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Projected Iraq oil costs up sharply

WASHINGTON -- The Bush administration has doubled the value of a contract to rebuild Iraq's oil industry, to $2 billion, sharply driving up the projected cost of restoring the country's prewar capacity.

The decision gave fresh ammunition to critics of the president's postwar policies and came as questions surfaced about whether the franchise now held by a subsidiary of Halliburton Co., the oil giant once led by Vice President Dick Cheney, will be expanded to include the development of virgin petroleum fields. The subsidiary, Kellogg Brown & Root Services, was originally hired to help rebuild Iraq's petroleum sector.

"Mission creep is occurring in Iraq," said Representative Henry Waxman, Democrat of California. "The administration says its goal is to repair war damage, but its budget request shows it wants taxpayer dollars to build projects that have nothing to do with repairing war damage, such as constructing an entirely new oil refinery."

The US Army Corps of Engineers, which is managing efforts to rehabilitate Iraq's war-torn and sanctions-deprived oil sector, said yesterday it would issue contracts to redevelop the country's oil grids in the north and south worth a maximum of $800 million and $1.2 billion, respectively, and a minimum value of $500,000 each. An earlier award to replace Kellogg's contract, which was to have been issued in August, valued the projects at $500 million each but was canceled as the spiraling cost of repairing Iraq's battered infrastructure became clear, and the scope of the project expanded.

An Army Corps spokesman said the budget for the oil contracts was increased in line with a study of Iraq's oil-sector needs conducted by Kellogg. In March, the Army Corps said it gave Kellogg a mandate with an initial maximum worth of $7 billion, one of a number of closed-door contracts issued by the US government. The Army Corps officials say it has always been their intention to replace the original Kellogg contract with one awarded in a competitive bid. A new award for the two 24-month contracts would be held within 30 to 60 days, according to the Army Corps.

The contracts, which have a minimum value of $500,000 each, are unrelated to the $2.1 billion included in the Bush administration's special budget request set aside for Iraq's oil industry.

That allotment is part of an $87 billion supplemental budget request submitted in September by the Coalition Provisional Authority -- the US-led agency running occupied Iraq -- to cover the rising costs of rebuilding and pacifying the country. The $2.1 billion special budget request was to cover such expenditures as upgrading seaports and protecting oil pipelines from sabotage.

The US government has already invested an estimated $1 billion to return Iraq's daily oil production to its prewar peak capacity of about 3 million barrels.

The terms of the new contracts will be consistent with the objective of the old one -- to help Iraqis upgrade and maintain existing infrastructure until the work can be transferred to the Iraqi oil ministry, said the Army Corps spokesman. Kellogg and Fluor Corp., of Aliso Viejo, Calif., are said to be among the companies interested in bidding for the new contracts.

The Kellogg contract has been a source of controversy since it was issued under emergency laws that allow the US government to hold closed and noncompetitive bids during wartime. Cheney was the chairman of Halliburton for five years until he was chosen by Bush as his running mate, and news of the Kellogg award prompted conflict-of-interest charges. Lawmakers and public-interest groups have criticized what they say is a lack of detailed information about the contract, which has gradually been uncovered by their own investigations of the deal.

The contract was originally thought to have limited Kellogg's tasks to capping war-damaged wells, but was slowly revealed by the probes to include gas-importation and surveys of unknown cost in coordination with Iraqi oil ministry officials of the country's neglected and damaged petroleum grids.

Recent statements by US officials suggest the franchise may have been expanded to include exploration and development of new oil and gas fields.

The White House request for supplemental funds, submitted through a 54-page document prepared by the US-led Coalition Provisional Authority in Iraq, says part of the money "will also initiate the development of new oil and gas fields," a reference to the vast reserves discovered in Iraq more than a decade ago, oil specialists say. Developing those sources, the request estimates, could enhance Iraq's energy output by 250,000 barrels of crude oil and 200 million standard cubic feet of natural gas per day.

On Oct. 8, Army Major General Carl Strock, the deputy director of operations for the Coalition Provisional Authority in Iraq, told the House Committee on Government Reform that money provided under the supplemental budget request would be used for "the development of the oil fields . . . and it's also building the new refinery."

Phone calls to Strock's office in Washington for comment were not returned; an Army Corps spokesman in Dallas said there was nothing in the terms of either Kellogg's existing contract or the two new contracts that would replace it that could allow for the tapping of new energy reserves in Iraq.

Developing Iraq's virgin petroleum fields could increase its crude output to some 8 million barrels a day, according to analysts. But oil specialists say it would be premature to move on new wells, portions of which were parceled out for development under deposed dictator Saddam Hussein to non-US oil companies.

"They need to develop a legal framework," said Fareed Mohamedi, chief economist of PFC Energy in Washington. "And who will negotiate the law? They have a lot of work to do first."

Stephen J. Glain can be reached at glain@globe.com.

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