Special Report

U.S. BIGGEST BUYER OF IRAQI OIL AMID WAR PREPARATIONS
By Soozhana Choi

New York, March 14 (Bloomberg) -- As the Bush administration masses troops in the Persian Gulf in preparation for a war to topple Saddam Hussein, U.S. refineries have been the biggest customers for the crude oil Iraq produces.

Shipments to the U.S. more than tripled from September to January, according to the Commerce Department. Iraq supplied 17.1 million barrels in January, 6.4 percent of total U.S. oil imports and up from 5.15 million four months earlier.

The jump in imports came as an illegal surcharge that benefited the Iraqi government was dropped and as refiners sought alternatives for crude from Venezuela, where a strike crippled oil production.

``The U.S. is by far the biggest customer of Iraqi oil,'' said Eric Kreil, an analyst at the Energy Department's Energy Information Administration. ``Iraqi oil is a pretty good substitute for the Venezuelan grades that were cut off.''

Iraq pumps about 3 percent of the world's oil and is the third-largest producer in the Middle East. The prospect of a war in Iraq has helped boost the U.S. benchmark oil price by 25 percent since November.

Iraq is allowed to export oil under an exception to United Nations sanctions imposed after the country's 1990 invasion of Kuwait. The UN must approve Iraq's oil sales, and proceeds are designated to pay for food, medicine and oil-industry equipment.

Global Market

The surcharge, which helped the government skirt UN control of oil revenue, stopped toward the end of last year, said George Beranek, an analyst with Petroleum Finance Co. in Washington. That made Iraqi crude competitive with oil from other sources.

The global oil market doesn't discriminate against a country's oil as long as it's priced competitively, said Youseff Ibrahim, editor-in-chief at Energy Intelligence Group Inc. in New York. ``It's not a deliberate decision by the U.S. or anyone'' that made the U.S. the largest user of Iraqi oil, he said.

About two-thirds of the oil Iraq exported in February was going to the Americas, or 1.12 million barrels, according to an analysis by Energy Intelligence. Half of that was headed to the U.S., matching the pace of imports the Commerce Department reported for January. Other destinations for Iraqi oil in the Americas were Brazil, Mexico and the Caribbean.

U.S. imports of Iraqi oil rose by 64 percent in November from October, after falling to a four-year low in September. They continued to climb in December and January, according to the Commerce Department data, released this week.

Iran, Libya

The U.S. doesn't import oil from Iran and Libya, two other states that the government has identified as supporters of terrorism.
In 1986, the Reagan administration banned U.S. companies from doing business in Libya; UN sanctions against the country were imposed in 1992.

The U.S. has imported little Iranian oil since 1979, according to Lowell Feld, an international oil-markets analyst at the Energy Department.

``U.S. sanctions have waxed and waned since then,'' he said. ``The last time the U.S. imported Iranian oil was in 1991,'' when the government allowed limited shipments.

Bush said in April that he would only support lifting U.S. sanctions against Libya and Iran if they acknowledged past acts of state-sponsored terrorism.

U.S. refiners have been buying Iraqi oil as an alternative to supplies from Venezuela, which were cut off when workers went on strike in early December. Venezuela met 10 percent of U.S. oil needs before the strike began. Iraq's Basrah and Kirkuk grades are reasonable substitutes for the crude produced in Venezuela, which is a high-sulfur or ``sour'' grade.

``Iraq got an additional boost from Venezuela,'' said Beranek. ``U.S. refiners took any bit of crude they could get, particularly sour crudes.''
Stigma'

``There was a certain stigma associated with taking Iraqi crude because it was assumed that you paid a surcharge'' that benefited Hussein, Beranek said. The UN forced Iraq to end the practice through a pricing policy that made any oil that carried the extra cost more expensive than the market would bear, Beranek said.

Some refiners may have started shunning supplies from Iraq as war in the country looms.

``Buyers are cautious about planning for Iraqi shipments with the war coming,'' said James Ritterbusch, a senior analyst for Prudential Securities Inc. in Galena, Illinois. ``Imports from Iraq have probably already fallen.''

ChevronTexaco Corp. hasn't loaded any cargoes of Iraqi crude oil since early this year, said Chris Gidez, a spokesman for San Ramon, California-based company.

``Last year we imported a total of 44 million barrels of Iraqi oil,'' Gidez said. ``We could resume purchases under the UN program or under some other circumstances if the situation is right. There's no policy of not using Iraqi oil.''

Valero Energy Corp., the third-largest U.S. refiner, has cut back on loading Iraqi oil since the beginning of the year, the Wall Street Journal reported this week, without citing anyone. The company didn't return phone calls from Bloomberg News.

ChevronTexaco and Valero were the top two U.S. importers of Iraqi crude oil in November, according to the latest figures available from the American Petroleum Institute.

[In accordance with Title 17 U.S.C. Section 107, this article is reprinted and distributed without profit to those who have expressed a prior interest in receiving this information for research and educational purposes.]

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