A Shaky Advance in Iraq Led by Oil Money

By HASSAN HAFIDH Seven years after the U.S.-led invasion, Iraq's petroleum industry shows signs of living up to the potential that American planners hoped for at the start of the military operation, a potential boost to the war-ravaged country's economic recovery. In a December 2009 photo, a worker at the al-Fakkah oil field flashes the "victory" sign next to the Iraqi flag in Maysan province, south of Baghdad, Iraq. After fits and starts, Iraq's oil production has rebounded to pre-war levels. The government thinks the field-development deals it has handed out to international companies are on the way to boosting output significantly. With Iraq depending on oil exports for some 90% of its government revenue, that is expected to provide a broader boost to an economy that is already benefiting from renewed growth and tame inflation. No one is predicting an economic miracle in Iraq, which is still smarting from decades of sanctions, underinvestment and a creaky, centrally planned economy. Unemployment remains high, posing a continued risk that jobless youth will be lured to the insurgency. Power outages are common, leaving residents sweltering in darkness and complaining at times that things were better before the invasion. The Bush administration denied going to war over oil. But senior officials in Washington suggested early in the military operation that Iraq's oil wealth offered a quick way to rebuild. Years of trying to lure outside capital and know-how, however, foundered. During the invasion, oil production went to zero. Afterwards, the country's oil infrastructure and power grid—never reliable in the first place—were heavily looted. Then, political opposition to foreign involvement in the country's oil fields flared. Today, Iraq pumps some 2.5 million barrels a day and sells around 2 million barrels a day overseas, according to Iraqi estimates. That's more or less the same as before the war. But last year, the government of Prime Minister Nouri al-Maliki forced through oil-field auctions, successfully luring some of the world's largest oil companies, which agreed to tough terms in order to access Iraq's long-closed oil fields. Exxon Mobil Corp., Royal Dutch Shell Plc, Total SA, Eni SpA and OAO Lukoil have all jumped in. So has China, which is now the biggest foreign investor in the Iraqi oil patch. View Full Image British oil major BP Plc and partner China National Petroleum Corp. won the right to work southern Iraq's Rumaila field, the country's largest producer. BP said it would invest some $15 billion to boost production from the current 1.06 million barrels per day to 2.85 million barrels per day by 2017. Iraqi oil officials now say they hope that they will be able to add by as early as the end of next year some 250,000 barrels a day in capacity. If all the companies live up to their production promises, the projects will add nearly 10 million barrels a day of capacity by 2017. "We have already started serious projects to boost Iraq's oil production," said Ahmad al-Shammaa, the Iraqi deputy oil minister. A Look Back View Slideshow Carolyn Cole/Los Angeles Times/Associated Press Lt. Col. Richard D. Heyward, left, of Illinois, and Sgt. Nick Wysong, of Washington, right, kept watch as the 2nd Squadron, 1st Cavalry Regiment of the 4th Stryker Brigade, 2nd Infantry Division crossed the southern desert of Iraq on Aug. 17, 2010. Theirs was officially designated the last combat brigade to leave Iraq. The War's Toll A look at the conflict and its milestones. But technical hurdles and political uncertainty lie ahead. Politicians are still wrangling over a new government six months after March's parliamentary polls. Some of the election's biggest winners have vowed to review the oil-field development awards. Other economic gauges are less optimistic. Today, Iraqi electricity production is some 7,000 megawatts, according to Iraq's electricity ministry, up from around 4,500 megawatts before the invasion. But higher demand in the seven years since has stretched the grid much further than before the war, and resulted in endemic power outages across Baghdad and beyond. The higher demand speaks to overall economic growth over the last three years—averaging 4.5%, compared with consistent, negative growth prior to the war, according to Mudher Kasim, a senior adviser to the Iraqi central bank. The International Monetary Fund estimates Iraq's gross domestic product will grow at above 7% this year, compared to a contraction of almost three quarters of a percent in 2005, the first year the IMF started posting reliable data. Inflation slipped to 2.7% in June, the lowest level in three decades, according to Mr. Kassim at the central bank. The IMF pegs inflation at just over 5% this year, down from about 37% in 2005. But unemployment remains stubborn, with official figures showing 20% of eligible workers without jobs. While that figure is down from previous years—and what Mr. Kasim said was a 50% unemployment before the U.S. invasion—U.S. commanders and diplomats are pushing job creation as a way of keeping young Iraqi men out of the insurgency. "We still need to regenerate the economy, create meaningful opportunities for employment, in order to help the security environment," says Mr. Kasim.