Market Focus : Detente With Iraq Could Spoil Oil Sales for Others : Kuwait and other OPEC neighbors wouldn’t mind if the sanctions stay forever. They are picking up business that Baghdad has lost.

Less than four years ago, when U.S. soldiers and their comrades in Operation Desert Storm liberated Kuwait, the emirate was on fire.

Nearly every one of Kuwait’s 700 oil wells was burning, the targets of Iraqi saboteurs, and the rest flowed like tributaries into great lakes of oil on the sand. The sky was black, and droplets of oil hung like humidity in the air, staining dishdashas and business suits here in the capital. The crippled refineries were closed.

It was, as one Western oil analyst here put it, “as bad as it gets in the oil business.”

Today, to the surprise of oil experts, Kuwait, a nation smaller than New Jersey with the third-largest oil reserves in the world, is fully back in business. Its three refineries are open and operating, and the nation is pumping 2 million barrels of crude a day, equal to pre-Persian Gulf War levels.

But the latest threat from Iraq, and its desperation to fling off the noose of U.N. sanctions, has been a blunt reminder to Kuwait and its Gulf neighbors that one of the world’s most important oil producers is still on the sidelines and that they owe much of their economic and political stability to the U.N. restraints on Iraqi President Saddam Hussein.

Since the Gulf War ended in 1991, the sanctions have cut Iraq, with the world’s second-largest oil reserves, out of the world petroleum market, leaving Kuwait and others in the Organization of Petroleum Exporting Countries to happily take up the slack.

Iraq once produced about 3 million barrels of oil a day. Today it pumps just about 600,000, enough to meet its domestic needs with a little left over to be sold at discount to friends such as Jordan.

No one knows for sure when, or even if, Iraq will accept all the United Nations’ preconditions for lifting the trade embargo. But that question is clearly on the minds of oilmen in nations such as Kuwait and Saudi Arabia, which wouldn’t mind if the sanctions remained permanently.

In public, those countries say regional security, and not oil revenue, is their main concern.

“Oil prices are not the core of the whole issue,” said Saud al Sabah, Kuwait’s information minister. “The issue is Saddam’s military capacity. He can export oil now if he uses the proceeds to buy food and medicine for his people.” The U.N. sanctions require oil profits be used only for humanitarian causes.

But privately, government officials admit that if Iraq returned to full oil production it could send prices for oil plummeting, touch off rancorous debate in OPEC and set up a testy economic battle in the region.

“Eventually, sooner or later, sanctions are going to be lifted. And when that happens, let’s face it, Iraq is going to flood the market,” a senior executive in the Kuwait Petroleum Corp. said.

But many Western oil analysts doubt that Iraq could come back to full production that fast. “It’ll be more of a phased event,” a Western diplomat here predicted. “I don’t envision 22 tankers on the seas overnight.”

When Iraq re-enters the market, it will also face some difficult negotiations in OPEC, which was formed to keep oil prices high by placing production limits on oil-exporting countries. Iraq, Kuwait and Saudi Arabia are among OPEC’s 12 members. Many major world producers do not belong to the cartel.

“There’s going to be some tough bargaining in OPEC,” another Western diplomat said. “Why should Kuwait or anyone else in OPEC bend over backward to help Iraq?” But some industry experts point out that Iraq could end up withdrawing from OPEC and sharply discounting its oil.

The first battles on sanctions will come in the U.N. Security Council.

U.N. conditions for lifting sanctions against Iraq are open to some interpretation, and the United States is likely to take a harder line than Russia and France. Russia wants to see sanctions lifted so Iraq can begin paying off its debts to Moscow, and two French oil companies have reportedly reached agreement with Iraq to develop two oil fields once sanctions are removed.

But some U.S. diplomats doubt that Iraq can ever clear the U.N. hurdles as long as Hussein is in power. Even if he agrees to some of the conditions--by recognizing Kuwait’s borders and agreeing not to use oil revenue on military spending, for example--the Americans and others still won’t trust him. Many oil market analysts believe that it will be a year, at the earliest, before sanctions are lifted.

That would be just fine with Kuwait, Saudi Arabia and others in the Gulf. The possibility of detente, and Iraqi oil on the market again, makes many oil executives in this region jittery.

In a race against that possibility, Kuwait is rapidly expanding its oil production as well as its other petroleum enterprises, from refining to retail gasoline sales. It already has 6,500 gasoline stations, owned by the government oil company, from Europe to the Far East.

With several multimillion-dollar expansion projects under way, Kuwait could boost its production capacity to 2.5 million by next year--and to 3.5 million within five years. It has served notice that it will seek an increase in its quota when OPEC next revises its agreement, probably next year.

Kuwait’s comeback from the war has been, by all accounts, remarkable. During the seven months of Iraqi occupation, and in the final sabotage of the wells, 1 billion barrels of oil--or 1% of Kuwait’s total capacity--disappeared in smoke.

Although Kuwait has a bloated official bureaucracy, the nation’s brightest people work in the government-owned oil industry. And they were able to bring back full production within two years.

“I have the highest regard for these people,” said a Western diplomat who dealt with Kuwaiti oil executives in exile.

Many had feared that the oil fires would provoke an environmental catastrophe or that some wells would be damaged beyond repair. But the fires were quickly put out by foreign firefighting crews.

The air over Kuwait is clean again, but the oil lakes have been a challenge for environmental engineers. After some crude was siphoned off, and some evaporated, all that was left were vast expanses of sludge, still visible from the air. Eventually the cleanup will cost millions, if not billions, of dollars.

For such a small country, Kuwait’s 96 billion barrels of proven oil reserves are immense, more than four times the reserves of the United States. The bulk of that oil is in the Greater Burgan field, the world’s second-largest, located about 20 miles south of Kuwait city. But there’s oil all over the country, from the northern border with Iraq to Kuwait city itself.

It is those oil reserves that brought the Western world rushing to Kuwait’s defense during the Gulf War, but Kuwaitis also know it is that underground treasure that has made them a target.

“If we didn’t have the oil,” Refai said, “even Iraq wouldn’t care about us.”

Valuable Reserves

Six of the 12 members of the Organization of Petroleum Exporting Countries (OPEC) are in the Persian Gulf Region. A 1990 dispute over the Rumaila oil field, which straddles the Kuwait-Iraq border, helped lead to the Persian Gulf War in 1991.

Iraq Loses; Others Gain

Iraq was OPEC’s second biggest oil producer before the 1990 U.N. embargo. Now other nations are filling in the gap. Crude-oil production in thousands of barrels per day Saudi Arabia July 1990: 5,418 July 1994: 8,017 *Iraq July 1990: 3,246* July 1994: 578 *Iran July 1990: 3,002 July 1994: 3,535 *Venezuela July 1990: 1,970 July 1994: 2,463 *United Arab Emirates July 1990: 1,954 July 1994: 2,193 *Kuwait July 1990: 1,812 July 1994: 2,015 *Nigeria July 1990: 1,702 July 1994: 1,790 *Libya July 1990: 1,256 July 1994: 1,383 *Indonesia July 1990: 1,252 July 1994: 1,333 *Algeria July 1990: 770 July 1994: 742 *Qatar July 1990: 378 July 1994: 438 *Gabon July 1990: 268 July 1994: 336 * The United Nations trade embargo was imposed on Iraq in August, 1990, after Iraq invaded Kuwait. SOURCE: Organization of Petroleum Exporting Countries. Compiled by Times researcher LAURA A. GALLOWAY