Tuesday, June 22, 2004

Early Signs of Life?
Contrary to perceptions that only Halliburton subsidiaries and other US companies with close ties to the US administration are being considered for major oil projects in Iraq, Arabian Oil Company, Ltd. of Japan is apparently in talks with Iraq's South Oil Company for a large infrastructure project to upgrade the country's southern export facilities. The project would be a key component of plans to increase production from new and existing oilfields.

Clearly such an undertaking is contingent on resolving the horrible security situation in the country, both in terms of ensuring the safety of personnel and ending the perpetual sabotage targeted against the oil infrastructure. These are large caveats, in light of the daily news out of Iraq, but the prize is enormous, and Japan has long taken a strategic--if not always entirely economical--interest in Middle East oil production.

The transition government, which will attain sovereignty later this month, estimates that the deliberate destruction of oil facilities has cost Iraq $1 billion, as well as creating significant environmental damage. Those engaged in these acts know precisely what they are doing, and it is telling that their attacks have focused on causing temporary disruption, rather than permanent destruction of Iraq's oil assets.

The upside of a stable Iraq includes the chance of founding a second "central bank of oil", as Saudi Arabia has been called recently. As reliance on Middle Eastern oil grows in the future, it will be important from the perspective of consuming countries to spread out Saudi Arabia's current role as sole supplier of last resort. A healthy Iraq--however hard that might be to imagine today--would reassure markets for more than just the obvious security reasons.

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