As President Bush prepared to tell the nation on April 13 that the U.S. and its coalition partners will stay the course in Iraq, conditions there are more unstable than at any time since Baghdad fell nearly a year ago. This month’s escalation of violence has resulted in the kidnapping of scores of civilians from a dozen countries and the deaths of 70 coalition forces and at least 700 Iraqi civilians. Reconstruction has slowed to a crawl. Supply convoy operations were suspended, pending security upgrades, and contractors were avoiding traveling to jobs.

The cycle of mayhem spiked after four Blackwater security contractors were killed and mutilated in Falluja March 31. As the First Marine Expeditionary Force moved in to roust insurgents, an attack on a KBR fuel convoy April 10 at nearby Abu Gharib, just west of Baghdad, left a soldier and a Halliburton KBR driver dead and two soldiers and six KBR employees missing. Four unidentified bodies had been recovered at ENR press time and the fate of the others was uncertain. Insurgents also claimed to hold Thomas Hamill, a 43-year-old KBR trucker from Macon, Miss., and threatened to kill him unless Marines withdrew. Click here to view map

Galustian says Iraq's conditions of great risk and great potential is making doing business in there the highest-stakes game in the world. (Photo by Glen Carey for ENR)

Security is affecting contractors all over the country, beginning with the convoys that supply food, fuel and bullets to the military. "KBR and the Army made the decision to temporarily put on hold the convoys while they work on additional security," said KBR spokeswoman Melissa Norcross on April 13.

Private security firms and subcontractors are scrambling to adjust. "Nowhere on the planet does there appear to be such great financial potential coupled with such danger," says Richard Galustian, senior partner in ISI, an Iraqi-British security company in Baghdad. "If you want to do business, you must have heavy security. If you need so much security, you will probably be unable to do business," says Galustian.

"I am confining my movements to local areas," says Howard Lowry, a Texan and senior partner in Iraq Business and Logistics Center, a company that deals in real estate, construction, distribution and turnkey solutions for companies entering the market. His best information comes from Iraqi partners or friends. "They are in the position to explain what is happening on the street," he says. "The situation has changed significantly over the last 10 days."

"Our business has stopped," says an Iraqi contractor, who asked to remain anonymous. "There is no law in Iraq and the roads are unsafe." He says the environment outside Baghdad has become too dangerous even for Iraqis. Local businessmen say it is affecting their work with the coalition. "It is too dangerous for me to be seen working with the Americans," one says. The country has been locked down since April 7, says one security contractor.

The impact of violence on reconstruction’s pace could be huge. Take the convoy suspension, for instance. KBR’s Houston-based parent, Halliburton, says the company often has 700 trucks on the road making contract deliveries to the Army. Drivers typically log more than 3.3 million miles monthly.

The work is risky. Many fuel convoys consist of 30 vehicles, with armed Humvees at the front and rear. Assaults usually result in one or two trucks being cut out while the rest drive on for self preservation. More than 300 trucks have been abandoned along the main supply route from Kuwait to Balad, following attacks and breakdowns, according to a company spokesman.

KBR has lost more than 30 employees and subcontractors. Several drivers quit recently, but KBR, with 24,000 employees in Kuwait and Iraq, sends 500 replacements from the U.S. weekly and says there is no shortage of volunteers.

As the Marines sought to stabilize Falluja and troops in the south fought to retake ground lost to Shi’ia firebrand Moqtada al-Sadr, the work force stayed off the job in droves. The Coalition Provisional Authority counts heads every Monday on reconstruction sites across the country, says U.S. Navy Capt. Bruce Cole. The count was 7,744 on March 28, 5,326 on April 5, and 3,732 on April 12.

Cole blames the drop on Muslim holidays and a transition from the first- phase reconstruction contracts to the second. He acknowledges that the surge of violence also plays a part.

Transition snags from Phase I to Phase II also forced a two-week halt to water injection system repairs in southern Iraq’s Rumaylah oil fields. On March 28, the Army Corps of Engineers told KBR to shut down several jobs. The action raised alarms about looting and sabotage. Work forces were demobilized and idled contractors say hundreds of Iraqi workers and more than 100 expatriate technicians were sent home.

Federal acquisition rules triggered the stoppage, which affected seven high-pressure pump facilities being refurbished. The repairs started in fiscal year 2003, but the contract ran out of money before the Corps finished processing a new task order to tap 2004 funds. "You only have so much FY03 money," says Col. Emmett Du Bose, director of Task Force Restore Iraqi Oil, under the Corps of Engineers Gulf Regional Division in Baghdad.

Du Bose said an order to resume went out April 9 but it was unclear how fast the workers could remobilize. One sub reports receiving such a string of contradictory messages about closing down and pulling off and resuming work that he doesn’t know what to believe.

"If we were to be asked now should companies venture in, we would hesitate, but overall there is reason in the medium and long term to be optimistic–say by the end of this year," Galustian says.