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Thursday, May 27th, 2010 | Posted by apons80

SPECIAL REPORT-Between Iraq and a rich place

(Reuters journalists have produced a special multimedia package on frontier markets including stories, video reports, pictures, research, and graphics. To see the full package click on http://frontiermarkets.thomsonreuters.com) * Foreign oil firms lay basis for economic transition * Shaky political scene no deterrent for bravest * Calls for diversified economy * Hurdles: corruption, sectarianism, skills shortage By Nick Carey and Aseel Kami BAGHDAD, May 27 (Reuters) - The first hint that Christopher "Kiffer" Andress is not just your average CEO is the 9mm automatic pistol at his right hip. "Regardless of the situation today, our security measures haven't changed since 2007 at the height of the violence here," said the head of AISG Inc on a tour of the firm's yard in Baghdad where Iraqi workers were turning abandoned cargo containers into temporary housing units and storage rooms. He looked down at the gun for a moment then grinned. "So far, I've never had a reason to use it." Andress is accompanied by two bodyguards who both also carry pistols and always keep the CEO a set distance between them, eyes constantly on the move. Some things haven't changed for AISG, a U.S. contractor based in Iraq for the past six years. But much like Iraq, the company faces a major transition. AISG has 500 employees, 80 percent of them Iraqis. The company provides construction, security and "life support" services -- food, water, waste management -- to a single employer: the U.S. military. But seven years after the U.S.-led invasion to topple Saddam Hussein, the U.S. military is on the verge of halving its numbers to 50,000 troops and preparing to leave Iraq -- where sectarian violence has abated but daily attacks and bombings are still a fact of life -- by the end of 2011. For AISG, which has its headquarters in Baghdad, and other firms like it employing 100,000 contractors here, that means looking for a new source of revenue. "For those contractors that have survived this far, the choice is clear," Andress said. "Either find a commercial line of business, or leave." Like Iraq, AISG is betting on the oil industry. The country has the world's third-largest known reserves and the current government has signed 11 ambitious oilfield development deals with major oil firms including Royal Dutch Shell, Italy's Eni, Exxon Mobil, Occidental Petroleum Corp and South Korea's KOGAS. In theory, those deals should take Iraq to second place among oil producing nations from 11th now and boost its capacity within seven years to just under Saudi Arabian levels of 12 million barrels per day from 2.5 million today. Whether Iraq could or should make that target, however, is an open question -- such a volume of oil could push prices down. What is not in doubt is a huge production boost is in the pipeline. "Most people, myself included, think the Iraq targets are very optimistic and some would argue that they are over-optimistic," said Samuel Ciszuk, an energy analyst at IHS Global Insight. "But unless things go very wrong in Iraq, it's going to be huge. "There's just no other way to say it: it's huge." RISING PROFILE The oil majors and their service companies are here or on their way, preparing vast projects to revamp Iraq's crumbling oilfield infrastructure and export facilities, plus build new capacity. For AISG, this means new business. It is already working with oil industry firms to get them registered in Iraq and aims to provide the same services as it has for the U.S. military because Iraq is still a dangerous place. "These companies want to know 'How do we execute these contracts without having to look over our shoulder?'" he said. "That's where we come in." The oil deals have also grabbed the attention of other investors because they could be the trigger needed for broader investment throughout the economy. "The oil deals really raised the profile of Iraq in the international business community," said Zaab Sethna, head of the Baghdad office of investment firm Northern Gulf Partners LLC. "When people see major household names sign huge deals to invest in Iraq, it really puts the country on the investment map." That interest, Sethna says, reflects the fact that after decades of war and sanctions, Iraq "needs practically everything". That could mean hundreds of billions of dollars in infrastructure projects. "The country is impoverished, but it has the potential to be rich." According to a November 2009 report from Dunia Frontier Consultants, after the energy sector more than 50 percent of nearly $160 billion in announced foreign investment projects last year involved commercial and residential real estate, plus "manufacturing, processing, service-sector and other productive infrastructure". Most of that investment remains in the pipeline -- hoped for rather than real -- but the time for investors to take the plunge may be close. Northern Gulf Partners looks for viable Iraqi investments of between $10 million and $30 million and helps Iraqi firms raise private equity for amounts above that. Where there is no local company providing a particular service, the firm sets up its own. Sethna said a heavy equipment leasing firm is in the works to provide machinery for the construction projects that lie ahead. In the short term, some investors are watching to see how Iraq's inconclusive March elections are resolved and whether the Iraqis can form a new government without a return to the wholesale sectarian violence that followed elections in December 2005. RESOURCE CROSSROADS Beyond the elections, the promise of oil money is also seen placing Iraq at a crucial crossroads -- where it must choose between remaining a centrally planned economy that uses oil wealth alone to provide jobs and homes for Iraqis, or use it to fund public private partnerships and help kick-start free-market reforms. Analysts say Iraq must diversify because its population is too large to be supported by oil money alone, making it dangerously reliant on high oil prices. Another problem is that the oil industry employs relatively few people. Although oil contributed around 56 percent of Iraq's gross domestic product in 2008, it employed only one percent of workers. "Even though oil will generate a lot of revenue, it's not going to generate a lot of employment," said a U.S. official who was not authorized to speak to the media. Stock Market Research But becoming a free-market economy involves painful choices. SPECIAL REPORT-Between Iraq and a rich place

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