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Finance 101: revenues <> profit.
As for why it's been taking so long to generate revenues:
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Iraqi oil revenues not materializing
By David Isenberg
The promise of oil revenues which US officials had counted on as an essential component of their plan to rebuild Iraq has not materialized, and it is beginning to look like it won't for at least two or three more years at best, even if continuing sabotage can be foiled.
While in mid-April various experts were predicting that oil exports could resume in a matter of weeks, that has not happened as quickly as it should have and oil facilities continue to be sabotaged today.
Oil industry experts have long known that a large share of the oil income would have to be spent to repair and upgrade those facilities. That means that the money for reconstruction efforts has to come from the international community and not from the Iraqi oil sector.
The reality is there won't be any surplus Iraqi oil income for at least three to five years under a best-case scenario. Considering that American administrator L Paul Bremer said, when last in Washington, that "oil revenues are 100 percent of our budget", that means that the Iraqi council next year that is going to be responsible for the 2004 budget is going to be allocating a deficit, and a huge one at that.
There was initial optimism because the worst-case scenario of damage to Iraqi oilfields from fighting during the war did not occur - a la the torching of Kuwaiti oil fields in 1991. Officially, by the end of the war only nine oil well fires were set by the retreating Iraqi forces, of out 1,800 in more than 500 oil fields in the southern region. The northern oil fields in Kirkuk and Mosul were not set afire.
But the cumulative effects of more than 20 years of underinvestment, mismanagement, neglect and lack of modernization due to sanctions have left Iraq's oil sector in a sorry state. Since before the war many US officials said reconstruction would be paid for by oil revenues, this is a huge problem. Iraq only earned $12.5 billion in oil exports in 2002, and its current export capacity may be down from over 2 million barrels a day in 2000 to around 800,000 - if there is no further sabotage.
Bremer said in a press interview on July 31 that it could take $50 billion to $100 billion to reconstruct Iraq, and a $1.6 billion plan to rehabilitate Iraq's oil industry was agreed to in late June.
According to a field review undertaken by members of the Center for Strategic and International Studies, oil revenue projections for the new few years are low - the Coalition Provisional Authority (CPA) expects production to reach 1.5 million barrels per day (bpd) by the end of 3003 and 2.5 million bpd by the end of 2004. It is currently at around 600,000 bpd. The CPA expects to earn $5 billion in oil revenue by the end of 2003, but this projection may decrease if security problems persist and oil infrastructure continues to be targeted. Power shortages are also hampering efforts to restart oil production.
According to an analysis by Anthony Cordesman of the Center for Strategic and International Studies, rather than conduct an open and transparent effort to rehabilitate Iraq's petroleum industry, with Iraq technocratic and political advice, the US acts on its own priorities and perceptions. Ordinary Iraqis come to feel their oil is being stolen and oil revenues are not used as the "glue" to unite Iraq's divided factions in some form of federalism.
Ideas like securitizing Iraq's oil revenues to make direct payments to Iraqi citizens deprive the new government the US is trying to create of any real financial power and leverage and Iraqis with no experience in dealing with such funds become the natural prey of Iraqis who know how to manipulate money and such payments, according to Cordesman's analysis.
Speaking at a July 24 symposium at the Carnegie Endowment for International Peace Edward C Chow, a visiting scholar in the Russian and Eurasian Program said, "So I have revised my own estimation of when production might resume back to the 2 million barrels per day or more rate pre-war, and I think, more importantly, the market has reassessed that as well. Right after combat was over, prices started moving lower in anticipation of higher Iraqi production. Since then, oil prices have resumed back to the $30 level."
In early May the US set up an advisory board headed by former Royal Dutch/Shell executive Phillip Carroll to oversee the rebuilding of Iraq's oil sector. An Iraqi oil industry professional, Thamer Ghadhban, was named to serve as head of the interim management team that will run Iraq's oil ministry and report to the advisory board. The fist exports began in late June 2003. In late July Iraq contracted to sell about 750,000 bpd. By comparison, its pre-war export rate was about 2.2 million bpd.
According to Carroll, a big increase in production is expected from Iraq's key southern oilfields around Basra, where output should more than double, to about 1 million barrels a day once repairs to a vital gas processing plant are concluded.
Last week, Iraqi and American officials said that they had agreed on a $1.6 billion plan to rehabilitate Iraq's oil industry over eight months. The plan focuses on pipelines, pumping stations and other plants that also suffered from a lack of spare parts and were disabled by widespread looting and sabotage after the war. Persistent looting and sabotage at oil installations have dogged production in both northern and southern Iraq. Security was significantly stepped up following recent attacks on pipelines feeding refineries and power stations. Last week oil prices rose to a level not seen since the end of the Iraq war on renewed fears that looting and sabotage were preventing Iraq from increasing its exports.
The pipeline through Kirkuk in northern Iraq to the Turkish port of Ceyhan, one of two main export lines for Iraqi oil, has been the target of sabotage since the end of the war in March, according to the Financial Times of London. Similarly, Iraq's North Oil Company, which produces 550,000 barrels of oil a day - currently two-thirds of Iraq's total - was unable to export because saboteurs blew up the pipeline for a second time last month.
http://www.atimes.com/atimes/Middle_East/EH12Ak02.html
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As for control and oversight of revenues:
| quote: | Baghdad bid to control its oil wealth
From The Times, AFP
May 20, 2004
AN Iraqi delegation has travelled to the United Nations headquarters to lobby for the proposed caretaker government to be given full control of the country's vast oil wealth.
Amid intensifying negotiations on a new UN resolution on the transfer of power, the Iraqi team will demand a cut in the current 5 per cent of its oil revenues set aside to pay reparations from the 1991 Gulf War.
"Iraq must have a say in the next UN resolution," Hamid Bayati, the Deputy Foreign Minister, said in Baghdad. "We will negotiate on the basis that Iraq must be fully in charge of its resource wealth and the 5 per cent of oil revenues we pay must be reduced further."
Britain and the US told other UN Security Council members at a private meeting last week that a new UN resolution on Iraq should give the new Iraqi government spending authority over the country's oil revenues.
But the coalition partners want to extend the current system of international "oversight".
That position appears to enjoy widespread support on the Security Council and elsewhere -- at least until a democratic government is elected early next year.
The Development Fund for Iraq now contains more than $US10 billion ($14.6billion) and there are fears that it could be misused if not properly watched.
"Given that this is not an elected government, and that there are so many oil revenues they could potentially control, you would want to make sure that there is an oversight mechanism until a duly elected government comes into force," said Svetlana Tsalik, director of the Open Society's Revenue Watch Project, which monitors Iraq's oil income.
"After that, the nation is sovereign and they should come up with their own system for managing revenues."
Under the current system, Iraq's oil income goes into a dedicated account, called the Development Fund for Iraq, at the Federal Reserve Bank in New York.
Spending decisions are taken by the coalition but are audited by an International Monitoring and Advisory Board, made up of the UN, the World Bank, the International Monetary Fund and the Arab Fund for Social and Economic Development.
In a holdover from the pre-war UN oil-for-food system, a portion of Iraq's oil income is diverted to the UN compensation commission in Geneva to settle billions of dollars of claims resulting from the first Gulf War in 1990-91.
That figure was reduced last year from 25 per cent of Iraq's oil revenue to 5 per cent, with the largest beneficiaries expected to be Kuwait and Saudi Arabia.
Neither Britain nor the United States is proposing any further change.
Iraq's interim leaders, however, contend that Iraq should not be liable to pay the estimated $US300 billion of reparations for a war that Saddam Hussein started.
http://www.theaustralian.news.com.a...55E2703,00.html |
Does that answer this thread?
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