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Iraqi State Company Wins Oil Well Repair Deal

Posted on: Tuesday, 30 August 2005, 15:00 CDT

BASRA, Iraq - An Iraqi state-owned company has been given the job of repairing oil wells that sit on large, lucrative oil reserves in the country's south - a decision likely to mean additional months of pumping delays for an industry already suffering from sabotage and lost revenues.

The decision by U.S. reconstruction officials came after American and other Western companies - including giant oil-field services firm KBR Oil - balked at doing the work without strong legal protections, or indemnifications, guaranteeing they would not be blamed if things went wrong.

Iraqi authorities had promised such protections, according to American officials, but concerns about the Iraqi government's stability prompted Western companies to unsuccessfully demand the same guarantees from Washington.

"Nobody is probably going to take on that type of liability - at least no U.S. company," said Don Lassus, an official with WorleyParsons, an energy services firm that declined the work.

U.S. officials announced the decision to use the Iraqi Southern Oil Co. after several inquiries by The Associated Press. American officials now are training employees and buying them equipment, according to Friday's statement by the Project and Contracting Office, a U.S. reconstruction agency. The contract is for $37 million.

The training likely will cause delays, whereas a Western firm already would have the needed expertise.

That means the reassigned project could take months longer at a time when delays already come at a high price. With the price of oil topping $60 a barrel, the Iraqi government is losing hundreds of millions of dollars in potential revenue from the dilapidated wells.

The wells deteriorated during Saddam Hussein's rule, when international sanctions barred leading Western companies from working with the Iraqi government. Oil production in the south could increase by as much as 500,000 barrels a day once the project is complete, according to the U.S. reconstruction agency. The number of wells to be repaired has not been disclosed.

The contract to repair wells was originally awarded to KBR Oil, a subsidiary of Halliburton. But the agreement was canceled when the oil giant and other companies insisted on financial protections upfront, in case wells were damaged during the drilling process.

"The feeling is that with conditions being relatively unstable, nobody feels comfortable with the notion that they'd be indemnified by the Iraqi Southern Oil Co.," Lassus said.

KBR said it required guarantees from the U.S. government because its contract was with American authorities, who are funding the project, and not with Iraqi authorities.

"KBR does not have a contractual relationship with the government of Iraq. Our (contract) is with the U.S. government, and it is therefore our position that all negotiations ... be struck directly with our client and not a third-party entity," said KBR spokeswoman Melissa Norcross.

The project was just one part of a larger KBR contract with U.S. agencies.

Repairing the aging and damaged wells is crucial because Iraq's economy now relies on oil exports from the south, a relatively peaceful part of the country. More than 80 percent of exported oil flows from the area, according to the U.S. Army Corps of Engineers.

Sabotage attacks have crippled the flow from northern areas such as around Kirkuk.

In July, the Iraqi oil ministry said about 300 acts of sabotage had cost the country about $11.35 billion since petroleum exports resumed after the U.S.-led invasion two years ago.

Repairing Iraqi oil wells

REPAIRING WELLS: State-owned Iraqi Southern Oil gets contract to repair oil wells in country's south, meaning possible delays in return of pumping as company must train employees and acquire equipment.

FOREIGNERS BALK: The decision came after U.S. and other Western companies balked at working there without stronger legal protections guaranteeing they would not be blamed if things went wrong.

SABOTAGE'S TOLL: About 300 acts of sabotage have cost Iraq about $11.35 billion since oil exports resumed after the U.S.-led invasion, the Iraqi oil ministry said in July.

Source: Advocate; Baton Rouge, La.

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