1. The Future of Iraq and Impact on Energy Markets Click to continue

2. The Future of Iraq and Impact on Energy Markets Presented by xxxxxxxxxxxxxxxxx For Emerging Markets Risk Conference June 12, 2003 Geopolitical Brief The Future of Iraq and Impact on Energy Markets

3. The Future of Iraq and Impact on Energy Markets Iraq’s place in the energy world (until now)  Most of Iraq’s export routes were developed with war in mind  Iran-Iraq war disrupted transport routes to Syria and Gulf waterborne exports; necessitated building new export routes through Saudi Arabia and Turkey  In the post-war peace, production reached 3.1 million bpd just before the Kuwaiti invasion  1991-2003: Gulf war and sanctions  Gulf war damaged much of the infrastructure and sanctions limited rebuilding efforts  Production averaged 2.04 million bpd in 2002

4. The Future of Iraq and Impact on Energy Markets Industry status post-war  Post war chaos hindered development  Looting of oil fields in the south  Sabotage of transport pipelines in the north

5. The Future of Iraq and Impact on Energy Markets Industry status post-war  Repair efforts mixed  South (Rumaila)  prewar production was 1.2 million bpd  security problems almost nonexistent  short trip from oil fields to export platform in the Gulf (less than 150km)  no Sunni population along route, so no militants and no sabotage  within six months southern production capacity hit 2.0 million bpd; most old production sites now producing (at improved rates)

6. The Future of Iraq and Impact on Energy Markets Industry status post-war  North (Kirkuk)  prewar production was 0.8 million bpd  fields are secure, but pipelines are not  preferred target for Sunni guerillas  export route passes through Baiji – a major Sunni population center  sabotage and attacks on personnel commonplace in 2003  prevented any resurgence in production for export  all northern production – when it flowed at all – supplied refineries in Baiji and Baghdad

7. The Future of Iraq and Impact on Energy Markets The coming year  South (Rumalia)  Iraqi Oil Ministry has already begun greenfield investments  Iraqi Oil Ministry is preparing packages for foreign bids  Saddam era contracts granted for political reasons will be handled by the ministry, with American assistance

8. The Future of Iraq and Impact on Energy Markets The coming year  North (Kirkuk)  Massive damage assessment must be carried out  Repair work to the Kirkuk-Ceyhan (Turkey) pipeline will take weeks  Then exports will come back on line as fast as they did in the south  Barring additional attacks, northern production will easily reach 1.0 million bpd by the end of 2004 (the Turkish export route’s current maximum capacity)

9. The Future of Iraq and Impact on Energy Markets The coming year  Western Desert  Iraq lacks the ability to explore and exploit it itself  Any/all infrastructure will be need to be built from scratch  Potentially as much as 100 billion barrels  Foreign firms will have to be brought in  Operations may begin, but certainly not begin producing, in 2004

10. The Future of Iraq and Impact on Energy Markets Immediate problems  Export limitations  Only current export route – Basra loading platform in the Gulf – is maxed out at 1.6 million bpd  Southern exports need a new outlet…options in order of likelihood  connection to Iran’s refinery at Abadan: 350,000 bpd  using Kuwait’s oil ports: 400,000 bpd  Khor al Amaya loading platform: 1.2 million bpd (after repairs)  ILSA pipeline via Saudi Arabia: 1.6 million bpd

11. The Future of Iraq and Impact on Energy Markets Immediate problems  Guerrilla conflict  Northern reconstruction cannot commence until the insurgency ends  Legality  Western firms will not begin operations without legal cover  That requires an internationally accepted government  That will probably require elections  Foreign firms won’t most likely have boots on the ground until the fourth quarter

12. The Future of Iraq and Impact on Energy Markets Impact abroad  Short term (until end of 2004)  Recovery of Iraqi production was the fastest in history  But occurred while the U.S., Japan, Europe and China were all experiencing rapid growth, so minimal effect on prices  Production increases will now come more slowly in comparison, with only mild short term effects on prices

13. The Future of Iraq and Impact on Energy Markets Impact abroad  Long term (2005-2006)  Once political difficulties are ironed out, Iraq will have export route potential of over 6 million bpd without building new infrastructure  Existing production regions can produce that much without bringing the Western Desert on line  The addition of 4 million bpd from Iraq alone – in addition to planned supplies from other producers – will lead to a steady drop in crude oil prices  That is already leading to a crack up of OPEC as the various producers are increasing their investment in order to maintain market share

14. The Future of Iraq and Impact on Energy Markets Strategic Forecasting, Inc. 700 Lavaca St., Suite 405 Austin, TX 78701 (512) 744-4300 www.stratfor.com