Failure to rebuild Iraqi oil Industry carries price | VailDaily.com

Failure to rebuild Iraqi oil Industry carries price

T. Christian Miller

QARMAT ALI, Iraq – The failure to rebuild key components of Iraq’s petroleum industry has impeded oil production and may have permanently damaged the largest of the country’s vast oil fields, American and Iraqi experts say. The deficiencies have deprived Iraq of possibly hundreds of millions of dollars needed for national rebuilding efforts, and kept millions of barrels of oil off the world market at a time of growing demand. Engineering mistakes, poor leadership and shifting priorities have delayed or led to the cancellation of several projects critical to restoring Iraq’s oil industry, according to interviews of more than two dozen current and former U.S. and Iraqi officials and industry experts. The troubles have been compounded in some cases by security issues, poor maintenance and disputes between the United States and its main contractor, Houston-based KBR, a subsidiary of Halliburton Corp., according to the interviews and documents.Despite U.S. spending of more than $1.3 billion, oil production remains below prewar levels of 2.5 million barrels per day and well below a December 2004 goal of up to 3 million barrels per day. Interviews and documents from whistle-blowers show problems with at least three projects deemed critical to Iraq’s oil production: — Qarmat Ali water treatment plant. This massive pumping complex is needed to inject water into Iraq’s southern oil fields to aid in oil extraction. Under a no-bid contract, KBR was to repair the complex at a cost of up to $225 million, but not the leaky pipelines carrying water to the fields. As a result, the water cannot be reliably delivered, raising concerns that some of Iraq’s oil may not ever be recovered. — Al Fathah pipelines. As part of the same no-bid contract, the United States gave KBR a job worth up to $70 million to rebuild a pipeline network under the Tigris River in northern Iraq despite concerns that the project was unsound. In the end, less than half the pipelines were completed, and the project was given to another contractor. The delay has aggravated oil transport problems, forcing Iraq to inject millions of barrels of oil back into the ground, a harmful practice for the oil fields and the environment. A government audit based on a complaint by a whistle-blower is ongoing. — Southern oil well repairs. A $37 million project to boost production at dozens of Iraqi oil wells was canceled after KBR refused to proceed without a U.S. guarantee to protect it from possible lawsuits. Perhaps most striking, some key problems have come despite the relative calm in southern Iraq. The reconstruction of the oil infrastructure in the north has been hampered by security issues, the southern oil fields – which account for most oil production – have been attacked only a few times since the invasion. U.S. officials and KBR moved swiftly at first, resuming oil production only a month after the war began and slowly increasing output. But after matching the postwar peak in September 2004, production has declined to about 2.2 million barrels per day in August. If the United States had successfully completed the planned repairs, Iraq could be producing up to 500,000 additional barrels of oil a day, according to some estimates. The difference would add up to more than $8 billion a year in revenue – money that the Iraqi government could use to for new schools and hospitals, supplant U.S. reconstruction spending and improve the Iraqi security forces that Washington hopes will replace American troops. U.S. reconstruction officials acknowledged delays, but said the effort had turned a corner and that despite the contract disputes, they were satisfied by the KBR’s performance. The company avoided a possible cancellation of its contract earlier this year after fixing problems associated with cost estimates. The United States also has brought in an Australian-American company to finish several projects started by KBR that had been delayed. “Overall, reconstruction is moving forward,” said Bob Todor, who is the senior U.S. adviser to Iraq’s Oil Ministry. “Like everything else, it took longer than everyone expected.” KBR officials, meanwhile, said their work reflected the orders they were given by U.S. reconstruction officials. The rebuilding, they said, takes place under difficult conditions, especially in the north. “KBR can’t emphasize enough that it performs all work at the direction of the U.S. government,” spokeswoman Melissa Norcross said in an e-mailed response to questions. “We only do what we are tasked to do.”Current and former Iraqi oil officials expressed disappointment, frustration and anger at the U.S. performance. They said that rather than tapping Iraqi state oil company officials, the U.S. program was overseen by American officials with little experience in the oil industry. In an interview, one senior U.S. official managing part of the restoration effort jokingly described his knowledge level as “Oil for Dummies.”Iraqi officials also accused KBR of relying too heavily on foreign contractors, conducting lengthy, unnecessary studies, and failing to deliver on promised equipment. They acknowledged that Iraq needs to spend more on its oil industry, but wondered why the U.S. investment has not had more of an effect. “They need to speed it up a bit,” said Ibrahim Bahr Uloum, the Iraqi oil minister, in an interview. “There’s great work to be done in all these fields.”Other Iraqis said that the United States and KBR simply failed to deliver. “I think we had the worst quality of U.S. service, staff and companies,” said Jaafar Altaie, who was a senior planner at the Oil Ministry and now works with Amman-based Tabouk Energy Group, a consulting firm. “We had maximum rhetoric and minimum results on the ground.”Only weeks after the U.S.-led invasion in March 2003, the United States. hired KBR under a no-bid contract to repair the Qarmat Ali water treatment plant, a complex of twisting pipes and rusting metal that sits in the middle of drab, flat desert a few miles north of Basra in southern Iraq. Both the United States and Iraq considered the water treatment plant a high priority. Oil rises from the ground in southern Iraq because of natural pressure in the sands. As the oil surges out, the pressure declines, making extraction more difficult. To counter the problem, the Iraqis inject water back into the earth to maintain the pressure in the oil field. That water, however, must be first cleaned at Qarmat Ali so that particles or bacteria don’t plug up the holes in the soil that allow the oil to rise. By August 2004, KBR had completed the repairs at the plant, which had deteriorated badly during 12 years of sanctions and in looting after the U.S.-led invasion. KBR rebuilt motors, refurbished pumps, installed electrical generators and chlorination and anti-corrosion systems. But when KBR opened the taps to send the treated water to Iraq’s legendary Rumaila oil field, the deteriorated pipes were unable to handle the increased pressure. The pipeline burst repeatedly, delaying work for weeks on end, KBR and U.S. Army Corps of Engineers officials said. In five months ending December 2004, KBR managed to send water through the pipes for only 29 days. Even today, the plant delivers only about a third of its capacity. To make matters worse, farmers tapped into the pipeline, using it to irrigate their fields. KBR found one local who was watering his entire tomato crop courtesy of the Qarmat Ali pipeline. Despite the problems, the United States never assigned KBR the task of repairing the aging lines. Todor, the U.S. oil adviser, said that by the time the problem became apparent, most of the money available in the south had already been committed to other projects. The Iraqis, meanwhile, have not invested in repairs, using most of their oil revenue for fuel subsidies and salaries. “The Iraqis have not had the money to do the work,” Todor said. On a recent tour of the sprawling, decades-old complex, its decrepit state was obvious. The walls were cracked; motors, valves and pipes were rusted. Dirt and mud covered the floors. Only two of the five pumps that KBR fixed were operating. An Iraqi engineer said a machine to add cleaning chemicals to the water was unusable. Another system to protect the interior of the pipelines from rust was not being used for fear that the anti-corrosion additive would damage the oil fields. Neither the United States nor KBR have provided additional maintenance or operating funds to the plant since turning it over to the Iraqis. For their part, the Iraqis said KBR had installed substandard equipment and had not provided sufficient training. “It’s useless. We have material from KBR, but we don’t have documents on how to use it,” said the Iraqi engineer, who requested anonymity because of security concerns. KBR said it had done all that was asked of it. “KBR is not responsible to support with the ongoing maintenance and repair of these facilities unless tasked to do so by (the U.S. government),” said Stephanie Price, another KBR spokeswoman, in response to questions sent by e-mail. A big part of the problem, some U.S. officials said, was the Army Corps of Engineers, which oversaw initial repairs under the Restore Iraqi Oil project. The Corps, which had little experience in the oil industry before the war, was forced to rely on advice from KBR and other experts in making decisions on rebuilding. Bunnatine Greenhouse, who was the top contracting official in the Corps, sharply criticized its involvement at a Congressional hearing in June. “The Corps had absolutely no competencies related to oil production,” said Greenhouse, who also criticized the no-bid contracts awarded to KBR. She was demoted in August. The end result of the U.S. investment here is that Qarmat Ali still does not produce enough water to be used for injection into the oil fields, nor can the water reliably be delivered to the injection stations, which also remain in need of repair. That means that every day, Iraq forgoes production of about 200,000 barrels of oil – or about $11 million in revenue at current world oil prices, according to Iraqi and U.S. officials. A joint venture formed by Australian firm WorleyParsons Ltd. and Pasadena, Calif.-based Parsons Corp. was recently brought in to complete the work that KBR began. The lack of reliable water injection has led to a debate over whether Iraq’s southern oil fields have been permanently damaged. Although nobody is sure, some oil experts fear that America’s failure to fix the problems has worsened damage that may have occurred during Saddam Hussein’s regime. U.N. oil experts have told the U.S. government that some oil reservoirs in southern Iraq have been so badly managed that the Iraqis will be able to recover only between 15 percent to 25 percent of the oil, well below the industry standard of 35 percent to 60 percent, a recent Department of Energy report states. Norm Szydlowski, a U.S. consultant to the Iraqi oil ministry, said that the Iraqis had begun an in-depth study of the health of their fields, the first in years. The possibility of damage “was and is a focus. It is a significant concern,” Szydlowski said. “The extent of the potential damage is really unknown. The Iraqis prudently have been working at this stage of the game as quickly as they can to get the right analysis of their reservoirs.” But some said the United States and Iraq needed to work harder, especially on fixing Qarmat Ali. “It’s frustrating. You’ve got one of the biggest fields in the world that’s sitting there and needs some help,” said one contractor familiar with the project who asked not to be named. “It’s like your favorite pet dog got hurt and you want to help it.” Abdul Raof Ibraheen is a manager at one of Iraq’s largest refineries. His massive complex of rusting metal spheres is nearly silent these days. KBR is supposed to be supplying parts to fix the plant. But the company has recently told Ibraheen that the worldwide spending boom in oil infrastructure has made it hard to purchase the needed equipment. The part will arrive perhaps by next summer, KBR officials told him. Ibraheen said he had expected more. “Frankly speaking, I am not satisfied with KBR’s work,” Ibraheen said. “What I saw from KBR, their performance is not what we had expected. We heard a lot about KBR, but we’re not satisfied.” Said Ibraheen: “The results have meant nothing for us.” Vail, Colorado