Iraqi oil output rises as security improves

Demetri Sevastopulo in Washington
Financial Times



Iraqi oil production has risen to its highest level since the 2003 invasion on the back of improved security across the country, according to a new US government report.

Iraq pumped an average of 2.43m bpd between April and June, according to the special inspector general for Iraq reconstruction. The report by the Special Inspector General for Iraq Reconstruction (Sigir) said the combination of record production and high global oil prices would likely provide a windfall to the Iraqi government, which previously forecast that 2008 oil revenues would be $35bn (€22bn, £18bn).

“With oil now hovering around $125 per barrel – about five times what it was five years ago – and Iraq’s oil production at record levels, Sigir estimates that oil revenues for 2008 could exceed $70bn,” said Stuart Bowen, the inspector-general in his quarterly report to Congress.

Sigir attributed the record production to the decline in violence across Iraq, in addition to a special exclusion zone created to protect a pipeline that runs from the oil-rich city of Kirkuk to the oil-refining city of Baiji.

It also acknowledged that the success of the $34m project was underscored by there having been no attacks on northern pipelines this year. Iraq is now extending the pipeline exclusion zone from Baiji to Baghdad.

Senior Bush administration officials argued before the war that Iraqi oil revenues would pay for reconstruction. But the US was left footing huge reconstruction bills as the dire security situation prevented Iraq from hitting pre-war levels of oil output.

The increasing oil revenues in Iraq have created budget surpluses that, earlier this year, prompted the US Congress to pass legislation ensuring that US reconstruction aid would be conditioned on Iraq stepping up its own spending.

The Sigir report comes as violence in Iraq has dropped dramatically from the high levels in late 2006 and early 2007, which was the most bloody period in Iraq since the 2003 invasion.

July is on course to see the lowest number of US military deaths since the war began. Iraqi fatalities – civilian and security forces – have also declined dramatically, despite the fact that the Iraqi army has undertaken a number of high-risk military operations across the country.

General David Petraeus, the top US commander in Iraq, is preparing to provide President George W. Bush with recommendations for troop levels in Iraq before early September.

During the past few months, the US has withdrawn the five combat brigades that made up the “surge” that was sent to Iraq last year. The Pentagon hopes the declining violence will allow the withdrawal of a further one or two brigades – up to about 7,000 troops – later this year.

In his report, Mr Bowen also warned that a security agreement being negotiated between Iraq and the US could have dramatic implications for reconstruction if it strips foreign contractors of immunity from Iraqi law. The issue took on more urgency for the Iraqi government after employees from Blackwater, a US private security company, last year were accused of shooting innocent Iraqi civilians in Baghdad.

“The removal of immunity could lead to a contractor exodus, which would impose significant limitations on US relief and reconstruction operations,” Mr Bowen said.

Copyright The Financial Times Limited 2008