Subject: [NEXTEL-1] Iraq's Spectrum Management Plan, Emergency Interim Nationwide Comm. System, SCADA All Top Priorities

From: [email-masked]
Date: Tue, 10 Jun 2003 04:42:55 -0400

Iraq's Spectrum Management Plan, Emergency Interim Nationwide Comm.System, SCADA
All Top Priorities

US official on the future of Iraq
Iraq-USA, Economics, 6/7/2003

Future of Iraq, By Alan P. Larson, Under Secretary for
Economic, Business, and Agricultural Affairs Testimony Before
the Senate Foreign Relations Committee Washington, DC June 4,
2003:

Introduction

The liberation of Iraq was a triumph of American armed forces,
working with coalition forces. The reconstruction of Iraq must be
a triumph of the Iraqi people, working with the coalition and the
international community. Our military victory was swift and
decisive. The rebuilding of Iraq after decades of misgovernment
will take longer. Most of this work will -- and rightly should -- fall
to the citizens of Iraq. It is their country, and they must ultimately
decide how it takes shape. The United States and other friends of
the Iraqi people will be there to assist, and to advise. A free,
democratic and prosperous Iraq will remove an island of hatred
that long threatened its neighbors and the United States.

Update

The situation on the ground in Iraq remains tense. Gunfire, looting
and the remnants of SaddamÕs regime continue to disrupt life in
Baghdad and elsewhere. To ensure stability, American troops
continue to be deployed throughout the country. In addition, we
will stand up an Iraqi national civilian police force within existing
structures. In Baghdad, there are already over 7,000 Iraqi police
patrolling with U.S. military forces. Until the security situation
calms down, it will be difficult for a genuine redevelopment of the
Iraqi economy to gather momentum.

Many of the problems that had been widely anticipated did not
materialize. We did not see mass hunger, widespread medical
emergencies or floods of internally displaced persons. The
military plans protected the oil fields from sabotage by Saddam in
his final moments.

Looking to the future, there are many things upon which to build.
Iraq has a large cadre of talented, dedicated technocrats anxious
to return to work. And we have offers from many, many
countries ready to provide technical assistance and to do business
in Iraq.

We are beginning to see some bright spots. For example:

* water in Baghdad is back at 75% of pre-war levels; * power is
being gradually restored; * mail delivery has begun around parts
of the country; * the Ministry of Health has been re-established
and there is currently no major health crisis; * primary schools
re-opened May 4; * oil production is increasing; * the agricultural
sector is reviving; and * shops are open and the retail sector is
increasingly active.

My colleagues and I can all tell you of the fine work our people
have done on the ground in dangerous and difficult circumstances.
Ambassador Bremer, General Garner and their teams have
worked hard to bring order out of a chaotic situation.
Ambassador Bremer is moving quickly to establish coalition
authority in the country. State, USAID, Defense, Treasury,
Justice and others have experts in the field looking at key
reconstruction issues. Ambassador Bremer has made real
progress in establishing communications with Washington, and in
organizing his own resources to meet the challenges ahead. We in
Washington have also organized ourselves to be as helpful to
Ambassador Bremer and his team as possible, as they progress
from the current situation, where stability and provision of basic
services are critical, to a time when we can address broader
policy issues.

Some practical steps have already been achieved by the team in
Baghdad. For example, an early goal of ours was to re-start
economic activity by getting people back to work, and to employ
the energy and talent of the Iraqi people in rebuilding the country.
In order to get Iraqis untainted by strong links to the BaÕath
Party back to work, the Office of the Coalition Provisional
Authority (OCPA), in consultation with Defense, Treasury, State
and OMB, has begun making ÒemergencyÓ salary payments to
Iraqis in key sectors. These payments have brought port workers
back to work at Umm Qasr, and key civil servants back to
critical jobs at important ministries, for example the Ministry of
Trade. And putting cash back into pockets means giving people
money to spend on goods and services, which spurs economic
activity.

UNSC Resolution 1483: A Framework for Reconstruction

President Bush has made clear his desire to work with the United
Nations, other international organizations and other nations to
rebuild Iraq. UN Security Council Resolution 1483 provides an
important framework for economic development in Iraq.
UNSCR 1483:

* Recognizes the United States and United Kingdom as the
ÒAuthorityÓ and charges us with carrying out the responsibilities
and obligations of this role for the welfare of the Iraqi people.

* Ends the economic sanctions in place for more than a decade,
allowing trade and financial transactions with the world.

* Provides for a significant role for the United Nations in:

* humanitarian and reconstruction assistance; * return of
refugees; * restoring and establishing national and local institutions
for representative governance; * formation of an Iraqi interim
administration; and * coordination of humanitarian and
reconstruction assistance by a Special Representative of the
Secretary General (Mr. Sergio Vieira de Mello has been named
to this position).

* Establishes a Development Fund for Iraq to be used to meet
humanitarian needs, for reconstruction and repair of Iraq's
infrastructure, and other purposes benefiting the Iraqi people.
Specific requirements include:

* receiving proceeds of all export sales of petroleum and natural
gas from Iraq, along with remaining UN funds designated for
Iraq, and frozen assets that had belonged to the Government of
Iraq or designated senior officials, including Saddam Hussein; *
disbursing money in a transparent manner, at the direction of the
Coalition Authority, with expenditures to be audited by
independent public accountants: the humanitarian needs of the
Iraqi people; rebuilding the economy and infrastructure; continued
disarmament; the costs of civilian administration; and for other
purposes that benefit the people of Iraq; and * formation of an
International Advisory and Monitoring Board, comprising
representatives of the UN Secretary General, the IMF Managing
Director, the Director General of the Arab Fund for Economic
and Social Development and the World Bank President.

* Supports efforts by the Iraqi people to form a representative
government based on equal rights and justice for all Iraqi citizens.

* Calls upon the international community and multilateral
institutions to assist with the reconstruction and development of
the Iraqi economy.

* Provides for a six-month winding-down of the Oil for Food
Program (OFF), and removes restrictions on oil exports and
sales.

The Job Ahead: Key Challenges of Reconstruction

We speak about the ÒreconstructionÓ of Iraq, but that word is
misleading. We are looking not at reconstruction, but at
construction, not at rebuilding, but at building. The Iraqi people
must overcome the damage of 25 years of corrupt and vicious
tyranny to build their society into a lively and historic center in the
Middle East.

As a result of Saddam HusseinÕs misrule, IraqÕs economy
deteriorated significantly. GDP fell from almost $180 billion in
1979 when Saddam took power to around $50 billion in 2001.
Twenty-five years ago per capita income was approximately
$17,000 -- on a par with Italy -- based on purchasing power.
Today, per capita income is around $2000, comparable to El
Salvador. Moreover, the United Nations Development
ProgrammeÕs Arab Development Report 2002 ranked Iraq in
110th place among 111 countries on its Alternative Human
Development Index, which measures such things as life
expectancy at birth, educational attainment and enjoyment of civil
and political liberties.

IraqÕs economy today not only has shrunk, it is distorted in the
way that the economies of Eastern Europe and the Soviet Union
once were. Central control removed incentives for production.
Overcoming the legacy of state planning and controlled prices will
be arduous and time consuming.

There are many tasks ahead, including solving problems in the
most critical sectors, properly managing the newly created
Development Fund for Iraq, creating a healthy trade and
investment climate and transitioning the country off the Oil for
Food Program.

Tasks In Four Key Sectors

Oil The oil sector did not do well in Saddam Hussein's Iraq. The
infrastructure suffered from years of neglect, forcing Iraqi
engineers to exercise ingenuity and find creative solutions to keep
oil production levels as high as possible. The technologies applied
to boosting production have in some cases damaged the oil fields.
The lack of maintenance, equipment, and spare parts also
affected the infrastructure throughout the production chain -- from
the wellhead to the gas-oil separation plants, to the power plants,
to the pumping stations, to the refineries, and to the pipelines.

Since the liberation, Iraqi and U.S. engineers have been working
around the clock to restore production so that Iraq will be able to
meet domestic needs and begin earning revenues through exports.
A lot of progress has been made already, but much more remains
to be done. Because the oil sector is of such central importance
and the issues it faces so complex, I will provide more details
about it later in my testimony.

Food and Agriculture The complexity of the task of
reconstruction and reintroduction of market principles is well
illustrated in the food and agriculture sector.

Under Saddam, agricultural productivity suffered from low
investment, input shortages, poor agricultural and irrigation
practices, droughts and soil salinity. Returning Iraqi agriculture to
productivity and competitiveness is a major challenge we face.

Iraq has not been food-self sufficient, traditionally importing
60-70 percent of its caloric needs. Thus as we rebuild agricultural
production to be competitive, we will also need to ensure that a
vibrant trading environment exists.

The government rationing system provided a majority of Iraqi's
with food. Procurement and production of staples, like grains,
were by the government. Neither production nor consumption
reflected market prices.

Winding down the Oil for Food program does not mean the end
of the need to feed Iraqis, most of whom have received virtually
all their food through OFF. We are in the process of re-activating
the food distribution system to do this. Operational
responsibilities of buying, shipping, and distributing food and
medicine will be transferred to us as the occupying power at the
end of six months.

In the short run, we must continue food assistance for the Iraqi
population dependent on it. In the longer term, we must move the
Iraqi economy from the distortions of the Oil for Food program
to a market-driven system with cash salaries so that people can
begin to purchase their own food. When freed of government
control, the agricultural sector is one of the most responsive to
market forces.

Locally produced products, such as fruits and vegetables are now
traded freely in open markets. Our challenge will be to extend this
to grains, wheat and rice, which are the staples of the Iraqi diet.

USDA and AID have already begun to think through and
implement steps needed to reintroduce competitiveness to Iraqi
agriculture. For example, USAID and USDA have already
designed and are putting in place a project to assist agricultural
production and develop agricultural enterprise, credit availability
and infrastructure. In the 1980's the United States was Iraq's
largest supplier of agricultural products. We now look forward to
rebuilding cooperation between Iraqi and U.S. agricultural
sectors.

Transport Critical to Iraq's reconstruction will be the
transportation sector, which faces numerous challenges. On May
23, the port of Umm Qasr became the first reconstruction project
transferred from military to civilian administration. The basic
infrastructure is sound, but has not received proper maintenance
for years. Rehabilitation priorities include the port administration
buildings, new lighting, utilities, security fences, grain elevators,
port dredging so that larger bulk grain vessels can offload near
the grain elevators. The adjoining railroad system is also under
review for repair to help move the large amount of cargo
projected to arrive through the port. Major roadways have also
sustained conflict-related damage and will need work.

In civil aviation, the aircraft of Iraqi Airways, the former national
carrier, are parked outside Iraq and are not airworthy.
Moreover, Baghdad International Airport has taxi lane craters,
broken runway lights, unexploded ordinance, plumbing
difficulties, and security access control problems. There is also no
functioning civil aviation authority to oversee airport security, flight
safety oversight, and the administration of civair services. Despite
these obstacles, the Coalition Provisional Authority hopes to
resume civair services before July to accelerate the flow of U.S.
and foreign actors involved in reconstruction efforts. We foresee
that with the improvement of IraqÕs internal transport system,
trade and investment relations with its neighbors will also
improve.

USAID contractors Skylink, Bechtel and Global Securities are
making preparations for the possible re-opening of Baghdad
International Airport to limited commercial traffic by June 15. As
part of an interim operation, Global Securities is to provide
passenger and baggage screening security, Bechtel a temporary
passenger terminal and Skylink airport management. Skylink has
also been contracted to assess and make preparations for the
re-opening of the Basra Airport. USAID contractor, Stevedoring
Services of America, assumed operational responsibility for the
deepwater port of Um Qasr from the British military on May 23.

Telecommunications Telecommunications remains a critical
requirement for OCPA and the reconstruction effort. Prior to the
conflict, Iraq had minimal telecommunications -- some three
phones per 100 citizens. Although among the lowest levels in the
world, even this low figure overstates phone penetration
experienced by the average Iraqi since the ruling institutions --
BaÕath Party, military and government offices -- controlled many
of the phones. In addition, there was no wireless system, little
Internet and few computers.

In prosecuting the war, command and control systems, and
telecommunications centers, were targeted. The war and
subsequent looting and fires destroyed some 50 percent of the
telephone switches in Baghdad and severed all intercity and
international links. Thus, even though about two-thirds of the
800,000 lines in Iraq remain serviceable; they can connect only
with phones in their local exchanges.

As part of its efforts to provide security and operations for
OCPA, DoD contracted with MCI for a small emergency
wireless system for Baghdad, initially involving some 2,000
phones. The United Kingdom Ministry of Defense contracted
through Vodafone for similar wireless coverage in the south.

The Department of State has been active in developing a policy
response to address the larger telecommunications requirements.
State leads an interagency Telecommunications Support Team to
coordinate with and support the operations of OCPA's Joint
Communications Advisory Board. The interagency team has
endorsed a three-phase approach for telecommunications that
addresses 1) emergency requirements, 2) telecommunications
needs assessments, and 3) development of a broad policy
framework for the telecommunications sector reconstruction and
development.

The interagency team has also taken the lead in responding to
specific telecommunications requests from OCPA, including that
from Ambassador Bremer for an emergency interim nationwide
communications system for Iraq. With interagency agreement,
State has recommended that USAID contract for the rapid
restoration of critical emergency telecommunications facilities.
This contract would provide a coherent, integrated management
approach to emergency telecommunications that would link 21
cities and provide international connections. It would call for
multiple technologies and not prejudge future decisions by service
providers about technology. It would support supervisory control
and data acquisition (SCADA) systems for other critical sectors
-- power, water, refinery, transportation/airport, as well as
support medical, fire, police and other emergency response
operations. And, most importantly, it would provide these
services within 30 days.

In other areas, members of the interagency team are developing a
spectrum management plan and a framework for the
telecommunications regulatory structure in Iraq that has as its goal
a market based, private sector-led telecommunications sector.

Looking forward, there remain several requirements for getting a
modern telecommunications system in Iraq. These include repair
and building the wireline system, as well as a registration system
leading to competitive licensing of wireless service providers so
the Iraqi people can benefit from this important technology. We
are working, as noted above, to establish the policy infrastructure
for this action. It is difficult to speak with precision as to when
these actions can be completed, but we hope within a matter of
months.

As you can see from a very brief overview of key sectors, Iraq
will need assistance to get up and running. Not long-term aid, but
shorter-term aid until its economy can function well, and its
citizens prosper.

Management of the CountryÕs Finances -- The Development
Fund for Iraq

Security Council Resolution 1483 directs that oil proceeds be
deposited in a Development Fund for Iraq and be used for the
humanitarian needs of the Iraqi people, for rebuilding the
economy and infrastructure, for continued disarmament, and for
the costs of civilian administration. Ambassador Bremer already
has created a senior-level Project Review Board, to be chaired
by former USAID Director Peter McPherson, that would
approve projects and allocate funding sources. This process of
reviewing and approving expenditures will provide the basis for a
national budget for Iraq; Treasury already has budget experts on
the ground in Baghdad working on these issues. We also expect
OCPA to design a transparent procurement mechanism for
Development Fund expenditures that is consistent with USG
procurement guides.

We have worked with other agencies to open accounts for the
Development Fund for Iraq in both the Central Bank of Iraq and
at the New York Federal Reserve Bank. The Development Fund
for Iraq is now open for deposits of oil sale proceeds and other
revenues, including transfers from the UN. State is also working
closely with the Department of the Treasury to support the work
of the International Advisory and Monitoring Board, which will
bring representatives of the UN and international financial
institutions together to approve auditors for the Development
Fund for Iraq.

Creating a Healthy Climate for Trade and Investment

Removing economic and financial sanctions alone will not open
trade. We must re-establish IraqÕs trade with its neighbors and
the world, and establish a healthy business climate for Iraqis and
for domestic and foreign investment. Our team in the field has
already made a preliminary identification of several key issues.
These include:

* establishment of a new tariff schedule; * removal of non-tariff
barriers; * encouragement of foreign investment through drafting
of a more open investment code and loosening of restrictions of
foreign ownership of private property; * creation of an effective
banking system, and other financial services; * privatization of
substantial means of production and development; * adoption of
effective copyright protections; and * eventual entry into the
WTO.

Mobilizing Resources for Iraq Reconstruction

UNSC Resolution 1483 lays a foundation for redevelopment of
much of IraqÕs economy and more work will need to be done
over and above that. The American people and coalition allies
paid the price in blood and treasure to liberate Iraq. The cost of
redeveloping IraqÕs economy should be shared by the Iraqi
people, the international community and by the coalition.

I cannot give you a figure on how much it will cost to rebuild Iraq.
This is a complicated question with a number of component parts.
First, there is a need for funding of repairs and rehabilitation
following this most recent conflict. Second, is the larger task of
undoing the damage done by decades of Saddam HusseinÕs
misrule -- corruption, plunder and the distortions of central state
planning. Third, the Iraqi people will need financing -- public and
private, domestic and foreign -- to bring Iraq -- isolated for
decades -- into the information-rich, technology-driven global
economy.

As my comments on the oil, agriculture, transport and
telecommunications sectors imply, it will be some time before we
can even begin to estimate accurately all the forms of damage this
countryÕs economy has sustained. We are not talking about
traditional long-term financial assistance. Iraq needs help to get its
economy on a sound basis, develop a welcoming investment
climate and integration into regional and international trade. The
global community has asked the World Bank and UNDP to send
a team of experts to Iraq soon to do a thorough assessment. The
instability of the environment hampers our efforts currently, but to
the extent we can, we stand ready to update you at any time on
this important issue.

There are a number of resources that we plan on mobilizing to
finance the rebuilding of Iraq.

Found and Vested Assets

First, existing Iraqi state assets and the ill-gotten gains of Saddam
Hussein and his regime will be made available for the benefit of
the Iraqi people.

After Saddam HusseinÕs invasion of Kuwait in 1990, the United
States acted quickly and decisively to deprive the Iraqi regime of
the means and materials to continue its regional aggression,
further develop its weapons of mass destruction programs, and
continue its repression of the Iraqi people. Consistent with
UNSC Resolution 661, the United States blocked all Iraqi state
assets legally within its control.

Today, the United States is using those assets for the benefit of
the Iraqi people, as they build a new and better Iraq. The
President vested $1.7 billion in Iraqi government assets in the
United States. The Secretary of the Treasury has already
designated the Secretary of Defense with the authority to use
over $573.5 of these assets to meet the immediate humanitarian
needs of the Iraqi people.

Since the President signed the March 20 Executive Order vesting
Iraqi state assets in the United States, the State Department, in
cooperation with our interagency partners, is confirming the status
of assets declared frozen by foreign governments in 1991. We
have reached out to more than 20 additional countries that also
may have information regarding Iraqi state assets. With the
unanimous passage of UNSCR 1483, we are also reminding
countries of their obligation under the new resolution to make
available any Iraqi state assets to the Development Fund for Iraq.

We have had, and continue to have, extensive bilateral and
multilateral meetings with key jurisdictions. For example, the
Administration took advantage of the IMF/World Bank meetings
held in Washington in April to hold several important bilateral
meetings to discuss the matter. Treasury and State officials have
contacted their counterparts in key jurisdictions. My colleagues
and I have stressed the need for all countries to search their
financial institutions for ill-gotten gains of Saddam Hussein and his
regime.

The Department of State is working closely with the Departments
of the Treasury, Justice, Defense, and Homeland Security, as well
as law enforcement and intelligence colleagues across the
government, to identify additional assets and front companies that
may be connected to Saddam Hussein or his fallen regime. Our
efforts are leading to the identification of funds that can be made
available for the benefit of the Iraqi people. To date more than $1
billion in previously unfrozen assets outside Iraq have been
identified.

Revenue From Petroleum Production

Oil sales are the biggest potential source of revenue for the new
Iraq, as they were for the old, but this time IraqÕs oil revenues
will benefit the Iraqi people. A top priority is to bring the industry
on line and to repair and rehabilitate the existing infrastructure. A
highly qualified team is ready to take on this work. Thamir
Ghadhban is the CEO of the Oil Ministry and is actively directing
the process. He has a team of experienced and well-qualified
Iraqi managers and engineers in place at the Oil Ministry, the
State Oil Marketing Organization (SOMO), and the South and
North Oil Companies, and they have technical support from the
Army Corps of Engineers. Steps are being taken every day by
Iraqis working with the Army Corps to assess the condition of
wells, pipelines, pumping stations, gas-oil separation plants,
power grids, and refineries, and to make repairs. As the security
situation improves, the work will proceed at a faster pace.

Iraq's entire oil infrastructure was shut down in the face of the
American advance. The Iraqis and we have been working
diligently since the international coalition liberated Iraq, to bring
the sector back on line. Mr. Ghadhban announced on May 21
that Iraq was already producing 800,000 barrels of oil per day.
While there are many variables that can affect success in meeting
production goals, he also said that production could reach 1.4 or
even 1.5 million barrels by June 15. On May 28, Mr. Ghadhban
announced that the northern fields around Kirkuk have been
producing 600,000 barrels per day since May 27 but are not
expected to increase production above that level in the near term.
In the south, the situation is not as far advanced, but again,
progress is being made. He also said that, as of May 27, oil
production in southern Iraq exceeded 200,000 barrels per day,
so it seems that Iraq is well on its way to meeting Mr.
Ghadhban's production goals.

As a point of comparison, Iraq produced between 2 and 3 million
barrels per day in 2002. This is was down from 3.5 million
barrels produced at IraqÕs production peak in 1990. During
2002, Iraq exported an average of 1.7 million barrels per day.

Mr. Ghadhban also announced that the Basra refinery is -- or
soon will be -- operating at full capacity -- 140,000 barrels per
day. The plant is antiquated and the condition of the pipeline that
runs to Baghdad is still being assessed. IraqÕs two other major
refineries at Baiji and Daura are also operating, but at below
capacity, because of damage from looting, the continued lack of
stable electrical power, and a shortage of heavy fuel storage.

Mr. Ghadhban has determined the first task is to ensure that Iraq
is able to meet its own domestic needs for motor fuel and
liquefied petroleum gas, which is used for cooking. Iraq's
domestic needs for refined products require a production level of
some 250,000 barrels of oil per day. But in creating gasoline,
Iraq also generates considerable heavy fuel, which is largely
exported. As Iraqi oil production reaches 1.3 - 1.5 million bpd,
this would translate into roughly 1 million barrels of crude oil
available for export every day, plus lesser quantities of refined
product/heavy fuel.

SOMO has placed the first crude up for sale and is in the process
of collecting and evaluating bids in expectation of oil liftings
resuming in the next week, if not the next few days.

There is ample crude ready for export now through the port at
Ceyhan in Turkey, with over nine million barrels of oil already in
storage at the port, over eight million of which will be ready for
export as soon as contracts can be drawn up and signed by
SOMO.

The Mina al-Bakr oil terminal is operational. However, there are
a number of problems that will need to be resolved in the south,
not the least being the need to repair an industrial water plant
needed for oil extraction, in order to raise production to pre-war
levels of 1.2 million barrels per day.

In order to export these quantities, however, the legal framework
of contracts, guarantees, payments, and credits will need to be
finalized. SOMO has been working to draft a model contract.
The head of SOMO, Mohammed al-Jibouri, has announced that
the new contracts will be similar to those used under the Oil for
Food program, but some important changes are envisioned: most
importantly, contracts will be made transparently, unlike the past
when Saddam Hussein sought kickbacks from purchasers.

Al-Jibouri plans to sign direct sales contracts with traders and
refiners, cutting out the middlemen that facilitated the kickback
schemes. SOMO will also drop the UN's retroactive pricing
formula, moving instead to standard market pricing techniques.

The petroleum sector has seen virtually no new investment since
1991, and no new technology. Upgrades to protect the
environment, to enhance efficiency, and to meet commercial and
safety standards are badly needed, both upstream and
downstream. There are a number of estimates that have been
made regarding the probable costs associated with returning
Iraq's oil production to previous levels. For example, Cambridge
Energy Research Associates recently put a ballpark figure of $3
billion over two years to reach 3.5 million bpd through an
intensive program of rehabilitation and modernization. This would
bring production back to pre-1990 levels.

In the meantime, Mr. Ghadhban has announced that in the short
term Iraq would need not billions of dollars but "several hundred
million dollars." Under a new Iraqi Government, Ghadhban has
noted that, "We are going to open the doors for foreign
investment but in accordance with a formula that safeguards the
interest of the Iraqi people."

Oil Ministry officials hope to raise production to over 2 million
barrels per day by the end of this year. This will require more
rehabilitation of the Rumaila fields and production chains in
southern Iraq. Since the security situation is only slowly
improving, it is difficult to project the likelihood of success or the
likely costs associated with this work.

There obviously is considerable uncertainty surrounding these
production and export projections. But we can still use these
numbers as a rough basis for estimating potential revenue earnings
from oil exports. In the next few days, as Iraq begins to sell oil
from Ceyhan and the Gulf, we will have a better idea of the price
Iraqi oil can fetch, compared to other blends on the market.
Recently, European oil traders were tentatively pegging Kirkuk
crude at a price of $3.65 to $3.85 per barrel lower than Brent,
which is the standard against which all European crude is
measured. Because of long-term damage to the fields, Kirkuk
crude is higher in sulfur than it used to be. Europe's strict air
quality standards will make the oil a hard sell there, which is
reflected in the lower price.

If, for purposes of estimate, we say that a barrel of Iraqi crude
sells for $20, and if Iraq is able to bring exports up at a stable
rate from 1 million bpd in mid-June to 2 million bpd at the end of
the year, Iraq's gross earnings -- before costs are deducted --
would be in the range of $5 billion for the second half of 2003. If
Iraq is able to maintain stable production and export rates at 2
million bpd throughout 2004, it could earn, again in gross
revenues, about $14-15 billion. But potential earnings are subject
to a host of factors both inside and outside the country, including
the volatile nature of global oil markets and whether there is
sufficient demand for Iraq's sour crude to keep the price at the
projected range. The state of the global economy is also hard to
predict, and this too will have an impact on potential earnings.

In looking toward the longer term, Iraq's oil ministry has begun to
assess its rehabilitation requirements and evaluate existing service
contracts against identified needs. Development contracts with
Lukoil and China are being held in abeyance until a new Iraqi
government is in place to determine their future. We would
expect that the new government would also need new contracts
to upgrade facilities -- including refineries, gas-oil separation
plants, power plants, pipelines and pumping stations, as well as to
rehabilitate wells and open new fields to production.

Because Iraq has not had access to investments or new
technology over the last decade, analysts say that the country
may not be able to increase its production at existing fields even
to pre-1990 levels, because standard operating procedures used
over the past decade may have caused irreparable damage to the
fields, especially in Kirkuk. The status of these fields will need to
be assessed.

Over the long term, Iraq will want to acquire updated technology,
and may want to open new fields (only 15 of the 73 known fields
are in production now). It is possible that Iraq will also be looking
into options for exploration in other regions.

Other parts of the oil sector infrastructure also need work.
According to recent reports, the Mina al-Bakr export terminal in
the Gulf has the potential to handle 1.6 million barrels per day,
but we estimate that it cannot be safely run at levels much above
1.1 million. A second oil terminal, Khor al-Amaya, was
destroyed in the first Gulf War and only partially repaired. It lies
in a calmer area of the Gulf, however, and once rehabilitated will
provide a useful alternative.

Many commentators are speculating about how much it would
cost if Iraq should seek to raise production above historical
levels. For example, experts at Deutsche Bank, PFC Energy
Associates, and Energy Compass, have looked at not only sector
rehabilitation, but also new field production. They have come up
with large estimates of the financial cost of raising Iraqi oil
production far above its historical peak.

But it will be up to the new Iraqi government to decide how far it
wants to go and just where it wants to target IraqÕs future
production levels. Any large expansion of Iraqi production
capacity would have to be accommodated by increased demand
in the international oil market; such an increase in production
capacity would, in all probability, need to be privately financed.
The focus now is on rehabilitation and repair to help Iraq meet
Mr. Ghadhban's more modest goal of 2 to 2.5 million barrels per
day.

Finally, new laws and regulations will be needed to foster
investment and facilitate foreign ventures in order to fund new
development.

OPEC will hold its next meeting on June 11 in Doha. Mr.
Ghadhban has indicated that Iraq has no plans to leave OPEC,
which it helped establish, but he also has no plans to attend the
June 11 meeting. Before the first Gulf War, Iraq was responsible
for about 4 percent of world oil sales. Under UN sanctions, Iraq
was exempt from OPEC quotas, and the other OPEC members,
especially Saudi Arabia, adjusted production to compensate for
Iraqi oil sales through the UN Oil for Food program and to
maintain their target price of $25 to $28 per barrel.

Contributions From Other Countries

Despite the billions Iraq has in existing assets and expected oil
revenues, resources will remain far below what will be needed for
the next year or so to help the Iraqis achieve a stable economic
base. We expect that other countries -- both individually and
through international organizations such as the United Nation --
will make major contributions to this effort. Many countries have
come forward with offers of assistance -- either monetary or
in-kind contributions. To date these have been offers nearing $2
billion from third countries-- much of this pledged through the
$2.2 billion UN appeal. The EU alone has promised $107
million. There have also been many pledges of in kind
contributions -- from AlbaniaÕs 70 peacekeeping troops to
JordanÕs field hospital to a medical team from Lithuania.

Even before the fighting stopped, the State Department, working
closely with colleagues from DoD and Treasury, launched a
series of quiet consultations with countries that share our interest
in helping Iraq rebuild. These consultations confirmed that there is
widespread recognition that repairing the damage of decades of
misrule in Iraq is an international undertaking.

We now are working with the United Nations and the World
Bank on a preparatory meeting on reconstruction that will involve
a broad cross section of countries. The preparatory meeting will
examine not only current needs, but also explore requirements in
coming years. The preparatory meeting will be organized by the
UNDP, the World Bank and the United States on June 24. One
outcome of the meeting is likely to be a major donors conference
in the fall. The meeting should also underline the urgency of
undertaking a World Bank/UNDP needs assessment.

Debt Relief

In addition to the many costs Iraq faces to rebuild its economy, it
will also have to deal with the weight of huge amounts of debt
contracted by the previous regime. Treasury and State are
working with other creditor countries on a long-run solution to
IraqÕs debt burden that is responsive to the full range of IraqÕs
creditors. Secretary Snow has urged the need for a
comprehensive, multilateral debt treatment for Iraq. The issue
was discussed at the spring World Bank/IMF meetings and in the
G-7, where nations agreed on the need to engage the Paris Club,
a group of creditor nations that meet regularly to provide debt
relief to debtor countries.

At the April session of the Paris Club, State and Treasury and
Paris Club colleagues discussed Iraq and began the process of
debt data reconciliation. In their recent meeting at Deauville, G-8
Finance Ministers recognized that it would be unrealistic to
expect Iraq to make payments on its debt at least through the end
of 2004. Currently, Iraq is not making payments on its
international debt. The G-8 also asked the IMF to assess IraqÕs
debt situation.

Private Sector Investment

In the end, the single largest contributor to IraqÕs economic
renewal will be the Iraqi people, their ingenuity and their
determination to improve their lives, now that the burden of the
Saddam regime has been lifted.

Ambassador Bremer has stressed that we must begin to create
the conditions for a free market economy in Iraq now. Our
biggest challenges will be creating a secure environment in which
honest IraqiÕs can establish and run businesses, and the smooth
transformation of a state-controlled economy into a free market.
But the Iraqi people are talented and ambitious. And, despite
decades of war, Iraq has a small private sector, which can be
nurtured back to health.

We have been studying the legal and economic reforms needed
to create a stable business environment in Iraq. Ambassador
BremerÕs team has been cataloging such reforms -- which range
from lifting tariffs to WTO accession to creation of a new legal
framework. These and many other practical issues must be
addressed before international trade activity with Iraq will resume
and flourish.

In Washington, StateÕs Assistant Secretary for Economic and
Business Affairs has hosted a series of interagency meetings to
look at key economic reconstruction issues for which
Ambassador Bremer's team in Baghdad needs Washington
guidance. Last week, the group conferred over necessary steps
to revitalize business and commerce in Iraq following the lifting of
economic sanctions. The group also examined action needed to
successfully transition from the current centrally controlled food
distribution system under the UN's Oil for Food program to a
market-based food distribution system.

We have been drawing on the knowledge and expertise of our
embassies in the region, and are also working to engage regional
governments -- the idea being to identify "best practices" and use
regional reform models where appropriate.

One of the most important steps we can take is to help Iraq
re-integrate with the broader regional economy. The upcoming
June 21-23 special World Economic Forum event in Amman,
Jordan, provides an excellent opportunity to begin this process,
as Secretary Powell will undoubtedly underline during his
discussions there. In addition, the international development
institutions and the donor community will focus extensively on
steps we can take to re-stimulate private economic activity in Iraq
during June 24 donor's meeting at the United Nations.

Conclusion

The transformation that will take Iraqis from life under a ruler of
unimaginable cruelty to a free and prosperous nation will take
time. The American people have committed to help Iraqis make
this transformation, but it will require much more work on our
part. The long-term future of Iraq depends on the establishment
of rule of law, representative government, and sustainable
economic development. The United States, our coalition partners,
the United Nations, and most importantly, the Iraqi people, must
work together to finish the job, in order to guarantee peace and
stability in the region, and safety for the American people.

The Administration welcomes the strong interest of the Congress
in this issue and its strong support for the important task at hand.
We look forward to working closely with the Congress in the
months ahead.

[End]

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