Iraq escalates efforts to control oil revenue

By Michael Georgy

LONDON (Reuters): Iraq's suspension of oil exports marks its biggest challenge yet to the United Nations on a new battleground -- control over Baghdad's oil revenue, analysts said on Friday.

Iraq halted supplies late on Thursday after it demanded that its crude customers pay a surcharge in violation of the terms of the United Nations oil-for-food program.

Baghdad, confident that it has eased years of international political isolation after its 1990 invasion of Kuwait, is now determined to break the United Nation's tight grip over its oil income, the analysts said.

"This is Iraq's first inroad into trying to chip away at core sanctions, mainly the control over oil revenue," said Raad Alkadiri of Washington's Petroleum Finance Co.

That's why Iraq appears to be spoiling for a protracted fight with the UN, hoping to secure concessions that would diminish the world body's supervision over its crude sales, analysts said.

Lifters of Iraqi crude and traders, struggling to determine how long the latest dispute will last, agreed Iraqi President Saddam Hussein appeared more stubborn this time around.

"It seems there are clear instructions being driven from above for (state oil marketer) SOMO to stick to its demands and deal a significant blow to sanctions," said a major lifter.

The mood among some of Iraq's oil customers was reinforced by an official announcement from an Iraqi oil ministry official who said that Baghdad would not back down on December crude pricing formulas that have been rejected by the United Nations.

"Iraq is determined to stick to its stand and its rights," the official Iraqi news agency quoted him saying.

Analysts believe Iraq is in no rush to resolve the issue. It knows oil companies cannot meet Baghdad's demands to pay a surcharge direct to an Iraqi bank account or they will be breaking sanctions.

"Iraq is trying to do something else to bring attention to the sanctions. It knows people are not going to pay the 50 cents," said a London trader.

"We are figuring on at least two weeks but it could go on longer. It is not something that could be easily resolved and it does not look like Iraq will back down," said another.

Iraq's defiance is part of a strategy that Baghdad has been pursuing in the last few weeks.

It has recently bombarded the United Nations with demands concerning the oil-for-food program..

At Iraq's request customers pay for oil in euros instead of dollars and Baghdad has plans for doubling port fees at the Gulf port of Mina al-Bakr starting Jan. 1.

Syria is receiving crude from Iraqi along a pipeline shut since 1982 and outside of UN financial control.

The Iraqi leader is once again turning to one of his most potent weapons against the United Nations and arch-enemy the United States -- shrewd timing.

"Iraq is trying to take advantage of the most favorable international market conditions in a few years by asking for the surcharge," said Alkadiri.

Baghdad unleashed the oil weapon again at a time of peak demand in the winter season, hoping to inflict the maximum psychological damage.

Iraq also picked an ideal moment to remind the United States that it is still going strong despite long years of international isolation.

The last thing the United States needs to worry about during its delayed presidential election results is less oil in the market while Americans worry about the politically explosive issue of high fuel costs in the winter.

Washington, for its part, repeated the official line during an Iraq crisis -- key U.S. ally and OPEC power Saudi Arabia will step in to fill any gap in Iraqi supplies.

But the disruption in Iraqi exports is menacing because getting Saudi oil to market takes time and other OPEC states are already pumping crude at full throttle.

Nevertheless, Iraq's new gamble might not pay off because its customers could start looking around for alternative suppliers, the Saudis could step in and the United States could tap its emergency reserves to fill in the gap.

Iraq's bargaining power then would diminish. But the UN knows all too well that Baghdad is quite capable of throwing a new card on the table.