Who Will Get the Oil ?
by Christian Parenti
www.thenation.com, March 1, 2007
Iraq's postwar oil bonanza remains a mirage.
The country has the second- or third-largest reserves in the world,
making petroleum the heart and vast bulk of its economy. Thus
in March 2003 did Paul Wolfowitz assure Congress that Iraq would
"finance its own reconstruction, and relatively soon."
American planners predicted that Iraq's oil production would triple
to a feverish 6 million barrels per day by 2010.
Instead war, corruption, sectarian slaughter
and a massive crime wave have reduced the country's once mighty
petroleum sector to an industrial zombie: still ambulatory, functional
but essentially dead.
Despite this, oil majors and the International
Monetary Fund have been pressuring Iraq to pass a thoroughly free-market
hydrocarbons law that would allow foreign companies to make huge
profits from Iraq's petroleum. A draft of the law has just been
released; the Iraqi Cabinet has approved it and sent it on to
Iraq's Parliament for debate and approval in March.
But is Big Oil really poised for total
victory in Iraq? Such an outcome is hard to imagine, at least
in the near term, given the likelihood of opposition from Iraqis
and, more important, the spiraling chaos: Iraq is a society in
meltdown with no real state to speak of. Many politicians have
fled Iraq, rarely risking trips back to Baghdad, so even achieving
a basic parliamentary quorum can be difficult. Controlling and
profiting from Iraq's oil has been the goal of the oil majors,
but they do not write history unmolested by the momentum of events
and competing agendas.
Nor does the proposed oil law simply serve
Iraq up on a plate to the oil giants. One London-based oil analyst
who expected a more decentralized and free-market law called it
"bloody confused." On key questions of foreign investment
and regional decentralization versus centralized control, the
law is vague but not all bad. In general terms it reaffirms state
control over oil and binds Iraq's Sunni center and Shiite south
to the Kurdish north by re-creating a single Iraqi National Oil
Company, which will in turn dole out oil income to the regions
on a per-capita basis. This might help de-escalate sectarian conflict.
But the law leaves plenty of problematic
wiggle room: All its important details are left for later resolution
by a new Federal Oil and Gas Council to be controlled by the prime
minister, which will effectively bypass Parliament. And while
the law asserts a set of generally nationalist economic goals,
it sets no minimum level for state participation, nor does it
cap the amount of profits allowed to foreign firms.
Among the Iraqi political class there
is pervasive confusion about the new law, but there is also a
deep resource nationalism that opposes selling off the country's
patrimony. My interviews with Iraqi oil experts, politicians and
regular people revealed a quite reasonable and balanced view of
the situation: Most felt that foreign participation in the oil
sector could be helpful in reviving an industry battered by a
fifteen-year nightmare of war, sanctions, more war and now anarchy.
But no one felt Iraq should have to enslave itself to the will
of Shell, BP or ExxonMobil.
If an aggressively liberalizing and decentralizing
interpretation of the oil law is eventually pursued, it is not
at all clear that it will, in fact, shape the future (if there
is one) of Iraq's petroleum sector. "If an unfair oil law
is passed, it will be a bone of contention for years to come,"
says Kamil Mahdi, an Iraqi academic now at the University of Exeter
in Britain. "It will be remembered as something forced through
during the worst period of violence. It will sow the seeds of
instability throughout the whole region."
So what will the new oil law actually
stipulate? Will it be passed into law and accepted by the people?
And what are the real conditions and potential of the Iraq oil
"The situation is pretty dire and
going to get worse before it gets better," says oil analyst
George Orwel, of Energy Intelligence. Orwel follows the Iraq oil
industry from New York, working the phones to reach contacts that
range from ministers in Baghdad to oil terminal engineers in Basra.
He and other analysts paint a horrifically bleak picture.
Before the 1991 Gulf War the country's
oil sector produced as much as 3.5 million barrels per day. But
after four years of occupation, Iraq has only recently and momentarily
managed to reach an output of 2.1 million barrels per day. And
it can rarely manage to export more than 1.5 million barrels per
day. Iraq's current oil production is concentrated in the north
and the south. But since the US-led invasion, production in the
northern fields has been almost totally off-line because of constant
sabotage: 400 major attacks have been recorded on the pipelines
that connect the Kirkuk fields to the Baiji refinery and both
of those to the Turkish port of Ceyhan. Last year attacks on oil
installations and employees killed 289 people and wounded 179.
The Oil Ministry--controlled by the Shiite
government--is mired in corruption. Shoddy record keeping, limited
accountability, little investment and endemic brain drain set
the tone. Many of Iraq's petroleum engineers and geologists have
escaped. "Most of those guys are either hiding in Sunni cities,
driving cabs or they have fled abroad because they were listed
on death-squad death sheets," said chief engineer Abdullah
of Saladin Province.
Last year the Oil Ministry allotted $3.5
billion for projects like repairing pipelines, but because of
abysmal security and a lack of skilled technicians and managers,
the ministry had spent only $40 million as of August 2006. The
work was assigned to the ministry's besieged State Company for
Oil Projects, which has taken over responsibility for construction,
exploration and repair now that Halliburton and Parsons, having
been paid billions but done little, have fled.
Exports are now so low and the flow of
oil is so intermittent that last year the Iraqi government paid
more than $100 million in demurrage charges, or compensation fees
to oil tankers that were delayed waiting to load at Basra.
Until the middle of 2006 most of Iraq's
oil pipelines were not even equipped with working meters. Earlier
in the occupation US viceroy L. Paul Bremer refused to install
new ones--why, no one knows. Now the few meters installed at Basra
are not working properly and maintenance was just delayed for
another month. Analysts are left to estimate Iraq's production
levels by adding up the amount of petroleum purchased by international
Smuggling is rampant, with methods ranging
from the use of truck convoys and small tankers to legitimate
tankers that top up their loads off the books and pay kickbacks
to officials to under-record the size of the cargoes.
At the Kurdish-Turkish border oil tanker
trucks wait in rows parked three and four abreast, stacked in
lines as long as eight miles. The truckers sit by their rigs for
days playing cards, drinking tea and tinkering with their engines,
waiting for higher-ups to pay bribes and doctor paperwork so they
might pass. The Iraqi Oil Ministry's inspector general recently
estimated that a petroleum truck driver willing to brave the country's
highways could expect to pay $500 in bribes and would make about
$8,400 profit once he resold his load in a safer country.
The subsidized price of Iraqi gasoline,
which is less than half the regional price, makes the resale of
legally purchased Iraqi fuels in Jordan or Syria very profitable.
But according to the US Government Accountability Office, about
10 percent of Iraq's refined fuels are stolen. Revenue Watch estimates
that this cost the state $4.2 billion in lost income in 2005.
Sunni politicians accuse the dominant
Shiite parties of controlling most of this sub rosa petroleum
traffic. "Iraqi oil is regularly smuggled out of the country
in many different ways," said an oil merchant in Amman. "Emir
al-Hakim [head of SCIRI] is spending all his time in Basra selling
oil as if it were his own. People there call him Uday al-Hakim,
meaning he is behaving the same way Uday Saddam Hussein was acting.
Other merchants like myself have to work through him with the
big deals or smuggle small quantities on our own. The petroleum
is now divided among political parties in power."
Given the level of violence in Iraq, it
is amazing that any oil gets produced and exported. The industry
runs in part on ordinary Iraqis' desperate attempts to cling to
some semblance of normalcy. One engineer at the Oil Ministry who
refuses to flee the country now lives in his office with his wife.
The rising mayhem means there is almost
no foreign investment in Iraq's oil sector, other than five small
deals between the Kurdistan Regional Government and a mix of independent
drilling and exploration firms. Only one of these has panned out;
Norway's DNO operates one well near the Turkish border.
Against this smoldering vista of general
disintegration, a small group of Iraqi politicians spent a year
secretly drafting the new hydrocarbons law. Weighing in from the
outside was the US consulting firm BearingPoint, as well as the
American and British embassies, and the US energy secretary, Samuel
Bodman, who supposedly showed early versions of the draft law
to several major petroleum firms. To add further pressure, the
IMF has made passage of a liberalizing hydrocarbons law a condition
for canceling about 6 percent of Iraq's outstanding debt.
It is estimated that Iraq would need $20
billion to $30 billion in new investment to get its petroleum
sector back in order. After initial outside loans and technical
support from oil service companies, Iraq could again be self-financing
and could lure back its engineers. But large oil companies want
to use Iraq's current weakness to gain as much access as possible
to Iraqi petroleum. And the Iraqi politicians working on the hydrocarbons
law--led by Oil Minister Hussain al-Shahristani, a prominent former
exile--have taken a bullishly free-market position.
In an e-mail to me, Minister Shahristani
explained the mood toward foreign companies as follows: "Opening
the Iraqi oil upstream sector for investment to reputable International
Oil Companies with state-of-art technologies and financial resources
to fast-track oil and gas fields development through transparent
bid rounds that offer the best return to the Iraqi people is not
disputed by any party in the government, or outside the government.
Even under the previous regime, such cooperation was encouraged."
But unlike other Iraqi politicians who
in recent years attempted to restructure Iraq's oil industry,
Shahristani's committee had to back away from some of the draft
law's more controversial elements. Early on, US-appointed Prime
Minister Iyad Allawi floated a radical privatization plan: giving
foreign corporations ownership of the subsoil petroleum. That
sort of arrangement is used only in the United States; in all
other countries oil is state property, even if private firms drill
and sell it. The Allawi plan lasted about as long as the failed
plan to redesign Iraq's flag. (The "new" flag championed
by Bremer was rendered in blue and white, like the Israeli flag.
It flew for one day in the summer of 2004.) Similar plans to privatize
the state-owned vegetable oil and soap industry were quietly dropped
when unknown assailants gunned down the company's pro-privatization
The draft law will leave ownership of
the oil in state hands. But according to several reports, early
versions of the law included contracts called Production Sharing
Agreements (PSAs) that would allow an unusually high average profit
rate of 25 percent. PSAs are widely disparaged because they are
often predatory and long term. Private oil companies prefer PSAs
because they allow the firms to count petroleum reserves on their
books--boosting their stock on international markets.
Several weeks ago Minister Shahristani
told me, "There is no reference to PSAs in the draft, and
there has never been any reference to it in the draft that the
ministry proposed to the Energy Committee. The Federal Council
for Oil and Gas will decide what type of agreement for which field
will maximize revenues for Iraq." Indeed, the new law does
not mention PSAs and it stipulates that firms will have to negotiate
on a field-by-field basis.
The law will restructure the oil industry
in other important ways: It will appoint a Federal Oil and Gas
Council led by the prime minister to oversee all future contracts
as well as review existing deals. Those agreements include the
five contracts signed by the Kurdish Regional Government and six
outstanding PSAs signed between Saddam Hussein and a mix of companies--most
notably Lukoil of Russia, Total of France, the China National
Petroleum Corporation and Italy's Eni.
A single state-owned Iraqi National Oil
Company will be reconstituted under central government control.
This commitment to recentralizing the oil industry could placate
Sunni fears that they will be left with no petroleum income, and
as such it represents a serious compromise by the Kurds. More
generally, centralization could pull the various leadership factions
into some sort of corrupt cooperation, de-escalating the centrifugal
forces of civil war.
So how will the law be received? Even
the cleverest Green-Zone-hatched plans are counterbalanced by
anarchy and the still-deep nationalism of the people. As one exiled
Iraqi oilman, Dr. Muhammad-Ali Zainy, told me, "For us, oil
is a very emotional issue."
"The whole culture of the ministry
opposes liberalization," says Rafiq Latta, a London-based
oil analyst with Argus Energy. "Those guys ran the industry
very well all through the years of sanctions. It was an impressive
job, and they take pride in 'their' oil." The political parties
still wield considerable power over the oil issue and not all
of them are so friendly to the Oil Majors. The main Sunni parties
adamantly oppose liberalization and decentralization, both of
which could allow the north and the south to keep revenues away
from the more heavily Sunni center of the country.
"We think that any decision that
would be passed in these exceptional circumstances...would be
a mistake," says Saleh Mutlaq, of the Iraqi Front for National
Dialogue, a Sunni party that opposes any moves toward breaking
Iraq into regional blocs. "It will further complicate the
Iraqi scene as well, and it will face a wide public refusal from
the Iraqi people."
A representative from the Islamic Party,
a prominent Sunni formation, speculated that the Shiite bloc of
Muqtada al-Sadr's followers would unite with them in opposing
any oil law that was excessively permissive toward foreign oil
"In fact, we are scared of the oil
investment issue because we don't trust the political process
that was formed during Bremer," concurs Sheikh Ghaith Al
Temimi, a key Sadr spokesman. He accuses most Iraqi politicians
of "stealing oil" and "collaborating" with
the occupation, but he was not uniformly hostile to foreign participation
in the oil sector. His sentiments seem to summarize the position
of most Iraqis: "We would welcome any investment in our oil
but under certain conditions. We want our oil to be developed,
not stolen. If a bad law were to be passed, all people of Iraq
would resist it."
Iraq's General Union of Oil Employees
deeply opposes any moves toward selling off national resources.
The GUOE has shut down Iraq's oil production on several occasions,
and they have called on Iraqi parliamentarians to reject the law.
Many regular Iraqis now seem to view oil
as a curse. "We are being punished because Saddam nationalized
Iraqi oil. I heard from my teachers at school in the 1970s that
Europe and America would not let that go unpunished," said
Salim Alwan, a police officer in Falluja.
"I wish we did not have oil in this
country," said Numan Hany, a teacher from Mosul. "That
way the United States would not have invaded our country, and
we would have lived on the two great rivers and the land on which
our grandfathers lived in dignity."