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, <> 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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