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Report Offered Bleak Outlook About Iraq Oil
Published on Sunday, October 5, 2003 by the New York Times
Report Offered Bleak Outlook About Iraq Oil
by Jeff Gerth
 

WASHINGTON, Oct. 4 The Bush administration's optimistic statements earlier this year that Iraq's oil wealth, not American taxpayers, would cover most of the cost of rebuilding Iraq were at odds with a bleaker assessment of a government task force secretly established last fall to study Iraq's oil industry, according to public records and government officials.


When Vice President Cheney was asked about Iraq's oil during an appearance before newspaper editors, he cited higher numbers rather than the task force's more sober findings.

The task force, which was based at the Pentagon as part of the planning for the war, produced a book-length report that described the Iraqi oil industry as so badly damaged by a decade of trade embargoes that its production capacity had fallen by more than 25 percent, panel members have said.

Despite those findings, Deputy Defense Secretary Paul D. Wolfowitz told Congress during the war that "we are dealing with a country that can really finance its own reconstruction, and relatively soon."

Moreover, Vice President Dick Cheney said in April, on the day Baghdad fell, that Iraq's oil production could hit 3 million barrels a day by the end of the year, even though the task force had determined that Iraq was generating less than 2.4 million barrels a day before the war.

Now, as the Bush administration requests $20.3 billion from Congress for reconstruction next year, the chief reasons cited for the high price tag are sabotage of oil equipment and the poor state of oil infrastructure already documented by the task force.

"The problem is this," L. Paul Bremer III, the top civilian administrator in Iraq, asserted at a Senate hearing two weeks ago: "The oil infrastructure was severely run down over the last 20 years, and partly because of sanctions over the last decade."

Similarly, Bush administration officials announced earlier this year that Iraq's oil revenues would be $20 billion to $30 billion a year, which added to the impression that the aftermath of the war would place a minimal burden on the United States. Mr. Bremer now estimates that Iraq's total oil revenues from the last half of 2003 to 2005 will amount to $35 billion, running at a rate of about $14 billion a year.

The administration now plays down the report's findings.

Senior administration officials said that Mr. Cheney, Mr. Wolfowitz and Donald H. Rumsfeld, the secretary of defense, were aware of the oil group's overall mission, but that they could not say whether they knew of its specific findings.

"I think when it is all said and done," said Lawrence Di Rita, the Pentagon's chief spokesman, "prewar estimates that may be borne out in fact are likelier to be more lucky than smart."

Mr. Di Rita added that earlier estimates and statements by Mr. Wolfowitz and others "oozed with uncertainty."

Iraq's Most Valuable Asset

In the months leading up to the war, administration officials said little in public about oil, partly because they were "encumbered by fear" that their actions would be seen as helping the American petroleum industry, said one administration adviser. But behind the scenes, officials were studying how to handle Iraq's most valuable asset.

It was evident from much of the information they received that Iraq's oil was not a ready resource for reconstruction.

One expert consulted by the government, Amy Myers Jaffe, who heads the energy program at the James A. Baker III Institute for Public Policy at Rice University in Houston, said her group concluded in a report last December that "oil revenues would not be enough and that the expenses of reconstruction would be huge."

In addition, United Nations reports dating back to the late 1990's documented the deterioration that occurred in Iraq's oil system as a result of trade embargoes, which curtailed Iraq's access to technology and equipment.

The administration's examination of the subject began last September when Douglas J. Feith, the under secretary of defense for policy, asked an adviser to oversee plans for Iraq's oil industry in the event of war, according to a Pentagon official involved in the project.

The result was the Energy Infrastructure Planning Group, whose existence has not been previously disclosed. It drew on the expertise of government specialists including the Central Intelligence Agency and retired senior energy executives. It planned how to secure the oil industry during the war and, afterward, restoring it to its prewar capacity.

The task force's job was not to make a direct assessment of how much money the oil industry could contribute to rebuilding Iraq. But determining Iraq's actual oil production capacity was important. First, it could help other administration officials gauge how much revenue might be generated for the reconstruction effort. Second, the administration was concerned that it did not want to be seen as profiting from invading an oil-rich nation and giving oil production levels a boost.

The task force concluded that although Iraq's stated production capacity was just over 3 million barrels per day, the system was only producing 2.1 million to 2.4 million barrels, panel members said.

"I think most people would agree that the 2.4 was a little high and the average for 2002 was 2.1," said a Pentagon official on the task force who spoke on the condition of anonymity. The "condition of the Iraqi oil infrastructure was not particularly good," the official said. "That would be evident to anybody who realized the country had been under U.N. sanctions for many years."

The United Nations produced reports on Iraq regularly from 1998 to 2001. The documents painted a picture of a troubled system and cited the need for improvements, some of which are now being proposed by Mr. Bremer, like the $125 million repair of the Qarmat Ali water plant in the south.

In April, when Vice President Cheney was asked about Iraq's oil during an appearance before newspaper editors, he cited higher numbers rather than the task force's more sober findings.

While noting that Iraq's oil fields were in "bad shape," Mr. Cheney said, "With some investment we ought to be able to get production back up on the order of 2.5, 3 million barrels a day, within, hopefully by the end of the year."

An aide to the vice president said recently that those estimates were "consistent with prewar capacity," but could not say whether Mr. Cheney was aware of the task force's different assessment.

An Optimistic Vision

The administration was also optimistic when it came to public estimates of Iraq's oil revenues.

Shortly after the war began in March, the administration's budget office provided Congress and reporters with a background paper on Iraq. It said that Iraq would "not require sustained aid" because of its abundant resources, including oil and natural gas.

On March 27, Mr. Wolfowitz, the deputy defense secretary, told the House Appropriations Committee that his "rough recollection" was that "The oil revenues of that country could bring between $50 billion and $100 billion over the course of the next two or three years."

Testifying in the Senate that same day, Mr. Rumsfeld emphasized that "when it comes to reconstruction, before we turn to the American taxpayers we will turn first to the resources of the Iraqi government." He noted that the war's costs were not knowable, but he also said an important source of money for reconstruction would flow after the United States worked "with the Iraqi interim authority that will be established to tap Iraq's oil revenues."

At the outset of the war, the administration had asked Congress for $62 billion for Iraq, which included $1.7 billion for reconstruction and $489 million for oil-related repairs.

In a televised interview in late April, Andrew S. Natsios, head of the United States Agency for International Development, the group overseeing Iraq's reconstruction, said that amount was "it for the U.S." He said any other reconstruction money would come from elsewhere, including other countries and future "Iraqi oil revenues," which he predicted at "$20 billion a year."

In an interview this week, Mr. Natsios said he had based those comments on "the discussion in the interagency process at the time," adding, "That's what the Office of Management and Budget was telling us."

Trent Duffy, a budget office spokesman, said this week that "the administration was very clear that the $1.7 billion in initial reconstruction was for the beginning stages and that it was necessary to get a better understanding of the fuller, comprehensive needs going forward."

Last week, appearing again before the Senate committee, Mr. Rumsfeld said, "I don't think I did misjudge" Iraq's oil capacity. According to current projections, he said, the country's oil revenues will grow to $12 billion next year from $2 billion this year; they should reach $19 billion in 2005 and $20 billion in 2006.

"So, their oil revenues will be contributing," Mr. Rumsfeld said.

Yet Mr. Bremer, in his remarks to legislators two weeks ago, said that for the next two years, whatever revenue was reaped from oil production would not exceed the cost of Iraq's day-to-day operating expenses. In 2005, he said, there would be a surplus of only $4 million to $5 million.

As for Mr. Cheney's projection in April that oil would produce as much as $20 billion a year, a Cheney aide said last week that "there was much more extensive damage due to looting and sabotage, so we're not going to get there when the vice president anticipated."

Reassessing Revenues

The public revenue estimates made in the spring were in line with the very top range of projections made by the Pentagon task force.

According to the Pentagon official who served on the task force, its projections for yearly oil revenues were $25 billion to $30 billion "in the very best case, no sabotage and little or no battle damage," and about $16 billion in the "worse than best case."

The worst case was no revenue for a few years, if there was "major sabotage and some significant battle damage."

Last December the Baker Institute estimated that even if there was no war damage, "Iraq's total oil revenues would still only likely average around $10 billion to $12 billion annually."

Yet even after the war, some officials in Washington seemed to cling to an optimistic view of Iraq's oil production.

In July, Mr. Wolfowitz told a group of senators that production had reached "over a million barrels per day." Although Iraq was having electrical power problems, Mr. Wolfowitz said the oil was flowing "because we brought in portable generators to provide electricity" and planned to bring in more.

But Philip Carroll, a retired petroleum executive and the senior American oil adviser in Baghdad, said in an interview that Iraqi oil production "experienced a terrible month in July because electrical problems cut us back to half of what we should have produced." Those problems, including the need to import considerable fuel, he said, led him to arrange new generator leases in late July.

Mr. Carroll said that although gross production for the week of July 25 was a million barrels a day, 350,000 barrels had to be injected back into the ground, because of a lack of storage or distribution infrastructure.

An aide to Mr. Wolfowitz said he believed that the oil information came from a briefing and that Mr. Wolfowitz's testimony was "sober and nuanced."

Once the war ended, and United States officials gained access to Iraq's oil records, they got a more complete picture.

"When we actually got their production figures for 2002, we were able to make a distinction between productive capacity and what they were actually producing," said Gary Loew, an Army Corps of Engineers official, reducing their capacity figures by 20 to 25 percent.

That reduction roughly corresponded to the Pentagon task force's cuts before the war began.

Copyright 2003 The New York Times Company

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