Of Iraq: The spoils Of War
By Danny Fortson,Andrew
Murray-Watson & Tim Webb
07 January 2007
Iraq's massive oil reserves,
the third-largest in the world, are about to be thrown open for large-scale
exploitation by Western oil companies under a controversial law which
is expected to come before the Iraqi parliament within days.
The US government has been
involved in drawing up the law, a draft of which has been seen by The
Independent on Sunday. It would give big oil companies such as BP, Shell
and Exxon 30-year contracts to extract Iraqi crude and allow the first
large-scale operation of foreign oil interests in the country since
the industry was nationalised in 1972.
The huge potential prizes
for Western firms will give ammunition to critics who say the Iraq war
was fought for oil. They point to statements such as one from Vice-President
Dick Cheney, who said in 1999, while he was still chief executive of
the oil services company Halliburton, that the world would need an additional
50 million barrels of oil a day by 2010. "So where is the oil going
to come from?... The Middle East, with two-thirds of the world's oil
and the lowest cost, is still where the prize ultimately lies,"
Oil industry executives and
analysts say the law, which would permit Western companies to pocket
up to three-quarters of profits in the early years, is the only way
to get Iraq's oil industry back on its feet after years of sanctions,
war and loss of expertise. But it will operate through "production-sharing
agreements" (or PSAs) which are highly unusual in the Middle East,
where the oil industry in Saudi Arabia and Iran, the world's two largest
producers, is state controlled.
Opponents say Iraq, where
oil accounts for 95 per cent of the economy, is being forced to surrender
an unacceptable degree of sovereignty.
Proposing the parliamentary
motion for war in 2003, Tony Blair denied the "false claim"
that "we want to seize" Iraq's oil revenues. He said the money
should be put into a trust fund, run by the UN, for the Iraqis, but
the idea came to nothing. The same year Colin Powell, then Secretary
of State, said: "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."
Supporters say the provision
allowing oil companies to take up to 75 per cent of the profits will
last until they have recouped initial drilling costs. After that, they
would collect about 20 per cent of all profits, according to industry
sources in Iraq. But that is twice the industry average for such deals.
Greg Muttitt, a researcher
for Platform, a human rights and environmental group which monitors
the oil industry, said Iraq was being asked to pay an enormous price
over the next 30 years for its present instability. "They would
lose out massively," he said, "because they don't have the
capacity at the moment to strike a good deal."
Iraq's Deputy Prime Minister,
Barham Salih, who chairs the country's oil committee, is expected to
unveil the legislation as early as today. "It is a redrawing of
the whole Iraqi oil industry [to] a modern standard," said Khaled
Salih, spokesman for the Kurdish Regional Government, a party to the
negotiations. The Iraqi government hopes to have the law on the books
Several major oil companies
are said to have sent teams into the country in recent months to lobby
for deals ahead of the law, though the big names are considered unlikely
to invest until the violence in Iraq abates.
James Paul, executive director
at the Global Policy Forum, the international government watchdog, said:
"It is not an exaggeration to say that the overwhelming majority
of the population would be opposed to this. To do it anyway, with minimal
discussion within the [Iraqi] parliament is really just pouring more
oil on the fire."
Vince Cable, the Liberal
Democrat Treasury spokesman and a former chief economist at Shell, said
it was crucial that any deal would guarantee funds for rebuilding Iraq.
"It is absolutely vital that the revenue from the oil industry
goes into Iraqi development and is seen to do so," he said. "Although
it does make sense to collaborate with foreign investors, it is very
important the terms are seen to be fair."
How the West will profit from Iraq's most precious commodity
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
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,
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
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 deprivation.
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
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 Iraqi, arbitration.
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 the state."
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
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 is large".
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 costs.
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 North Sea.
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
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 of occupation."
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
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 just 40 pages,
Iraq is locked into sharing its oil with foreign investors for the next
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 modernisation projects".
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 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 regretting them.
The $50bn bonanza for US
companies piecing a broken Iraq together
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 reconstruction.
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 over $50bn.
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
© 2006 Independent News and Media Limited
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