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

3. 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. Industry status post-war • Post war chaos hindered development • Looting of oil fields in the south • Sabotage of transport pipelines in the north

5. 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. 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 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 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 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. 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. 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. 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. 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

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