IRAQ: OPEC Prepares For Oil Price Roller Coaster In 2001.

IRAQ now is beginning to receive oil payments in euros, with the UN having approved the switch after the US dropped its objection. Buyers are paying Iraq's State Oil Marketing Organisation (SOMO) the US dollar value of their crude oil cargoes in euros, at the exchange rate effective in the pricing period. In late October SOMO issued its official November prices in US dollars.

Iraq is exporting about 2.55m b/d, having sold a record of 2.77m b/d a few weeks ago. Phase 9 of its oil-for-aid programme is to begin on Dec. 5. Negotiations with the UN for this have started already.

Baghdad's switch to the euro, a symbolic political move, will cost Iraq a lot in lost US dollar revenues during each 180-day phase. This is because the euro's value against the US dollar has been falling steadily since 1999. The switch away from the US dollar has affected all the other sectors in Iraq, with Baghdad having warned foreign trading partners as well as local merchants that it was no longer to accept dealings in the American currency.

The Central Bank of Iraq has begun buying European currencies, including the euro, the German mark, Swiss and French francs, the Dutch florin, the Austrian schilling and the Italian lira. It is buying them against their equivalent in US dollars. As a result, the Central Bank and the other sectors in Iraq are expected to incur large losses. It is not clear yet how this costly switch will affect the Iraqi dinar.

Baghdad in the past two months has been accusing Kuwait of pumping Iraqi crude oil from fields straddling their border. In a letter to UN Secretary General Kofi Annan on Oct. 11, Baghdad's permanent representative to the UN in New York said: "Some Iraqi oilfields extend into Kuwaiti territory, and they include the Rumaylah South and Zubayr fields. Rumaylah extends into the Ratka area and Zubayr into the Safwan (Abdali) area. Kuwait had few wells in these two fields, only eight in Ratkah and four in Safwan. Production from the fields on the Kuwaiti side was modest because the oil where was associated with large quantities of water, and prior to 1990 it was no more than a few thousand barrels a day. After the new boundary demarcation, however, as a result of which many Iraqi oil wells in both fields fell beyond the boundary line, Kuwait proceeded to make announcements and invite American and British companies to sign long-term contracts for the exploitation of its fields in the north, and these included the two fields in question...

"Kuwait", the letter added, "is engaging in lateral drilling that extends for several kilometers into the Iraqi reservoirs beneath the surface of the earth. This would explain the high production levels achieved and announced by Kuwaiti officials and the Kuwaiti media, which are estimated to be in the order of 80,000 b/d for both fields, when prior to 1990 the Kuwaiti wells had been almost dry and had ceased production because of the high levels of reservoir water they contained".

Iraq's Oil Minister, Amer Al Rashid, has been opposed to any cut in OPEC production since the March 2000 meeting. Acting to direct orders from President Saddam Hussein, he wants OPEC to work on keeping oil prices maximised throughout 2001 and in the subsequent years.

Potentially the biggest oil province in the world for foreign investors in oil E&P, Iraq is offering private Western and Eastern companies equity in its reserves under attractive PSAs. The country's oil production capacity has reached 3m b/d. But there are doubts as to whether this will be sustainable for 12 consecutive months.

Some experts say an easing of the UN sanctions, allowing foreign companies to develop oilfields for a capacity expansion, might be expected in 2001. They speculate that the longer it takes to mend the Arab-Israeli peace process, the faster the ropes around Iraq are likely to loosen.