Sell Off Your Oil Wealth
and Ye Shall be Free
America’s Lust
For Oil in Iraq
By James Houle
12/12/05 "ICH"
-- -- The
Project for the New American Century
(PNAC) plan for the Middle East was fleshed-out in a policy paper
issued in early 2002 entitled “Moving the Iraqi Economy from
Recovery to Sustainable Growth” and produced at the American
Heritage Foundation by Aaron Cohen and Gerald O’Driscoll. Reissued
by the State Department in February 2003, it provided the rationale
for the Bush oil policy for Iraq in those heady days after the
thunderous advance up the road to Baghdad. They proposed to sell off
all of the oil resources of Iraq, currently held in trust by the
Iraqi National Oil Company (INOC), to major US oil firms.
Privatization of Iraqi oil, literally the sale of rights to own and
exploit the country’s oil and gas resources, was trumpeted as the
cure for all ailments. The nationalization of the country’s oil by
the socialist government in the 1960s, they explained, has resulted
in corruption, mismanagement and a failure to expand production.
Nationalization has been used to “keep a precious and profitable
resource in the hands of the ruling elite”. Privatization, by
contrast, would sell these resources to private oil, increase
production rapidly, reduce prices, and allow Iraq to leave OPEC (the
Saudi-dominated cartel that controls oil supply and keeps prices
high). Getting Iraq out of OPEC would increase oil revenues, the Neo
Cons explained and thus “dampen oil price fluctuations, ensuring
stable oil prices in the world market on a price range lower than
the current $25 to $30 a barrel”. (In actual fact, Saudi Arabia, the
swing producer in the Middle East with considerable flexibility in
its production rates, has more often acted to hold oil prices in
line, preventing price spikes that could lead the US to seriously
conserve energy.)
The Department of
Energy predicted that Iraqi oil production would soon double if
privatized and oil revenues would bring in $50-100 billion during
the next 2 to 3 years. With these glowing predictions in mind,
seizing and securing the oil fields was given highest priority
during the invasion. The White House had predicted during the
buildup to the invasion that oil revenues would pay the entire cost
of the invasion and occupation as well any necessary rebuilding
effort. Paul Wolfowitz happily explained
that while “Iraq was going to soon become a democratic country, what
we’re going to do with respect to the oil resources is something 99
percent of the Iraqis would not vote for”. Thus the grab for the
country’s assets has got to be accomplished quickly before an
elected government is in place that might not take kindly to this
loss of the country’s most important asset. (So much for spreading
democracy).
Mixed Signals Out of Baghdad
General Jay Garner, appointed by President
Bush to be Pro-Consul of the new Iraq, made his big career mistake
in March 2003 on his way to Baghdad by announcing that Iraq would
have free and fair elections just as soon as Saddam was toppled,
preferably within 90 days. This could certainly derail Wolfowitz’
plan to sell off the oil wealth before the people got the vote.
However not to worry, for Garner’s “90-days-to-democracy” ideal
immediately ran into a practical problem: The entire oil sector
couldn’t possibly be wrapped up and sold off in 90 days, even with
the help of “e-Bay”. In fact, the State Department’s Economic Plan
optimistically called for a 360-day schedule for a free-market
face-lift for the entire country. (None of this has been achieved
although some 900 days have now passed). Garner had an additional
problem: he didn’t really agree with the planned sell off of oil.
“That’s one fight you don’t want to take on,” he explained later in
Washington. He was summarily deposed by Don Rumsfeld in a telephone
call on his very first day in Baghdad. Paul Bremer, an employee of
Kissinger Associates, was his replacement. Bremer proved to be a
gung-ho advocate of free markets and the privatization of
practically everything on Iraq that did not move.
Philip
Carroll, the former CEO of Shell Oil USA, moved to Baghdad and took
control of Iraq's oil production on behalf of the US-led Coalition
Provisional Authority and immediately stalled the whole sell-off
scheme. He made it clear to Bremer that: "There was to be no
privatization of Iraqi oil resources or facilities while I was
involved.” In response to later criticism by Aaron Cohen at the
Heritage Foundation, Carroll dismissed him as follows: “To privatize
would be a no-brainer. It would only be thought about by someone
with no brain". Later, he explained that: "Many neo conservatives
are people who have certain ideological beliefs about markets, about
democracy, about this, that and the other. International oil
companies, without exception, are very pragmatic commercial
organizations. They don't have a theology." This remark could be
translated as: Big Oil lets the geology tell them where the oil is,
and employs the common sense gained over many years to then guide
them in how best to get it produced.
Privatization Blocked by Industry
In contrast to the views heard in
Washington and initially from Bremer’s office, advisors from big US
oil firms summarily dismissed the notion of undermining OPEC by over
producing and flooding the market. A new oil policy was ordered up
and a team assembled in Washington that included both
well-experienced Iraqi oil experts and US oil company executives
working under the cover of the State Dept. Their late 2003 report
entitled “Options for Developing a Long Term Sustainable Iraq Oil
Industry” compared six alternatives ranging from total state control
and financing of oil development (the Saudi model) to full
privatization as advocated by the Neo Cons, and included the scheme
advanced by the international oil companies called the Production
Sharing Agreement. Recent analysis has suggested that the
privatization scheme advocated by some of the neo-conservatives was
actually a misconception of what the term meant in the petroleum
sector. Iraqis have little such confusion since under the British
Mandate in 1925 their King Faisal (a British import) had signed away
for 75 years all rights to the country’s oil resources under a
privatization policy. It was not until 1961 that a more equitable
split of revenues between the state and the international oil
companies was negotiated.
Production Sharing Agreements or PSAs are
widely used in smaller producing countries without the financial
clout to self-finance oil field development and are particularly
useful for high risk oil where the volume of recoverable oil is not
well assured. Under a PSA, the state nominally owns the oil
resources but hands over their development and exploitation to the
international oil companies. Ms Amy Jaffe, who coordinated the
State Department report, has explained that Big Oil prefers state
control of Iraq's oil over an outright sell-off of the oil resources
as would occur under privatization. Furthermore, US oil companies
are not warm to any plan that would undermine OPEC and the current
high oil prices. Ms. Jaffe said: "I'm not sure that if I'm the chair
of an American oil company, and you put me on a lie detector test, I
could say high oil prices are bad for me for my company."
Given the heat coming from the wiser heads
in the US oil industry and the opposition of the Iraqis, Bremer
quickly removed oil from his hit list of national assets to be
privatized in a hurry. In September of 2003 the newly
installed Oil Minister Ibrahim Bahr al-Uloum, earlier an advisor at
the State Department, said privatization of production was not an
option. While he favored some type of PSA, he thought it unlikely
that Big Oil would come back to Iraq until there was better security
in the country.
The
Oil Patch Goes Up In Smoke
Within
weeks of the collapse of the Saddam Hussein government, insurgents
thought to be agents of Saddam Hussein were blowing up the major
pipelines that transport oil southward to the oil terminal on the
Gulf, and northward through Turkey. With the capture of Saddam, the
attacks only accelerated, and from January 2004 through early
September of 2005, 230 major attacks were successfully carried off
on the oil infrastructure. While a total
of 12,000 guards have been positioned along these pipelines,
sabotage continues. If it remains the perception of Iraqis
that their oil wealth is being ripped off by the West, then oil
facilities will remain a key target for insurgents. The blowing up
of an oil pipeline is seen as a good means of preventing oil from
becoming too attractive a prize. Any means to shut off this revenue
stream will make the war more costly to the US taxpayer. Most of
these attacks have been on pipelines and pumping stations, rather
than on the oil wells or the downstream oil processing and refining
facilities. Thus the sabotage slows down temporarily the flow of oil
to markets but does not cause major damage to installations that
would require a years to replace. As a consequence, oil production
has declined ever since the first day of the invasion. It is now
under 2.0 million barrels per day on average compared with 2.6
million just before the invasion. The Saddam Hussein regime had
boosted production to 3.4 million barrels
per day prior to the first Gulf War. Oil has been lost to corruption
within the Oil Ministry, to black marketeering, and to downright
theft. The failure to operate water injection plants for pressure
maintenance in the giant Rumailia oil field has led to irreversible
damage to the reservoir. Commenting upon these setbacks in
December 2005, Rumsfeld carefully counted his blessings and
acknowledged that while the war has not gone according to plan, many
things that were feared, including lighting off of oil wells, have
not happened.
Insurgents responsible for the sabotage are quoted as saying, "Look,
you're losing your country and you're losing your resources to a
bunch of wealthy billionaires who want to take you over and make
your life miserable.” The increasing attacks upon the oil
infrastructure suggest that it is downright delusional to believe,
as senior US policy makers seem to, that military force is a
reasonable tool for securing access to petroleum resources. Our
major oil companies, who have been exploiting foreign oil by less
drastic means since 1943 in Arabia, find the Bush approach to be
utterly blind to the realities of the world.
The Iraqi Interim Government Takes a Role
In September 2004,
when Allawi became Prime Minister, he modified petroleum policy once
again in the face of strong domestic opposition even to PSAs as a
replacement for INOC control. He stated that INOC would continue to
control the 17 oil fields that are now in production while PSAs
would be considered for the other 63 fields that have been
discovered but yet exploited. This works out to 64% of the country’s
current oil reserves being turned over to international oil
companies for exploitation. If an additional 100 billion barrels of
reserves is discovered, as most oil experts think likely, then at
least 81% of the country’s total oil wealth would be placed in the
hands of foreigners. Allawi’s new oil minister said that these PSAs
would be signed quickly in 2006 without extended negotiation, taking
the best terms Big Oil were currently willing to accept. We can
renegotiate at some future date, he suggested.
A new
National Assembly was finally installed in early 2005 and in June a
Petroleum Law was drafted and ready for enactment after the December
2005 elections. This draft confirms Allawi’s plan for the
establishment of PSAs in the new oil fields and continued control by
INOC of the existing fields. However the new Constitution approved
in an October 2005 vote adds more confusion than light by waffling
on the question of control over oil resources. It calls rather
obscurely for the government to “rely on the most modern techniques
of market principles and encourage investment”. To further confound,
it does not list the exploitation of new oil fields as the exclusive
power of the federal government, leaving it an open question as to
whether regional governments such as Kurdistan can cut their own
deals. This has already advanced a few steps with the award of an
exploration and development contract to a Norwegian firm by the
Kurdistan Regional Government. A big battle between the Kurds, the
Sunnis and the Shi’ites over regional oil exploitation could be part
of the 2006 scenario.
So How
Will the Pie Be Sliced?
A serious
question has been posed concerning the suitability of Production
Service Agreements for Iraq. A British study by the Platform Group
recently concluded in their
Crude Designs – The Rip-Off of
Iraq’s Oil Wealth”that
PSAs are really not much different than the old concession
agreements such as were signed by King Faisal way back in the 1920s.
While the country appears to retain ownership of the oil resources
symbolically, the international oil companies effectively run the
operation, decide the production levels, which fields to exploit and
how quickly. Only 12% of the world’s oil reserves are still under
PSAs and this does not include any of the major producers in the
Middle East, such as Saudi Arabia, Kuwait, and Iran. Russia signed
some PSAs in the 1990s, had a bad experience and is unlikely to
repeat it. The Arab Emirates and Venezuela, the two other big
producers, do not use the PSA type contract either, though they have
allowed some foreign investment in their oil by other means. These 7
countries, counting Iraq, hold 72% of the world’s oil reserves.
“Countries with reserves the size of Iraq’s’ do not use PSAs because
they do not need them. They are able to finance their oil industry
themselves on far better terms,” the Platform Study concludes. (The
United States, the world’s only fully privatized oil producer, gave
away its oil wealth to “wild-catters”, to the Standard Oil Trust,
and to Mr. John D. Rockefeller long ago.)
The current
government in Baghdad is most anxious to negotiate PSAs quickly and
without public participation or debate and without a legal framework
being in place. The Kurds and the Southern Provinces may wish to
sign agreements as well, before the very equivocal language of the
draft Petroleum Law is more carefully written. The Platform Study
estimates that PSAs for new oil fields could cost the Iraqi people
between $74 and $194 billion, the equivalent of $2800 to $7400 per
capita at a long-term world oil price conservatively assumed to
average $40 per barrel (current prices are just under $60). For
comparison’s sake, the current GDP per capita in Iraq is only $2100.
The alternative to
PSAs is for INOC to maintain full ownership over both currently
producing and newly developed oil fields and to finance
rehabilitation and future exploitation through international loans.
The financial advantages of this approach are considerable. The
extent of many of Iraq’s still-undeveloped oil fields is well
established, making it relatively easy to get international loans
for their development, should Iraq find it difficult to pay the
capital costs of oil sector expansion directly from their operating
budget.
A major fear of
many observers is that the Iraqi government will quickly negotiate
PSAs at terms that are decidedly unfavorable for Iraq over the long
term. In such negotiations, Big Oil will understandably demand
contractual conditions that reflect current risks and insecurities
and the high costs protecting their employees. However, this may not
give adequate weight to the fact that over the 25-year life of these
PSAs, such instability would not be expected to persist. Should this
fast sell-off take place, we can expect a continued insurgency, this
time targeting the foreign oil companies. Will the big and
well-experienced international oil companies rush into such ventures
with a weak and unrepresentative government, knowing they will be
highly unpopular with most Iraqis? Will instability and greed hold
back development of Iraq’s oil wealth or will Big Oil recognize
their long-term interests are better served in ways that show fairer
and equitable benefits to all involved?
After all, Big Oil
has come to terms with strong national oil companies before, in
Saudi Arabia, in Kuwait, and in Venezuela, and seems to be making a
comfortable profit. Meanwhile, they have quietly sent a few of their
experts to work with the Iraqis on rehabilitation projects and
reservoir studies in places where it is relatively safe while they
await a more stable political environment. Perhaps the intelligence
and far-sightedness of Big Oil will save both the US and the Iraqis
from the simple-minded ideologues and the plain-ass stupidity of our
current Administration.
James Houle, <jfh@rwwifi.net>
has spent his career as an engineer and economist working in third
world countries on development projects. He has lived and worked in
the Middle East and knows the oil industry well.
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