Pipe
Dreams Of Iraqi Oil
By Faisal Islam and Oliver
Morgan
The Observer
13 July, 2003
The industry
The oil has started to flow
at last. For the first time since the beginning of the war in Iraq,
supplies from the world's second largest reserve are being pumped into
a sluggish global economy in need of an injection of cheap black gold.
Today, a BP tanker is scheduled
to load 2 million barrels of Basra Light crude oil at the Gulf port
of Mina Bakr. US oil giant ChevronTexaco will lift a further 2m barrels
next Sunday, and Shell will take its own tranche the following week.
These are the first direct purchases of freshly pumped Iraqi crude since
the fall of Saddam. Other exports have been taken from stocks, or last
week's cargo to a Swiss-based trading house. At least three-quarters
of the new oil will be heading for the US.
It is a landmark for Iraq.
The occupying authorities say that it will be the first time that proceeds
from the country's oil wealth will directly benefit its people. Most
of the $200m proceeds from the sale will go into the coalition-controlled
Development Fund for Iraq, though some will be diverted to Kuwait to
pay reparations for Saddam's invasion of the country in 1991.
British and American tankers
making off with the first few million barrels of Iraqi oil are only
likely to confirm long-held suspicions of war-sceptics. But the sales,
though more than $5 per barrel below standard US crude prices, will
be the lifeblood of Iraq's reconstruction. The problem for the Iraqi
and world economies is that the country is not exporting enough of its
oil.
The budget announced by Paul
Bremer, head of the US Coalition Provisional Authority (CPA), assumes
that oil exports will fund just over the half of the coalition's spending
until the end of the year.
'Your budget allocates over
9 trillion dinars ($6 billion) to key [reconstruction] projects and
the key challenges ahead. A little over half of the money will come
from oil revenues. It is the coalition's policy that Iraq's oil will
finally be used for the benefit of the Iraqi people. The officials who
used to steal Iraq's resources have gone,' Bremer said in an address
to the Iraqi people last week.
This would require exports
of around 800,000 barrels per day. But oil flows out of the unsettled
country remain a trickle - just 363,000 barrels per day compared with
daily pre-war capacity of some 2m barrels. Exports are even below last
month's figures, and well below the 1m target of Iraq's oil officials.
This is partly due to sabotage
of the pipeline from the northern fields near Kirkuk to the Turkish
port of Ceyhan. No fresh oil has been pumped through this key pipeline
since the US-led invasion of Iraq. So the first challenge after stabilisation
is repair.
Last week the US Army Corps
of Engineers (ACE), Iraqi oil officials, and contractor Kellogg, Brown
& Root, a subsidiary of Vice President Dick Cheney's former company
Halliburton, held a four-day conference in Baghdad aimed at pushing
oil production to 3m barrels per day.
Tomorrow the US ACE will
hold a conference in Dallas to issue two further contracts, worth $1
billion in total, for upgrading the oil industry infrastructure in the
north and south of Iraq.
On CPA estimates, total oil
production should reach 1m barrels per day by the end of summer and
1.5m by the end of the year.
The Centre for Global Energy
Studies (CGES) had predicted that existing fields could be back to full
capacity of more than 3 million barrels per day within three years,
depending on foreign investments and the restoration of security, the
rule of law and the country's infrastructure.
'Now with the lack of security,
pillaging and so on, things aren't so promising the authorities cannot
start serious work, everything will be pushed back by at least a year,'
says Manouchehr Takin of the CGES.
Exploitation of new finds,
such as the huge West Qurna field in southern Iraq and the untapped
Western Desert could see production as high as 8m barrels per day by
2011. Even under a pessimistic case the CGES sees Iraqi oil production
at this rate by 2020.
The implications of such
production would be huge. Opec's grip on world oil prices would be weakened
fatally. The budgets of Saudi Arabia, Russia and Venezuela could be
thrown into turmoil by a low oil price. Saudi Arabia would have to share
its control over the oil price with Iraq and Russia. But by that time,
demand for oil from industrialising behemoths such as China and India,
may also have surged. Saudi Arabia too, could ramp up production from
10.2m bpd to as much as 14m.
But Iraq, when it gets a
new government, may choose to keep its foot off the gas pedal. The cost
of redeveloping fields may exceed $30bn, says the CGES, a huge amount
in a country with more fundamental reconstruction priorities. It is
also unlikely that a low oil price would be in Iraq's interest. Opec
is likely to argue for the resumption of Iraq's pre-1990 quota of 3.5m
barrels per day. Iraq will not be allowed to participate in the organisation
until an Iraqi government is established.
'My personal view is that
Iraq will remain a member of Opec, but in the first two or three years
production won't even approach a theoretical quota level,' says Takin.
But the mere threat of Iraqi oil coming back onstream has prompted remarkable
discipline within Opec. At the start of the year the cartel was beset
with quota-busting of more than 3m barrels per day. The latest Reuter
survey shows that total Opec production is within half a million barrels
per day of its quotas, keeping prices at the high end of its $22-$28
target price range.
The 'Iraq effect' on global
oil prices is likely to be a long time coming.
Finance: Free market forces
take hold of reins
Iraq will soon have its very
own Alan Greenspan. The Coalition Provisional Authority will introduce
an independent central bank to control monetary policy. An Iraqi will
take the helm at the Iraqi Central Bank, charged with the task of rebuilding
the country's banking sector, issuing new currency and eventually controlling
inflation.
British firm De La Rue, which
recently bought the Bank of England's note printing business, will soon
be churning out Saddam-free dinars. The land that centuries ago invented
the cheque and the limited liability company is reacquainting itself
with the free market.
Fiscal policy has already
been set by US administrator Paul Bremer, who signed off a 9 trillion
dinar ($6 billion) budget last week.
At $2.2bn, the budget deficit
for the last half of this year is a huge proportion of GDP, anything
between 7 per cent and 75 per cent, depending on whether Saddam-era
economists' estimates of GDP are to be believed.
With oil revenues likely
to come in below the costs of reconstruction (Bremer is pencilling in
about $13bn in revenues next year), voices within the US administration
have come up with a novel solution. The US Export-Import Bank, a government
trade promotion agency, has launched a campaign for a securitisation
of future Iraqi oil receipts to pay for the reconstruction work of foreign
contractors.
The controversial scheme
will essentially sell a proportion of Iraq's oil receipts over the next
few years. The move will simultaneously solve Iraq's funding gap, take
the funding pressure off an overstretched US budget, and provide the
security of payment that can attract the finest US contractors to work
in the unstable country. No coincidence then, that a trade lobby featuring
the likes of Pentagon favourites Halliburton and Bechtel is also pushing
the plan.
'Commonsense says get Iraq
running. How do you get the country running? By using its own oil revenue
100 per cent for the benefit of the Iraqi people. If you want to wait
three or four years, be my guest. But that means the country is going
to be running on the dole [hand-outs] of the United States,' said Philip
Merrill of the Exim Bank.
The plan is deeply controversial.
It is not at all clear that military occupation confers any right to
sell off future oil production.
'There has to be a legitimate
government to do that. The Security Council resolution does not grant
the US the power to commit the Iraqi people to such loans,' says Manouchehr
Takin of the Centre for Global Energy Studies.
It is also difficult to imagine
tens of billions of dollars more debt being added to Iraq's backlog,
when the US is haranguing European nations to cancel their own historic
debts.
Iraq already owes as much
as $120bn in sovereign and commercial debt. On Friday the Paris club
of rich country creditors announced that its members were owed $21bn
in loans from contracts that pre-date Saddam's invasion of Kuwait in
1990, and probably the same again in interest arrears.
Infrastructure: A whole
year just to turn the taps back on
When he appeared before the
Commons liaison committee last Tuesday Tony Blair swatted aside suggestions
that the UK and US went to war without an adequate plan for the peace.
Things on the ground don't
bode well. A senior source with the US Agency for International Development
(USAID) in the region last week told The Observer he believed it could
take a year just to get the water treatment system in Baghdad functioning
again.
And, while he did not say
there was 'no planning', he indicated bad planning. Jay Garner, the
retired general chosen by the Pentagon to run and start rebuilding Iraq,
along with his Office for Reconstruction and Humanitarian Assistance
(ORHA) and most of its senior personnel, faced heavy criticism for mishandling
the post-war situation, and were replaced in May by diplomat Paul Bremer
and his Coalition Provisional Authority (CPA).
As the USAID official says:
'They [ORHA] underestimated the amount of effort, money and time it
would take to turn Iraq around. Many of them thought they were going
to be gone by the end of June and there would be an Iraqi interim administration
by then.'
While there appeared to be
poor planning for civil administration, minds in Washington appeared
to be focused on commercial arrangements.
Contract awards have been
accomplished efficiently, and Washington is now effectively running
big business in Iraq. As the US Department of Commerce says in its guide
to the country: 'Business opportunities in Iraq are presently limited
primarily to the US government reconstruction contracts outlined in
this guide, issued mainly by the USAID and Department of Defense.'
Latest information is that
15 contracts, ranging from seaport administration to 'economic recovery,
reform and sustained growth in Iraq' have either been let or are out
to tender.
The eight so far signed off
by USAID - including the controversial $680 million capital construction
deal that went to Bechtel, the construction giant with close links to
Bush - total close to $1 billion. There are two ways to look at that
figure. Either it is very large, a huge subsidy by US tax payers to
US companies; or it is very small, a tiny fraction of reconstruction
estimates of up to $180bn.
But the early signs are that
this US-led public-private partnership is facing real difficulties.
The problem for companies is still security. Chris St George, commercial
director of London-based Olive Security, which is contracted to supply
armed security to Bechtel and its subcontractors in Iraq, says: 'There
are two types of threat - first from armed local Iraqis, and second
from forces loyal to Saddam or terrorists such as al-Qaeda.'
US contractor SSA pulled
its staff out of the southern port of Umm Qasr on 21 June when Iraqis
went on a 48-hour looting spree with guns and hand grenades. St George
says this is not an isolated case: 'The events at Umm Qasr, with armed
gangs looting, are typical of what companies operating around Iraq are
facing.'
A USAID spokesman says: 'Along
with the sanitation problem, armed gangs have been sabotaging electricity
towers and substations. Bechtel has been trying to be strategic, but
it is being knocked off course day to day by these kinds of events.'
Some companies are more irritated
than nervous. One UK company currently bidding for work on Iraq's oil
infrastructure says: 'The organisation has been appalling. First there
was the Garner thing, and more recently there has been another major
change of personnel in Baghdad. The whole thing has been a shambles.'
The process of setting up
the post-war administration, along with the award of contracts, is to
be examined by the US General Accounting Office - the equivalent of
our National Audit Office. A separate contract has been awarded by USAID
to the US Army Corps of Engineers to monitor the execution of other
reconstruction contracts by USAID.
'We are aware that whatever
we do on this we are likely to be criticised,' said a USAID official
in Washington. 'We would like to have had a private sector operator,
but there are none.'
In the meantime, departments
in Washington are continuing to promote Iraq as a business opportunity.
The Department of Commerce lists 'the prime sectors that should provide
a firm foundation for trade and investment in Iraq'. Among these are
listed oil, ports, railways, roads, power, water and telecoms. It records
that in all of these sectors bar oil, preliminary work is being carried
out by Bechtel under its capital construction programme. Preliminary
oil work - more contracts have just been put up for grabs - is being
carried out by a subsidiary of Vice President Dick Cheney's old company,
Halliburton.
There are plenty of US firms,
such as Mack Trucks and American Express, and some UK ones who want
to be in Iraq in future. But there are huge risks, including security
threats to individuals, problems with getting insurance, inadequacies
in currency and banking systems, legal bars to investment and gaps in
civil law to enforce commercial claims.
While they are sensitive
to criticism, US officials believe the situation will improve. One said:
'There has been a lot of criticism about how long it is taking to get
things moving. It is true there are security issues. But if you compare
it with Kosovo, for example, we are actually doing well. We are sanguine.'
Tony Blair can only hope American sanguinity is justified.
Who will foot the bill
for human tragedy?
The final cost of the war
on Iraq to British taxpayers is likely to exceed the £3 billion
put aside by the Chancellor of the Exchequer.
The Treasury will soon publish
its public finance out-turn report, which will detail exactly how much
of the special contingency funds established for the war have been drawn
on by the Ministry of Defence.
Despite the war's comparatively
short duration, the likelihood of a long stay in southern Iraq is likely
to stretch the MoD budget.
A raft of legal claims from
the families of killed civilians may cost the coalition millions more.
The Survey of Civilian Deaths in Iraq says that there were a minimum
of 4,000 and a maximum of 7,000 deaths. But the chances of the relatives
of victims being able to make successful claims against UK or US forces
through the courts is open to doubt.
Martyn Day, of human rights
law firm Leigh Day, investigated the likelihood of such actions succeeding
after the Kosovo conflict. 'We were asked to look at some of the Kosovo
civilian deaths which had occurred as the result of dropping cluster
bombs. It never really got very far. My feeling about this is that it
is not impossible for people to make a claim, but it is very difficult.'
Day says claims would have
to be judged in the national courts of the forces being sued. In the
UK, this would mean the High Court.
Relatives would have to prove
that forces acted in a way which they knew would cause civilian casualties,
rather than in a way which mistakenly caused them. 'It would have to
be something like a cluster bomb where a decision was made to use cluster
bombs that would bring numbers of civilians into peril.'
In the case of a missile
hitting a house or civilian facility such as a hospital, Day says: 'The
difficulty is that you would have to show that it was not a mistake.
I would be amazed if our courts said they expect the military to be
so exact as not to avoid mistakes in war.'