CAPITAL: Baghdad

MONETARY UNIT: Dinar

REFINING CAPACITY: 347,500 b/d

OIL PRODUCTION: 1.15 milion b/d

OIL RESERVES: 112.5 billion bbl

GAS RESERVES: 109.8 tcf

Military targets in Iraq came under attack in December 1998 after complaints by United Nations weapons inspectors that Iraqi officials were not cooperating with them. Forces from the U.S. and U.K. conducted the assault.

Iraq had been subject to a U.N. economic embargo since 1990, when its military troops invaded and occupied Kuwait until their explusion by an international alliance in the Persian Gulf War early in 1991.

Iraq in 1998 produced about 2 million b/d of crude under a U.N. program requiring that revenues be used for humanitarian purposes. Early in 1998 the U.N. more than doubled the program`s revenue ceiling to $5.26 billion every 180 days. With oil prices low, the country couldn`t generate nearly that much revenue with production at capacity levels.

How the renewed hostilities might affect the program and Iraqi production was not clear at year-end.

Before the U.N. oil-for-food program took effect, Jordan was the main customer for Iraqi crude oil and products. In January 1998 Iraq agreed to increase its exports of crude and products to Jordan to 4.8 million metric tons in 1998, up from 4.5 million metric tons in 1997.

With most countries not trading with Iraq because of the U.N. sanctions, the deal with Jordan would raise about $300 million, which Iraq planned to use to buy Jordanian goods and services.

Iraq`s oil industry was plagued by a lack of spare sparts because of trade sanctions put in place by the U.N. Iraqi oil production amounted to about 2 million b/d for much of 1998, with proceeds from sales required to be spent mainly on food and medical supplies under a U.N. edict.

Iraqi Oil Minister Amer Mohammed Rasheed said in March 1998 that the country`s oil production capacity was 2.3 million b/d but that it could be boosted to 3-3.5 million b/d within a year if it received sufficient spare parts.

At the same time the Energy Information Administration (EIA) of the U.S. Department of Energy produced a report which suggested that Iraq`s true oil resource potential might have been understated.

The EIA said that most of the exploration and production activity in Iraq had concentrated on Cretaceous formations and that formations of Jurassic and Triassic age, particularly in the unexplored Western Desert region, could yield additional oil and gas.

The EIA added that advances in horizontal and multilateral drilling and enhanced oil recovery techniques would also increase likely recovery rates and raise total reserves. The report pegged Iraq`s reserves at more than 112 billion bbl of oil, second largest in the world after Saudi Arabia.

Plans and activity

In September Ahmed Al Basheer, energy minister of Jordan, visited Baghdad to discuss with Iraqi officials plans to lay a 150,000 b/d capacity oil pipeline to deliver Iraqi oil to the Zarka refinery near Ammam.

The 750 km pipeline was expected to cost $250 million and was intended to run from Hadeetha oil field to Zarka, replacing 2,000 road tankers carrying about 4.5 million metric tons/year of crude oil to Jordan.

The talks covered prospects for appointing an international consultant to study the feasibility of the project, which was expected to be developed in two phases. The first phase would be from the Iraqi border to Jordan`s refinery and would include storage facilities and a pumping station. The second phase would incorporate the pipeline from the oil field to the border.

In October Russia`s Lukoil disclosed it had made a little progress towards development of Iraq`s West Qurna oil field as it awaited lifting of U.N. sanctions against Iraq.

Middle East Economic Survey reported that Lukoil had prepared a plan to install equipment with capacity to produce 100,000 b/d of oil from the field`s Mishrif formation by March 2000.

West Qurna was one of a handful of Iraqi field development projects promised to foreign firms for when U.N. sanctions against Iraq were lifted. Elf Aquitaine SA was promised development of Majnoun, with estimated reserves of 7-10 billion bbl of oil; Total SA was promised development of Nahr Umr, with estimated reserves of 6 billion bbl of oil; India`s Oil & Natural Gas Commission and Reliance Industries Ltd. were pledged development of Al Halfaya field, with estimated reserves of 4 billion bbl of oil; and China National Petroleum Corp. secured a deal for development of Ahdab field, with estimated reserves of 1.4 billion bbl of oil.

MEES added that Lukoil had selected its Zmnevolzhskneftj unit to carry out preliminary design work and chosen four firms to bid for engineering and development.

The potential bidders were said to be SNC Lavalin International Inc., Calgary; Technipetrol, Rome; Techno Export, the Czech Republic; and Lukoil-Nizhnevolzhskneft.

Lukoil was at the time interpreting geophysical and geological data from West Qurna provided by the Iraqi Ministry of Oil. The operator had allocated $200 million for preliminary work and purchase of materials until June 2000.

In March 1997 Lukoil signed an agreement to develop 7-8 billion bbl of oil over 23 years from West Qurna`s Mishrif and Yamamah formations at an estimated cost of $3.5 billion.

Besides having to wait for lifting of U.N. sanctions, Lukoil had been hampered by difficulty in finding Iraqi firms capable of carrying out 3D seismic acquisition or with workable rigs for drilling work.

The rigs owned by Iraqi Drilling Co. were said to be old, with no spare parts or stocks. By late 1998 Lukoil was thought to have spent $20 million on initial field work and the purchase of supplies outside Iraq.

Tensions build

The year-end military strikes followed a long build-up of tensions, with the U.N. inspectors always in the middle.

The doubling of the oil-for-food program`s revenue ceiling came just before a visit to Baghdad in February by U.N. Sec. Gen. Kofi Annan to defuse tensions that nearly ignited military conflict.

In October, Annan met within with Tariq Aziz, Iraq`s deputy prime minister, in a bid to end yet another deadlock between Baghdad and the U.N. over weapons inspections.

Iraq appeared to be aiming to divide the U.N. Security Council in a bid to get sanctions lifted. The U.S. and U.K. were against lifting sanctions until Baghdad proved it had no major weapons, while China, France, and Russia-each with oil companies which had been promised redevelopment projects-wanted to end sanctions for humanitarian reasons.

While these repeated stand-offs between Baghdad and Washington had buoyed the oil price for long periods during 1996 and 1997, by November 1998 oil market fundamentals had become so weak that even another outburst of shenanigans by Saddam Hussein did not revive prices.

On Oct. 31 the Baghdad government once again banned U.N. weapons inspectors from entering its sites, thus halting a cataloging of Saddam`s arsenal.

In a by-then familiar routine, Baghdad prevented inspectors doing work, which the U.N. required as a precursor for lifting sanctions against Iraq, and said inspections could not resume until sanctions were lifted.

As U.S. and U.K. diplomats began to hint about military strikes, Russia voiced opposition to the use of force against Baghdad.

Once again Saddam gave in to U.N. demands just before the promised air strikes were about to be delivered.

Geoff Pyne, oil market analyst at SBC Warburg Dillon Read, London, noted that Saddam by that time had backed down in the face of a military threat three times in 1998 but in each case had been left with a residual political gain.

"Each time the U.N. fails to take action only strengthens his position," said Pyne, "whatever is promised at the time. The U.N. would do well to recall that in April, Iraq promised that the U.N. should have unlimited access to all sites, that there should be an unrestricted time scale for the inspections, and that there should be no restrictions on the U.N. choice of personnel.

"Yet by August, the U.N. was only permitted to monitor sites already searched, and Iraq was again threatening to throw the U.N. out unless sanctions were lifted.

"Finally, at the end of October Iraq halted monitoring at all sites, only conceding that automated monitoring equipment would be allowed to be serviced."

The critical U.N. Security Council meeting in early November ended with a bland statement by the U.S. ambassador to the U.N. that the council called on Iraq to cooperate with inspectors, noted Pyne, and that the council accepted Iraq`s decision to allow arms experts back.

"Meanwhile," said Pyne, "U.N. Sec. Gen. Kofi Annan has accepted congratulations by some security council members for again helping to defuse the crisis. That may be, but only at further cost to the U.N.`s credibility."

Pyne noted that oil prices quickly retreated after jumping in response to the late-October tensions.

"Yet it would be surprising if this were the end of this confrontation as Iraq`s record shows that it is certain to cheat again," he said.

The following month, events proved him right.

In mid-December 1998 the U.S. and U.K. forces in the Arabian Gulf area launched "a substantial military attack" on military installations in Iraq late on Dec. 16, hours after United Nations weapons inspectors were recalled from Baghdad.

In a pattern repeated several times over the previous 2 years, President Saddam Hussein was accused by UN weapons inspectors of preventing their work seeking out and destroying Iraq`s weapons of mass destruction.

On the morning of Dec. 17 the people of Baghdad began to assess the damage of a 6-hour attack which began at 22.00 hours the night before and in which hundreds of missiles rained on the Baghdad area.

Crude oil markets also reacted to the news in a recognizable pattern, with dated Brent prices leaping by more than $1/bbl. At close of trading on Dec. 16, as expectation of air strikes against Iraq were growing, dated Brent stood at $11.04/bbl, which was $1.15/bbl up on the previous day`s close, while February delivery Brent stood at $11.34/bbl, up 78¢/bbl.

As the news sank in the next day crude prices sank also, with February delivery Brent trading at $11.07/bbl by mid-morning. The fervor among traders was tempered by a feeling that a meeting of the oil ministers of Saudi Arabia, Mexico, and Venezuela, due to take place in Madrid on Dec. 17, was unlikely to lead to further production cuts, given that the next scheduled meeting of OPEC oil ministers was not until March 1999.

The U.S. and U.K. governments called off their air strikes on Iraq after 4 days, but even before the campaign ended oil prices were once again weak. On Dec. 21 the U.S. and U.K. claimed their bombardment of Iraq, intended to weaken President Saddam Hussein`s military threat, had been successful. Saddam claimed Iraq`s defense had been successful too.

Nizar Hamdoon, Iraq`s ambassador to the United Nations, said Baghdad would ask the UN Security Council to lift immediately the economic sanctions on Iraq.

Jacques Chirac, president of France, called for a review of the 8-year-old international embargo on Iraq, saying that conditions should be eased so long as checks on Iraqi weapons building remained.

France plus two other members of the UN Security Council, China and Russia, condemned the action of fellow members U.S. and U.K. against Iraq, increasing doubts about the UN`s effectiveness as a peace-keeper.

Prakash Shah, the UN special envoy in Baghdad, said that UN humanitarian workers would be flown back to Baghdad by Dec. 23, to continue aid work interrupted by the air strikes.

Shah said the UN/Iraq oil-for-aid program would also be resumed "in full measure", and that the UN Security Council would meet in New York on Dec. 21 to discuss the Iraq crisis.

Meanwhile, reports from the Arabian Gulf revealed that oil infrastructure had been among the targets of the later air attacks, and not just military installations.

On Dec. 18 Reuters reported that U.S. Defense Secretary William Cohen said a "limited" attack was carried out on a crude oil refinery in southern Iraq to stop "illegal shipment" of oil out of Iraq.

Cohen said Iraq used the Basra refinery to process and export oil in violation of the UN`s food-for-aid program that requires the country to sell up to $5.2 billion of oil every 6 months to buy food and medicine.

The defense secretary did not say whether the Basra refinery was destroyed or how much damage was done to it. Nor did he confirm oil market rumors that an oil tanker had been attacked in the Arabian Gulf.

Reuters noted that Iraq has been accused by the U.S. of smuggling up to 100,000 b/d of crude oil and petroleum products to Turkey by truck; to India and Pakistan along the Gulf Coast; to Iran across the Fao Peninsula in barges, and to Dubai in small tankers.

The U.S. Department of Energy reportedly estimated that the oil and products shipments may have provided Iraq with up to $700 million a year in revenue in addition to legitimate supplies to Jordan.

The Basra refinery was said to be Iraq`s third-largest, handling up to 126,000 b/d of crude oil a day. The energy department estimated Iraq`s total refining capacity at 350,000 b/d, while Iraq claimed it had capacity of 700,000 b/d.

A report in early January 1999 by UN inspectors showed that Iraqi oil production capacity was continuing to decline at a rate of 4-8%/year, with a significant number of wells shut in during 1998 because of a lack of water removal facilities.

In a letter to the president of the U.N. Security Council, UN Sec. Gen Kofi Annan said the experts estimated that about 20% of the wells shut in because of water production were irreparably damaged.

The remainder of the shut-in wells could be returned to production with imported spare parts, to recover production capacity of about 100,000 b/d. Supply of sufficient spare parts would enable Iraq to boost oil production capacity over 6 months.

On Dec. 28, said Annan, Iraqi oil authorities applied for spare parts and equipment worth a total $240 million, of which applications amounting to $130 million were approved.

"It must be noted," wrote Annan, "that the entire program for the oil industry of Iraq is out of step with modern engineering techniques and generally accepted principles of `value for money` investment.

"The list of spare parts reflects a proposed expenditure on valid items, but related to a reliance on outdated oil field development concepts. It is extremely unlikely that the Iraqi oil industry will ever meet the planned production targets associated with the oil-for-food program within the current constraints."

Iraqi oil production was about 2.5 million b/d by the end of 1998, of which 550,000 b/d was consumed locally, 70,000 b/d was exported by tanker truck to Jordan, and 1.88 million b/d was available for export.

Subsequent reports revealed that Iraq`s Basra refinery went largely undamaged in raids by U.S. and U.K. bombers. The main plant at the refinery was untouched, though the distribution manifold outside the refinery was hit. The refinery had been processing 70,000 b/d of crude oil prior to the air strike, roughly half its full capacity.

Subsequently U.S. and U.K. airplanes several times fired missiles at Iraqi radar positions, after the ground installations locked onto the plans in the "no fly zone" over Iraq.

U.S. Defense Secretary William Cohen said Saddam was becoming "frantic and agitated", while the French government continued - unsuccessfully - to try to persuade the U.S. and U.K. to adopt a new diplomatic approach to the Iraqi issue.