Iraq's oil production capacity has been reduced by two-thirds because allied air strikes severely damaged key installations, mainly in the south, the Middle East Economic Survey reports.

Before Iraq began the Persian Gulf crisis and the war that followed by invading Kuwait, Iraq's production capacity was estimated at 4.5 million barrels a day. But it was not operating at that level because it was observing an OPEC quota of 3.4 million barrels a day.The Iraqis had been driving to boost production capacity to 5 million barrels a day to increase exports, their main source of revenue to fund reconstruction and industrial expansion after the 1980-88 war with Iran.

The six-week U.S. and allied bombing offensive hammered oil installations, refineries and petrochemical complexes as well as military and other strategic targets. The survey, a respected oil industry newsletter published in Nicosia, said that Iraq's southern export facilities suffered the most damage.

The weekly said the PS-1 pumping station south of Zubair, near the port city of Basra, was seriously damaged.

The P-3 petrochemical complex near Basra was bombed and it has been reported set ablaze by artillery and tank fire from President Saddam Hussein's troops, who are now fighting Shiite Muslim rebels in and around Basra.

Before the war, the PS-1 complex was the main dispatch point for pumping 1.6 million barrels a day through the IPSA pipelines across Saudi Arabia to the al-Muajjiz terminal on the Red Sea.

Iraqi and Kuwaiti oil exports were halted by a U.N. trade embargo imposed after the Iraqis invaded the emirate.

Saudi Arabia and Turkey, through which other pipelines run, shut down Iraq's overland export routes after the invasion.

The Middle East Economic Survey said PS-1 was also used to pump 800,000 barrels a day to the offshore Mina al-Bakr terminal in the northern gulf.

"Reports indicate that the offshore terminal has also been damaged, but there is no precise information as to the extent of the destruction," the survey reported.