How the West will profit from Iraq's most precious
The 'IoS' today reveals a draft for a new law that would
give Western oil companies a massive share in the third
largest reserves in the world. To the victors, the oil?
That is how some experts view this unprecedented
arrangement with a major Middle East oil producer that
guarantees investors huge profits for the next 30 years
By The Independent
Independent" -- -- So was this what
the Iraq war was fought for, after all? As the number of
US soldiers killed since the invasion rises past the
3,000 mark, and President George Bush gambles on sending
in up to 30,000 more troops, The Independent on Sunday
has learnt that the Iraqi government is about to push
through a law giving Western oil companies the right to
exploit the country's massive oil reserves.
And Iraq's oil reserves, the third largest in the world,
with an estimated 115 billion barrels waiting to be
extracted, are a prize worth having. As Vice-President
Dick Cheney noted in 1999, when he was still running
Halliburton, an oil services company, the Middle East is
the key to preventing the world running out of oil.
Now, unnoticed by most amid the furore over civil war in
Iraq and the hanging of Saddam Hussein, the new oil law
has quietly been going through several drafts, and is
now on the point of being presented to the cabinet and
then the parliament in Baghdad. Its provisions are a
radical departure from the norm for developing
countries: under a system known as "production-sharing
agreements", or PSAs, oil majors such as BP and Shell in
Britain, and Exxon and Chevron in the US, would be able
to sign deals of up to 30 years to extract Iraq's oil.
PSAs allow a country to retain legal ownership of its
oil, but gives a share of profits to the international
companies that invest in infrastructure and operation of
the wells, pipelines and refineries. Their introduction
would be a first for a major Middle Eastern oil
producer. Saudi Arabia and Iran, the world's number one
and two oil exporters, both tightly control their
industries through state-owned companies with no
appreciable foreign collaboration, as do most members of
the Organisation of Petroleum Exporting Countries, Opec.
Critics fear that given Iraq's weak bargaining position,
it could get locked in now to deals on bad terms for
decades to come. "Iraq would end up with the worst
possible outcome," said Greg Muttitt of Platform, a
human rights and environmental group that monitors the
oil industry. He said the new legislation was drafted
with the assistance of BearingPoint, an American
consultancy firm hired by the US government, which had a
representative working in the American embassy in
Baghdad for several months.
"Three outside groups have had far more opportunity to
scrutinise this legislation than most Iraqis," said Mr
Muttitt. "The draft went to the US government and major
oil companies in July, and to the International Monetary
Fund in September. Last month I met a group of 20 Iraqi
MPs in Jordan, and I asked them how many had seen the
legislation. Only one had."
Britain and the US have always hotly denied that the war
was fought for oil. On 18 March 2003, with the invasion
imminent, Tony Blair proposed the House of Commons
motion to back the war. "The oil revenues, which people
falsely claim that we want to seize, should be put in a
trust fund for the Iraqi people administered through the
UN," he said.
"The United Kingdom should seek a new Security Council
Resolution that would affirm... the use of all oil
revenues for the benefit of the Iraqi people."
That suggestion came to nothing. In May 2003, just after
President Bush declared major combat operations at an
end, under a banner boasting "Mission Accomplished",
Britain co-sponsored a resolution in the Security
Council which gave the US and UK control over Iraq's oil
revenues. Far from "all oil revenues" being used for the
Iraqi people, Resolution 1483 continued to make
deductions from Iraq's oil earnings to pay compensation
for the invasion of Kuwait in 1990.
That exception aside, however, the often-stated aim of
the US and Britain was that Iraq's oil money would be
used to pay for reconstruction. In July 2003, for
example, Colin Powell, then Secretary of State,
insisted: "We have not taken one drop of Iraqi oil for
US purposes, or for coalition purposes. Quite the
contrary... It cost a great deal of money to prosecute
this war. But the oil of the Iraqi people belongs to the
Iraqi people; it is their wealth, it will be used for
their benefit. So we did not do it for oil."
Paul Wolfowitz, Deputy Defense Secretary at the time of
the war and now head of the World Bank, told Congress:
"We're dealing with a country that can really finance
its own reconstruction, and relatively soon."
But this optimism has proved unjustified. Since the
invasion, Iraqi oil production has dropped off
dramatically. The country is now producing about two
million barrels per day. That is down from a pre-war
peak of 3.5 million barrels. Not only is Iraq's whole
oil infrastructure creaking under the effects of years
of sanctions, insurgents have constantly attacked
pipelines, so that the only steady flow of exports is
through the Shia-dominated south of the country.
Worsening sectarian violence and gangsterism have driven
most of the educated élite out of the country for
safety, depriving the oil industry of the Iraqi experts
and administrators it desperately needs.
And even the present stunted operation is rife with
corruption and smuggling. The Oil Ministry's
inspector-general recently reported that a tanker driver
who paid $500 in bribes to police patrols to take oil
over the western or northern border would still make a
profit on the shipment of $8,400.
"In the present state, it would be crazy to pump in more
money, just to be stolen," said Greg Muttitt. "It's
another reason not to bring in $20bn of foreign money
Before the war, Mr Bush endorsed claims that Iraq's oil
would pay for reconstruction. But the shortage of
revenues afterwards has silenced him on this point. More
recently he has argued that oil should be used as a
means to unify the country, "so the people have faith in
central government", as he put it last summer.
But in a country more dependent than almost any other on
oil - it accounts for 70 per cent of the economy -
control of the assets has proved a recipe for endless
wrangling. Most of the oil reserves are in areas
controlled by the Kurds and Shias, heightening the fears
of the Sunnis that their loss of power with the fall of
Saddam is about to be compounded by economic
The Kurds in particular have been eager to press ahead,
and even signed some small PSA deals on their own last
year, setting off a struggle with Baghdad. These issues
now appear to have been resolved, however: a
revenue-sharing agreement based on population was
reached some months ago, and sources have told the IoS
that regional oil companies will be set up to handle the
PSA deals envisaged by the new law.
The Independent on Sunday has obtained a copy of an
early draft which was circulated to oil companies in
July. It is understood there have been no significant
changes made in the final draft. The terms outlined to
govern future PSAs are generous: according to the draft,
they could be fixed for at least 30 years. The
revelation will raise Iraqi fears that oil companies
will be able to exploit its weak state by securing
favourable terms that cannot be changed in future.
Iraq's sovereign right to manage its own natural
resources could also be threatened by the provision in
the draft that any disputes with a foreign company must
ultimately be settled by international, rather than
In the July draft obtained by The Independent on Sunday,
legislators recognise the controversy over this,
annotating the relevant paragraph with the note, "Some
countries do not accept arbitration between a commercial
enterprise and themselves on the basis of sovereignty of
It is not clear whether this clause has been retained in
the final draft.
Under the chapter entitled "Fiscal Regime", the draft
spells out that foreign companies have no restrictions
on taking their profits out of the country, and are not
subject to any tax when doing this.
"A Foreign Person may repatriate its exports proceeds
[in accordance with the foreign exchange regulations in
force at the time]." Shares in oil projects can also be
sold to other foreign companies: "It may freely transfer
shares pertaining to any non-Iraqi partners." The final
draft outlines general terms for production sharing
agreements, including a standard 12.5 per cent royalty
tax for companies.
It is also understood that once companies have recouped
their costs from developing the oil field, they are
allowed to keep 20 per cent of the profits, with the
rest going to the government. According to analysts and
oil company executives, this is because Iraq is so
dangerous, but Dr Muhammad-Ali Zainy, a senior economist
at the Centre for Global Energy Studies, said: "Twenty
per cent of the profits in a production sharing
agreement, once all the costs have been recouped, is a
large amount." In more stable countries, 10 per cent
would be the norm.
While the costs are being recovered, companies will be
able to recoup 60 to 70 per cent of revenue; 40 per cent
is more usual. David Horgan, managing director of Petrel
Resources, an Aim-listed oil company focused on Iraq,
said: "They are reasonable rates of return, and take
account of the bad security situation in Iraq. The
government needs people, technology and capital to
develop its oil reserves. It has got to come up with
terms which are good enough to attract companies. The
major companies tend to be conservative."
Dr Zainy, an Iraqi who has recently visited the country,
said: "It's very dangerous ... although the security
situation is far better in the north." Even taking that
into account, however, he believed that "for a company
to take 20 per cent of the profits in a production
sharing agreement once all the costs have been recouped
He pointed to the example of Total, which agreed terms
with Saddam Hussein before the second Iraq war to
develop a huge field. Although the contract was never
signed, the French company would only have kept 10 per
cent of the profits once the company had recovered its
And while the company was recovering its costs, it is
understood it agreed to take only 40 per cent of the
profits, the Iraqi government receiving the rest.
Production sharing agreements of more than 30 years are
unusual, and more commonly used for challenging regions
like the Amazon where it can take up to a decade to
start production. Iraq, in contrast, is one of the
cheapest and easiest places in the world to drill for
and produce oil. Many fields have already been
discovered, and are waiting to be developed.
Analysts estimate that despite the size of Iraq's
reserves - the third largest in the world - only 2,300
wells have been drilled in total, fewer than in the
Confirmation of the generous terms - widely feared by
international non government organisations and Iraqis
alike - have prompted some to draw parallels with the
production-sharing agreements Russia signed in the
1990s, when it was bankrupt and in chaos.
At the time Shell was able to sign very favourable terms
to develop oil and gas reserves off the coast of
Sakhalin island in the far east of Russia. But at the
end of last year, after months of thinly veiled threats
from the environment regulator, the Anglo-Dutch company
was forced to give Russian state-owned gas giant Gazprom
a share in the project.
Although most other oil experts endorsed the view that
PSAs would be needed to kick-start exports from Iraq, Mr
Muttitt disagreed. "The most commonly mentioned target
has been for Iraq to increase production to 6 million
barrels a day by 2015 or so," he said. "Iraq has
estimated that it would need $20bn to $25bn of
investment over the next five or six years, roughly $4bn
to $5bn a year. But even last year, according to
reports, the Oil Ministry had between $3bn and $4bn it
couldn't invest. The shortfall is around $1bn a year,
and that could easily be made up if the security
"PSAs have a cost in sovereignty and future revenues. It
is not true at all that this is the only way to do it."
Technical services agreements, of the type common in
countries which have a state-run oil corporation, would
be all that was necessary.
James Paul of Global Policy Forum, another advocacy
group, said: "The US and the UK have been pressing hard
on this. It's pretty clear that this is one of their
main goals in Iraq." The Iraqi authorities, he said,
were "a government under occupation, and it is highly
influenced by that. The US has a lot of leverage... Iraq
is in no condition right now to go ahead and do this."
Mr Paul added: "It is relatively easy to get the oil in
Iraq. It is nowhere near as complicated as the North
Sea. There are super giant fields that are completely
mapped, [and] there is absolutely no exploration cost
and no risk. So the argument that these agreements are
needed to hedge risk is specious."
One point on which all agree, however, is that only
small, maverick oil companies are likely to risk any
activity in Iraq in the foreseeable future. "Production
over the next year in Iraq is probably going to fall
rather than go up," said Kevin Norrish, an oil analyst
from Barclays. "The whole thing is held together by a
shoestring; it's desperate."
An oil industry executive agreed, saying: "All the
majors will be in Iraq, but they won't start work for
years. Even Lukoil [of Russia], the Chinese and Total
[of France] are not in a rush to endanger themselves.
It's now very hard for US and allied companies because
of the disastrous war."
Mr Muttitt echoed warnings that unfavourable deals done
now could unravel a few years down the line, just when
Iraq might become peaceful enough for development of its
oil resources to become attractive. The seeds could be
sown for a future struggle over natural resources which
has led to decades of suspicion of Western motives in
countries such as Iran.
Iraqi trade union leaders who met recently in Jordan
suggested that the legislation would cause uproar once
its terms became known among ordinary Iraqis.
"The Iraqi people refuse to allow the future of their
oil to be decided behind closed doors," their statement
said. "The occupier seeks and wishes to secure... energy
resources at a time when the Iraqi people are seeking to
determine their own future, while still under conditions
The resentment implied in their words is ominous, and
not only for oil company executives in London or
Houston. The perception that Iraq's wealth is being
carved up among foreigners can only add further fuel to
the flames of the insurgency, defeating the purpose of
sending more American troops to a country already
described in a US intelligence report as a cause célèbre
America protects its fuel supplies - and contracts
Despite US and British denials that oil was a war aim,
American troops were detailed to secure oil facilities
as they fought their way to Baghdad in 2003. And while
former defence secretary Donald Rumsfeld shrugged off
the orgy of looting after the fall of Saddam's statue in
Baghdad, the Oil Ministry - alone of all the seats of
power in the Iraqi capital - was under American guard.
Halliburton, the firm that Dick Cheney used to run, was
among US-based multinationals that won most of the
reconstruction deals - one of its workers is pictured,
tackling an oil fire. British firms won some contracts,
mainly in security. But constant violence has crippled
rebuilding operations. Bechtel, another US giant, has
pulled out, saying it could not make a profit on work in
In just 40 pages, Iraq is locked into sharing its oil
with foreign investors for the next 30 years
A 40-page document leaked to the 'IoS' sets out the
legal framework for the Iraqi government to sign
production- sharing agreement contracts with foreign
companies to develop its vast oil reserves.
The paper lays the groundwork for profit-sharing
partnerships between the Iraqi government and
international oil companies. It also lays out the basis
for co-operation between Iraq's federal government and
its regional authorities to develop oil fields.
The document adds that oil companies will enjoy
contracts to extract Iraqi oil for up to 30 years, and
stresses that Iraq needs foreign investment for the
"quick and substantial funding of reconstruction and
It concludes that the proposed hydrocarbon law is of
"great importance to the whole nation as well as to all
investors in the sector" and that the proceeds from
foreign investment in Iraq's oilfields would, in the
long term, decrease dependence on oil and gas revenues.
The role of oil in Iraq's fortunes
Iraq has 115 billion barrels of known oil reserves - 10
per cent of the world total. There are 71 discovered
oilfields, of which only 24 have been developed. Oil
accounts for 70 per cent of Iraq's GDP and 95 per cent
of government revenue. Iraq's oil would be recovered
under a production sharing agreement (PSA) with the
private sector. These are used in only 12 per cent of
world oil reserves and apply in none of the other major
Middle Eastern oil-producing countries. In some
countries such as Russia, where they were signed at a
time of political upheaval, politicians are now
The $50bn bonanza for US companies piecing a broken
The task of rebuilding a shattered Iraq has gone mainly
to US companies.
As well as contractors to restore the infrastructure,
such as its water, electricity and gas networks, a huge
number of companies have found lucrative work supporting
the ongoing coalition military presence in the country.
Other companies have won contracts to restore Iraq's
media; its schools and hospitals; its financial services
industry; and, of course, its oil industry.
In May 2003, the Coalition Provisional Authority (CPA),
part of the US Department of Defence, created the
Project Management Office in Baghdad to oversee Iraq's
In June 2004 the CPA was dissolved and the Iraqi interim
government took power. But the US maintained its grip on
allocating contracts to private companies. The
management of reconstruction projects was transferred to
the Iraq Reconstruction and Management Office, a
division of the US Department of State, and the Project
and Contracting Office, in the Department of Defence.
The largest beneficiary of reconstruction work in Iraq
has been KBR (Kellogg, Brown & Root), a division of US
giant Halliburton, which to date has secured contracts
in Iraq worth $13bn (£7bn), including an uncontested
$7bn contract to rebuild Iraq's oil infrastructure.
Other companies benefiting from Iraq contracts include
Bechtel, the giant US conglomerate, BearingPoint, the
consultant group that advised on the drawing up of
Iraq's new oil legislation, and General Electric.
According to the US-based Centre for Public Integrity,
150-plus US companies have won contracts in Iraq worth
30,000 Number of Kellogg, Brown and Root
employees in Iraq.
36 The number of interrogators employed by Caci,
a US company, that have worked in the Abu Ghraib prison
since August 2003.
$12.1bn UN's estimate of the cost of rebuilding
Iraq's electricity network.
$2 trillion Estimated cost of the Iraq war to the
US, according to the Nobel prize-winning economist
WHAT THEY SAID
"Oil revenues, which people falsely claim that we
want to seize, should be put in a trust fund for the
Tony Blair; Moving motion for war with Iraq, 18
"Oil belongs to the Iraqi people; the government
has... to be good stewards of that valuable asset "
George Bush; Press conference, 14 June 2006
"The oil of the Iraqi people... is their wealth. We
did not [invade Iraq] for oil "
Colin Powell; Press briefing, 10 July 2003
"Oil revenues of Iraq could bring between $50bn and
$100bn in two or three years... [Iraq] can finance its
Paul Wolfowitz; Deputy Defense Secretary, March
"By 2010 we will need [a further] 50 million
barrels a day. The Middle East, with two-thirds of the
oil and the lowest cost, is still where the prize lies"
Dick Cheney; US Vice-President, 1999
© 2006 Independent News and Media Limited