Iraq’s oil production is expected to remain constrained for the next one to two years by ongoing attacks against oil infrastructure, despite the US-led Coalition Provisional Authority’s (CPA) transfer of power to an interim Iraqi government, interim Prime Minister Iyad Allawi said June 28.

“Our production in oil is regressing because of the terrorists,” Allawi, a Shi’ite Muslim representing the majority of Iraq’s 23-mil people, said during the handover ceremony. “We need one or two years to bring back solid growth in the oil ministry. But we will progress until we reach our objectives.”

The CPA handed over legal authority to an Iraqi interim government two days ahead of the scheduled June 30 date in a surprise move some analysts and Iraqi expatriates in the Middle East interpreted as an effort by the US-led forces to stem escalating violence in the run-up to the handover.

US overseer Paul Bremer left the Iraqi capital Baghdad within hours of handing over official documents to Allawi and President Ghazi al-Yawer, a Sunni Muslim.

“Bremer can leave Iraq without bombs going off,” the former commander of UK forces in Nasiriya, Adrian Weale, said on BBC World television. But he predicted more attacks against the new government in the short term by insurgents determined to destabilize the post-war government they say would still be under orders from the 130,000 US-led coalition force remaining behind.

With Bremer’s departure, the CPA was dissolved, leaving power in the hands of Allawi, who was hand-picked by the Americans.

“There is really nothing different despite the early transfer,” said Youssef Ibrahim, managing director of Dubai-based Strategic Energy Investment Group. There is still a substantial US military presence in Iraq, while the role the United Nations and NATO will play remains undefined, he said.

There is also the feeling Bremer has passed enough laws over the last 14 months to tie the hands of the interim government. “There are so many exceptions to governing that real power will be held by the US,” Ibrahim said. “It is difficult for Iraqi insurgents to see how this is an Iraqi government.”

Abu Mussab al-Zarqawi, the Iraq-based dissident with suspected links to al-Qaeda, threatened June 23 to kill Allawi and any Iraqis who cooperate with US forces.

Weale said he expected opposition to the interim government to continue from within the so-called Sunni triangle in central Iraq, where he said there was likely to be more sympathy for the strict Wahabi interpretation of Islam that prevails in Saudi Arabia.

John Negroponte, the newly appointed US ambassador to Iraq, will preside over the biggest US mission anywhere in the world and, with the disbanding of the CPA, the new embassy will assume control of US interests in Iraq.

Allawi will serve until elections in January 2005. Thamer Ghadban is expected to retain his job as oil minister. Ghadban, a technocrat, served as acting oil minister immediately after the end of the war last year.

He said recently he wanted the Iraqi government to assume control of security so he can focus on producing and selling crude. Ghadban and his ministry will be responsible for the world’s second biggest reserves of crude, estimated at 113-bil bbl of recoverable reserves, though much of the country is unexplored.

Under UN Resolution 1546, the interim government will have full control over Iraqi oil revenues and oil infrastructure developments following the handover. But Iraq’s ability to fund post-war reconstruction has been impeded by the continuing attacks on the oil infrastructure, preventing regular crude sales from its northern fields while disrupting exports from southern Persian Gulf oil terminals.

Iraq has held five tenders to sell Kirkuk crude since the end of the war last April, as persistent acts of sabotage have made it impossible to conclude firm contracts.

Kirkuk crude, which makes up 40% of total Iraqi production, was late last week running at only 200,000 b/d to the Turkish port of Ceyhan. Shipments in the south, which had been averaging 1.65-mil b/d, were halted last week as a result of multiple pipeline bombings and only returned to normal at the weekend.

[The return of normal exports in southern Iraq was a catalyst in the sharp drop in crude prices June 28. August crude futures on the New York Mercantile Exchange dropped $1.31 to $36.24/bbl. A contributing factor was the resumption of full Norwegian production following the end of an eight-day strike. Product prices also weakened, with July unleaded gasoline off 6.09 cts to $1.1448/gal and heating oil down 3.57 cts to 97.50 cts/gal.]

The ongoing violence also has deterred new investment to expand existing crude production capacity beyond 2.8-mil b/d, if that.

Oil industry experts do not expect immediate solutions until the security situation becomes clearer, allowing foreign investment to flow into the country. By some estimates, Iraq needs more than $100-bil to fully develop its oil and gas fields, which are believed to contain up to 300-bil bbl of reserves.

Oil revenues are the country’s economic lifeline and Ghadban has said one of his first tasks will be establishment of a national oil company. Current plans call for raising production to 3-mil b/d by end-2004 and to 3.5-mil b/d in 2005.

During the handover ceremony, Alawi said Iraq has the resources to rebuild the country, despite the acts of sabotage, while he called for Iraqis to remain patient. “We have our resources, our oil and our agriculture,” he said. “Great changes in societies take years, not months. Have patience and faith in the future of democracy.”

From the US perspective, the transfer is expected to ease the ongoing security problems facing US forces throughout much of the country. The Iraqi insurgency has been particularly stiff in the Sunni heartland.

Whatever the motives of the hasty handover, ordinary Iraqis welcomed the handover as their first nibble at democracy after decades suffering under the brutal dictatorship of Saddam Hussein, the indignity of UN sanctions and a foreign occupation.

“People are expecting things to start moving. They hope things will get better with infrastructure such as electricity and sewage,” said Edmond Adam, Middle East Council of Churches interim director in Baghdad.

A prominent Iraqi businessman in the Gulf described it as a major milestone toward self-governance.

“The transfer of power is a historical milestone for Iraq after years of oppression,” said Talib Khan, chairman of the Iraq Business Council in Abu Dhabi.