Iraq's Oil Output Is Highest Since U.S.-Led Invasion

By Tony Capaccio

July 30 (Bloomberg) -- Iraq's daily oil production is at its highest level since the March 2003 U.S. invasion, in large part thanks to improved security, according to a Pentagon audit.

``Iraqi oil production set new records this quarter, with output reaching 2.43 million barrels per day, the highest quarterly average since the invasion,'' Stuart Bowen, the Defense Department's inspector general for Iraq reconstruction, wrote in his 18th quarterly report to Congress on the expenditure of $50 billion in U.S. economic aid. Production fell to 1.3 million barrels a day during 2003.

A $34 million security system of ditches, fences and concertina wire has stopped attacks since July 2007 on the pipeline from Kirkuk in the north to a major refinery in Baiji, central Iraq, according to the report, which was released today. The result has been a substantial rise in crude oil exports from the north, Bowen said

``Iraq's burgeoning oil windfall, which has yielded more than $33 billion in revenues to date in 2008,'' may result in another $7 billion that could be spent on reconstruction as U.S. spending winds down, Bowen said. Analysts say Iraq has the world's third-largest reservoir of untapped crude oil.

Contributing to Iraq's improved security was the so-called surge of almost 30,000 U.S. military personnel that ended this month plus operations of the Iraq Security Forces, who cleared Muslim militias from Basra, Baghdad's Sadr City, Mosul and Amara, said Bowen, who for the third time this year reported increasing improvements in Iraq's security and economy.

`Year of Transfer'

These operations have been followed by Iraqi government commitments to spend more than $100 million in each of these cities, he said.

The Iraqi government is spending more money on reconstruction in this ``year of transfer,'' Bowen said, up to an estimated $13 billion this year compared with $4.2 billion in U.S. funds.

An indication of improved security is the reduction in U.S. combat deaths, with four so far this month, plus another five non-combat deaths, according to the Pentagon. The four combat deaths is the lowest number since May 2003.

``As heartening as that is, it is not the metric by which we measure success but it is certainly an encouraging sign,'' spokesman Geoff Morrell said yesterday at a Pentagon briefing.

Since the March 2003 invasion, 4,117 U.S. members of the U.S. military have died in combat in Iraq, according to Pentagon figures.

Increased Exports

Iraq's increased production between July 2007 and May was especially noticeable in the north, where exports rose by about 91.3 million barrels, or about $8.2 billion, Bowen said.

In addition to expanded exports, the uninterrupted growth in supplies of refined petroleum products ``has contributed to the increase in electricity production and improved living conditions of the Iraqi people, making fuel available for heating, cooking and transportation,'' he wrote.

In contrast, Bowen wrote in January 2007 that at least some of the oil storage facilities at Baiji were under insurgent control.

``It's a good-news story, but the cloud in the silver lining is that the actual production capacity has been barely sustained and hardly expanded,'' Yahia Khairi Said, director of Middle East Revenue Watch at the London School of Economics, said today in a telephone interview. ``It was in a bad shape to begin with and during the war. Iraq has not succeeded in properly maintaining the fields or expanding their capacity.''

Cheney Comments

At the start of the Iraq war more than five years ago, Vice President Dick Cheney said Iraq might be able to increase oil production to 2.5 million to 3 million barrels daily by the end of 2003. Iraq pumped 2.48 million barrels a day in February that year, the last full month before the war began. Production fell 44 percent the following month, to 1.4 million barrels a day. It decreased to 1.3 million barrels during 2003, according to data from the U.S. Department of Energy's Information Administration.

The department said in an August 2007 report that the Baiji refinery ``has been subject to repeated disruptions and power loss and generally operates at around 75 percent capacity.''

Bowen said the turnaround in the north ``stems in part from the improved security across Iraq and the success of the Pipeline Exclusion Zone,'' barriers that protect oil pipelines.

The Iraqi government plans to build similar protection systems for the pipelines between Baghdad and Karbala and between Baiji and Baghdad, the Pentagon said.

To contact the reporter on this story: Tony Capaccio in Washington at acapaccio@bloomberg.net.