Significance

Northern pipeline sabotage has tested nascent Iraqi resources to the limit over the last eighteen months and the elections have done little to change the status quo, with insurgents seemingly gaining the upper hand in northern areas over the last four months.

Implications

Northern oil supplies were adding less than 300,000 b/d at best to the overall Iraqi export balance, although their continuing loss will make it difficult for the country to push exports over 2 million b/d, despite technical capacity well in excess of those levels.

Outlook

The Oil Ministry has announced 'indefinite' closures before and a near-term reopening of the northern export route can't be ruled out, particularly if some level of secrecy over operations can be maintained. However, persistent problems on this strategic route are indicative of the wider crisis enveloping the Iraqi oil sector, which will undoubtedly cap progress in 2005 and keep the onus on damage limitation rather than developing new resources.

Saboteurs Have the Upper Hand

Following a number of sabotage attempts on the northern oil export pipeline since its reopening in mid-February, Iraqi oil minister, Thamer al-Ghadhban, has admitted at least temporary defeat in stating that operations will not be resumed at the pipeline until 'comprehensive security measures for the pipeline' are established.

The pipeline and surrounding feeder lines have suffered at least 15 attacks since the start of the year. This followed two months of more intensive targeting from mid-October, which culminated in a major direct bombing on 18 December that resulted in a two-month outage . In fact, it will be a surprise if even a million barrels of oil have flowed through the facility in 2005 to date, despite capacity of some 600,000 b/d, because of the intensity of attacks, particularly around the Fatha-Beiji area.

Saboteurs have targeted pipelines, pumping stations, security guards and feeder fields such as Dibis and Khabbaz in their bid to derail the northern export programme. This has undermined attempts at forward contract sales last year, and pretty much put paid to any meaningful export contribution from the northern oilfields since August 2003, although the region accounted for nearly half of Iraqi supplies during the Saddam Hussein era.

But just how the oil ministry intends to implement 'comprehensive' security at the pipeline is debatable, given the existing assignment of national guardsmen and army personnel to pipeline infrastructure, in addition to the 15,000-strong oil pipeline force inherited from Erinys, which is in the process of being doubled. An electronic monitoring system for the pipeline has also been ordered, although without improvements in the wider political and security context, these measures will only be partially effective at best.

Outlook and Implications

With northern exports out of the picture, Iraq is again thrown back onto its southern export options in the absence of alternative supply routes to neighbouring states. This is despite a number of proposals for alternative land routes put forward at this time last year when the Coalition Provisional Authority (CPA) found itself in a similar situation.

While the Kuwaiti supply option was ruled out in the near term due to lack of port capacity, routes to Iran and Syria held more hope. However, lack of political will - in part because of US influence - combined with a widely held expectation of improved security, have held back these politically sensitive schemes.

The sense of déjà-vu surrounding Iraq's current export difficulties should at least put the issue of diversifying export options back on the agenda, particularly given the below-par southern export contribution since early 2005, where daily exports have struggled to climb over 1.5 million b/d because of weather and technical problems. While warmer weather may improve southern export flows, vulnerability to sabotage and one-off problems affecting the Basra/Khor al-Amaya region remains - putting all of Iraq's oil exports and, consequently its revenues, in one fairly flimsy basket.

This means that despite the temptation to focus on new projects and development work over the next year, the real challenge will be to sustain last year's performance on both the production and export side amidst ongoing political unrest. While the oil ministry may hope that extraordinary investment in security will help its operations buck the general trend, the balance of probability weighs firmly in favour of the saboteurs, whose increasing focus and technical abilities are likely to keep the sector on a defensive footing, at least until some improvements in the wider security climate can be made. Meaningful advances on last year's export average of 1.55 million b/d and output of 2 million b/d therefore look unlikely until at least 2006.