Hope arises for Iraqi oil production

BASRA, Iraq -- In the oil-rich deserts of southern Iraq, a rusted pipeline snakes through piles of burning garbage, lakes of raw sewage and slums controlled by hostile militias.

Mundal Mayali, a local councilman, points to the pipeline and sighs. If oil infrastructure like this were modernized and the country's vast untapped reserves of crude explored, then this port city of Basra — and indeed much of Iraq — would flourish, he says.

"We are desperate for oil investment," Mayali says.

After years of violence and political dysfunction that have kept Iraq's oil production stuck below prewar levels, there finally are tentative signs that Mayali could get his wish — and Iraq could begin to realize its potential as an oil giant.

Concerns over security, sabotage and smuggling are fading as the government in Baghdad takes control of oil-rich areas that were run by rogue Shiite militias just a few months ago. This month, the Iraqi government expects 10 major foreign oil companies — including ExxonMobil, Shell and Chevron — to sign modest contracts that could be a first step toward bigger investments.

"The government is finally sending the signal that Iraq is open for business," Mayali says. "We will rise again within a very short period when the international companies start investing."

Any major jump in Iraqi oil production is probably years away, analysts say. Former deputy Defense secretary Paul Wolfowitz's now-infamous prediction to Congress in 2003 that Iraq could "finance its own reconstruction, and relatively soon" is a reminder of the false promise the oil sector has shown in the past.

Still, the stakes are enormous for both Iraq and the global economy. With the world's fourth-biggest crude reserves, Iraq could provide the world's best hope for a medium-term solution to record-high prices of around $130 a barrel, which have pushed gas prices above $4 a gallon for American drivers.

If foreign oil companies provide money and technical know-how in deals more ambitious than those now being negotiated, Iraq realistically could pump an extra 3.5 million barrels per day into the global oil market within two to three years, says Wayne Kelley, director of RSK, an oil consulting company that has studied Iraq's oil sector for clients including the U.S. and Iraqi governments.

Such an increase would more than double Iraq's current oil output — and add nearly 4% to the global supply. "That becomes a very significant amount that would help alleviate gas and energy prices," Kelley says. "Iraq truly has that capacity."

A resurgent oil sector also could hasten the withdrawal of U.S. troops by providing Iraqis with the jobs and revenue necessary to sustain recent security gains, according to the Iraq Study Group, a bipartisan panel that assessed the Iraq situation for Congress in 2006.