SPECIAL REPORT-Between Iraq and a rich place

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* 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 (BestGrowthStock) – 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