent announcement by Pakistan that it had uncovered a plot to hijack a plane and fly it into a structure in the United Arab Emirates are just some of many alarming signs indicating that oil terrorism is an imminent threat to the global economy.
Although to many policymakers the fight over Iraq’s oil seems to be a rather mundane issue, it could be the most critical element determining success or failure in the reconstruction of Iraq. With oil prices hovering around a historic high of $40 per barrel, the need for Iraq’s oil is more pressing than ever, not only for the people of Iraq but for the rest of the world. However, no foreign investment and no expansion of Iraq’s oil sector will be possible unless security improves. As the consumer of a quarter of the world’s oil and the occupier of Iraq, the United States should view the pipeline war illustrated by this week’s attacks as a high priority and should provide additional funding to bring Iraqi oil back on-line on a larger scale and with greater reliability. That said, the United States needs to brace itself (and the Iraqis) for the possibility that despite all efforts Iraqi oil production in the next few years will continue to be unreliable and erratic, and the world’s second-largest oil treasure will stay in the ground for many years to come.