Behindthescenes Plot To Get Iraqi Oil Supply

The constant wars fought over Iraq highlight the exceptional lure of the country's oil resources. Iraq's oil is of good quality and is very much in demand around the world; that oil is very cheap to produce and profitable to refine. By some estimates, royalties on Iraq's oil could yield as much as $80 billion to $90 billion per year, although the 2005 earnings were much less at $23.5 billion, according to Iraq Weekly Status Report, which is published by the U.S. Department of State.

As other oilfields around the world become depleted in the next two decades, global production will increasingly depend on the enormous reserves of the Persian Gulf region. Because of its potential, Iraq's oil will in the future represent a huge part of the world's supplies, and so any sensible oil executive would want to be a player in the recovery of Iraq's oil sector.

Shortly before the 2003 war, industry experts described Iraq as a future "gold rush," where the companies would battle to gain control of key reserves. According to James Paul, at that time a well-informed diplomat at the U.N. commented bluntly: "Exxon wants Majnoun and they are determined to get it." And a longtime industry observer said: "There is not an oil company in the world that doesn't have its eye on Iraq." The future of major oil companies might at some point have to depend, to a large extent, on their control of Iraqi oil reserves.

The 1972 oil nationalization in Iraq pushed the U.S. and U.K. companies completely out of the country. In the period leading up to nationalization, international oil companies held a 75 percent stake in the Iraq Petroleum Company and also some equity in the country's oil reserves. In the 1980s and 1990s, oil companies from France and Russia began to make deals that resulted in lucrative production sharing agreements allowing companies such as French oil giant Total and Russian oil company Lukoil to gain a large potential share of Iraq's oil reserves. The 1990-2003 sanctions prevented these deals from going forward.11

In the oil market generally, as production from older fields worldwide has fallen, oil companies have found reserve replacement increasingly expensive. Some studies say the cost of finding new reserves is up 60 percent in the past decade. Some companies, like Royal Dutch Shell and Repsol, have had to revise their reserves downward. Other companies, including Exxon Mobil, have struggled to maintain their reserve levels in recent years.12

That view is supported by many analysts who believe that Iraq would help oil companies to improve their reserve replacement. Major Anglo-American companies were eager to tap Iraqi oil, but waited for regime change. Meanwhile, in 1997, as the sanctions became unpopular around the world, Chinese, Russian, and French companies struck deals with Saddam's regime for production sharing in some of Iraq's biggest fields.

But, as permanent members of the U.N. Security Council, China, Russia, and France pressed for lifting of the sanctions. Of course, one can argue that the three veto-holding members were motivated by their economic interests, but so were the United States and Britain. With Iranian fields being parceled out to their rivals in Europe and Asia, US oil executives were eager to put up shop in Iraq, and they reportedly encouraged Washington to move quickly with plans to get rid of Saddam.

But in fact the oilmen didn't have to, because the foreign policy establishment was restive and growing more hawkish on Iraq. In the late 1990s, the neoconservative wing of the Republican Party, led by William Kristol, editor of the Weekly Standard, formed a small think tank called Project for a New American Century to refocus U.S. foreign policy toward American hegemony.

This group argued, for example, that as the only remaining superpower following the demise of Communist Russia, the United States had become an empire and so should use its military strength to dominate world affairs. To these neoconservatives, Iraq was an unfinished business they wanted to deal with, and so they decided that the starting point would be the removal of Saddam from power. On January 26, 1998, they sent a letter to President Bill Clinton, warning that containment was a failed policy and called for "a strategy for removing Saddam's regime from power."13

Exiled Iraqis told reporters and U.S. government officials that Saddam was hiding large stocks of deadly weapons. Congress held hearings and then drafted legislation. President Clinton then asked the Pentagon to plan strikes on Iraq, starting 1999 through 2000.

Clinton also signed a law that provided $5 million in funding for the Iraqi opposition, and set up Radio Free Iraq. Later, Clinton signed another law pushed by Washington military hawks, accusing Iraq of reconstituting weapons of mass destruction and failing to cooperate with U.N. inspectors. A military conflict was then set in motion with the signing by Clinton of the Iraq Liberation Act of 1998, which stated that, "It shall be the policy of the United States to support efforts to remove the regime headed by Saddam Hussein from power in Iraq."

This aggressive policy was a turning point, and it showed a hardening of positions in the United States and Britain that Saddam must be pushed out by force, if it could be done through covert means. While it can be argued that the Clinton administration became more aggressive only after being pushed by conservatives, it should be noted that this came on the heels of the successful military intervention to end the Kosovo war by the North Atlantic Treaty Organization (NATO).

Neoconservatives like William Kristol supported that Kosovo war on moral grounds, and so Clinton might similarly have been persuaded to get tough with Saddam on moral grounds. But for the war in Iraq, morality may have played a very small role, and in fact traditional conservatives didn't feel strongly for the war. Those who supported it did so for different reasons, including political expediency and some form of economic benefit for their political constituencies.

For neoconservatives, however, Iraq just fell into their grand vision of American dominance, which they thought "can be sustained for many decades to come, not by arms control agreements, but by augmenting America's power and, therefore, its ability to lead."14

The new Bush administration came into office in January 2001, just in time to finish the job of getting rid of Saddam. Former Secretary of the Treasury Paul O'Neill says in his memoirs that the new Bush White House started planning for an invasion of Iraq almost immediately. According to O'Neill, Iraq was "Topic A" at the very first meeting of the Bush National Security Council, just 10 days after the inauguration. "It was about finding a way to do it," says O'Neill in a book written by Ron Suskind, a former Pulitzer Prize-winning reporter for the Wall Street Journal. "That was the tone of the President, saying 'Go find me a way to do this.'"15

Meanwhile, President Bush ordered stepped-up overflights and provocative attacks on Iraqi targets under a plan evidently known as Operation Desert Badger. On February 16, U.S. aircraft bombed Iraqi radar installations north of the no-fly zone and very close to the southern limits of Baghdad. Readily audible from the Iraqi capital, this attack drew wide media comment. Just a few weeks later, the National Energy

Policy Development Group, chaired by Vice President Cheney, studied the challenge posed by French, Russian, and other nations' companies. One of the documents produced by the Cheney group, made public after a long court case, is a map of Iraq showing its major oil fields and a two-page list of "Foreign Suitors for Iraqi Oilfield Contracts." The list showed more than 40 companies from 30 countries with projects agreed to or under discussion, but not a single U.S. or U.K. deal. The list included agreements or discussions with companies from Germany, India, Italy, Canada, Indonesia, Japan, and other nations, along with the well-known French, Russian, and Chinese deals. The report by the Cheney group, released in May, warned ominously of U.S. oil shortfalls that might "undermine our economy, our standard of living, our national security."16

The Bush administration seems to have reached a decision to go to war with Iraq in 2001, but the decision was firmed up in mid-2002 in the aftermath of the September 11 attacks on the United States, according to leaks from Prime Minister Blair's aides. According to Christopher Meyer, the British ambassador in Washington at the time, President Bush raised the issue of Iraq with British Prime Minister Tony Blair at a private dinner at the White House just nine days after September 11. Bush asked for British support for removal of Saddam Hussein from power, a clear reference to a military operation.

Meyer's account, which is similar to those of Richard Dearlove, David Manning, and Philippe Sands, says that Blair gave his silent assent to the proposal. Both Dearlove and Manning were at the meetings with U.S. officials planning the Iraq war and they made top-secret notes of the discussions, which later found their way into newspapers. Dearlove, for example, says in his notes dated July 23, 2002, that he realized during a trip to Washington that intelligence was being fixed around the policy to invade Iraq, even though the case against Saddam was thin to begin with. 17

Manning, in his notes around the same time, says that President Bush told Prime Minister Blair during a private two-hour meeting in the Oval Office on January 31, 2003, that he was determined to invade Iraq no matter what, and the "diplomatic strategy had to be arranged around military planning." He adds that the start date for the military campaign was penciled in for March 10, 2003.18

Meanwhile, there was a growing sense in the oil industry that war was imminent, and preparation would have to be made to minimize the impact of the conflict on the oil market.

As war talk peaked in Washington and at the United Nations, the influential Heritage Foundation published a report on post-Saddam Iraq, which called for the privatization of Iraq's national oil company and hinted that only U.S. and U.K. companies would sign oil contracts. The companies, the Bush administration, and the Iraqi opposition held many meetings over postwar oil. The Washington Post reported in September that the big companies were "maneuvering for a stake" in postwar Iraq and that the war could cause major "reshuffling" of world petroleum markets.19

James Woolsey, former CIA director, said that the United States would use access to postwar oil to manipulate the French and the Russians into supporting the war. Around the same time, Iraqi exile leaders said that a post-Saddam government would cancel all the foreign oil contracts. Ahmad Chalabi, at the time a leader of the exile group Iraqi National Congress and a U.S. favorite as heir to the Iraqi leadership, said, "American companies will have a big shot at Iraqi oil."20 Chalabi, who was accused of bank fraud in Jordan, is now a senior cabinet member in the postwar Iraq government and has enormous influence over the country's oil resources. But that was still in the future.

In the early months of the Bush administration in 2001 and 2002, Russian officials told the Observer newspaper in London that they feared that the United States would void Russian oil contracts and award the most lucrative deals to U.S. companies. The Observer quoted one official in Moscow as saying that the impending conflict could be called "an oil grab by Washington." In France, state-owned oil firm Total decided to negotiate in advance with the U.S. government "about redistribution of the oil regions between the world's major companies."21

On Wall Street, investment banks published investor research speculating on the prospects of postwar Iraq oil, in which Western oil companies were expecting to play a role. One such report by Deutsche Bank noted that "war drums are beating in Washington" and "Big Oil is positioning for post-sanctions Iraq." It analyzed the upward stock market potential of the oil industry in light of declining world reserves and Iraq's postwar potential. Around the same time, Youssef Ibrahim, a former energy reporter for the New York Times and the Wall Street Journal who at the time was a fellow at the Council on Foreign Relations, warned in the International Herald Tribune that the coming war was "bound to backfire." Ibrahim wrote:

Let us not be fooled. The upcoming war against Iraq has nothing to do with the war against terror. President George W. Bush's war is fueled by two things: bolstering the president's popularity as he attempts to ride on the natural wave of American patriotism unleashed by the criminal attacks of Sept. 11; and a misguided temptation to get more oil out of the Middle East by turning a "friendly" Iraq into a private American oil pumping station. .. . So all the talk about spreading democracy and changing the whole Middle East, starting with Iraq, does not hold water. The United States, obsessed with oil and something called "regime change," wants to create a totally pro-American Middle East. The problem is that it will not work. You don't impose democracy by installing an occupying power in a region that has no tradition for it.22

Meanwhile, diplomatic initiatives continued through early 2003 in Washington, London, and elsewhere, between government officials, oil executives, and Iraqi opposition leaders in various combinations. In December, there was a meeting of oil company executives at a resort near Sandringham in Scotland, which was addressed by the former head of Iraq's Military Intelligence Agency. The executives wanted information on Iraq's future oil potential and whether Iraq might pull out of OPEC after the overthrow of Saddam. In Washington, meanwhile, war planners were considering seizing Iraq's oilfields in the first days of the impending conflict. U.S.-U.K. forces invaded Iraq on March 20, 2003, taking control of the major oilfields, pipelines, and refineries almost immediately. When they later entered Baghdad, they protected the Oil Ministry, while leaving all other institutions unguarded. Looters ravaged the National Museum and burned a wing of the National Library, but the Oil Ministry remained unscathed, with its thousands of valuable seismic maps safe for future oil exploration.

President Bush immediately appointed Phil Carroll, a former highranking U.S. oil executive, to assume control of Iraq's oil industry, and on May 22, Bush issued Executive Order 13303 giving immunity to oil companies for all activities in Iraq and deals involving Iraqi oil. On the same day, under pressure from the United States and the United Kingdom, the U.N. Security Council passed Resolution 1483, which lifted the former sanctions and allowed the occupation authorities to sell Iraqi oil and put the proceeds in an account they controlled. Every step in the early postwar period confirmed the centrality of oil, and every argument to the contrary, however well intentioned, fails to hold up to close scrutiny. In 2006, three years after the war, the picture remained the same and, in fact, American military presence in Iraq is designed to be permanent.

Meanwhile, the companies are not in a great hurry to go to Iraq. They plan and act on decades-long time horizons and are now waiting for the insurgency to end before committing to investing in Iraq. But it is by no means certain that the Anglo-American oil majors will get their way as easily in Iraq. As they wait, the violence is escalating into a civil war, pitting Sunnis against Shiites.

After the Iraq War of 2003, it is clear that U.S. and British oil giants will gain privileged access to Iraq's oil resources only after the fighting for the heart and soul of Iraq stops. At this point, nobody knows when that will be, but the companies are still happy to wait. Having been excluded from control over Iraqi oil since the nationalization of 1972, Exxon Mobil, BP, Royal Dutch Shell, and Chevron expect to gain the lion's share of the world's most profitable oilfields when the dust settles. Few outside the industry understand the huge stakes in Iraq, which amount to tens of billions of dollars in potential profits. That's because the fate of the country's oil reserves escaped public scrutiny, even though they are central to Iraq's future economy. Iraqi oil ministry officials anticipate signing contracts with foreign oil companies in 2006. The move would open the majority of Iraq's oilfields to Western companies for the first time in more than 30 years.

In 2005, one observer summed up a debate on Iraq's new constitution this way: One key issue was how oil revenues would be managed and whether oil production would be shared between the central government and the regions. But Iraqi politicians didn't talk about whether and how revenues would be divided between Iraqi state and private companies. The constitution, which took effect later that year, says that oilfields will be developed according to "the most modern techniques of market principles and encouraging investment."23

That language was quite ambiguous, although it laid the groundwork for a radical change in Iraq's oil industry. Other parts of the constitution said that Iraqi oilfields that were already producing hydrocarbon should be developed by the state-owned Iraq National Oil Company (INOC), but that all other undeveloped fields should be developed by private companies. Given that only 17 of Iraq's 80 known fields—and 40 billion of its 112 billion barrels of known reserves—are currently in production, that policy potentially allocated to foreign companies 64 percent of known reserves. And if a further 100 billion barrels are found, as is widely predicted, the observer suggested the foreign companies would control 81 percent of the total.

The liberal investment policy came from guidelines issued in August 2004 by Ayad Allawi, a moderate who was installed as interim prime minister of Iraq by the U.S. government. He wanted new fields to be developed by private companies through production sharing agreements (PSAs), the contractual mechanism favored by foreign oil companies. In addition, he wanted:

• New fields would be developed exclusively by private companies, with no participation of INOC.

• The Iraqi authorities should not spend time negotiating good deals, but should proceed quickly with terms that the companies will accept, while leaving open the possibility of later renegotiation.

• INOC should be partly privatized. It is not known whether these details have been carried forward into the current draft law.

There were many people, mostly Iraqis, who didn't agree with Allawi's privatization plan, although many experts working in conservative think tanks in Washington, D.C., thought it was the best thing for Iraq. I remember that I was invited to debate the issue on a San Francisco radio affiliate of National Public Radio with Dr. Gal Luft of the Institute for the Analysis of Global Security, and he strenuously argued that total liberalization of Iraq's oil sector was necessary; by this he meant the government should play no role at all. I thought that his view was totally bogus because it neglected the fact that nationalism dominates much of Iraq's policy initiatives. In addition, the political situation there probably won't allow it because the Sunnis think such policies are politically designed to deprive them of their economic power, so they would be more willing to support the ongoing insurgency.

Details aside, the opening up of Iraq's oil resources to foreign companies is certainly going to happen and the only question is when. The oil ministry has been seeking bids for the development of 11 oilfields in the south of Iraq, and has held preliminary talks with BP, Chevron, Eni, and Total. This was happening despite a political stalemate in early 2006 because the senior oil officials argued that it would take months or even a year to negotiate contracts with foreign companies. The contracts are expected to impact Iraq's public revenue (of which oil accounts for almost the entirety) because they are likely to preclude any future regulation or legislation that damages the oil companies' profits. And once signed, the contracts will be irreversible. Some Iraqis are concerned that contracts signed while Iraq is still under foreign occupation will tie the hands of any future Iraqi government. And it is even more worrying that this happened without extensive public debate. For the short term, oil companies are still nervous about the deteriorating security situation, although this may just be what the Iraqi nationalists want because that way they still stay in control of their oil wealth. Looking at the situation, one observer wrote: "The great tragedy is that the one thing that may stop the loss of Iraq's sovereignty over its resources, and of its main opportunity for development, is the continued bloodshed."24

Total sent officials to Iraq soon after the war but has since stopped, while ConocoPhillips and BP have both acknowledged safety issues. Royal Dutch Shell won't send anyone there before the security situation improves. The insurgency will delay but won't prevent the companies from reentering Iraq. BP, Exxon Mobil, and Royal Dutch Shell recently struck cooperation or training deals with Iraq's new leaders. France's Total regularly invites Iraqi engineers to Paris for training. "It's a way to maintain contact and get the oil officials to know about them," said Issam Chalabi, a former oil minister who fled Saddam Hussein's regime in 1991.25 Meanwhile, Lukoil has teamed up with

ConocoPhillips as it evaluates a 68.5 percent stake in the large West Qurna oilfield that Lukoil negotiated with Saddam's Iraq. Lukoil, based in Russia, which opposed the war, is granting a 17.5 percent stake in the southern oilfield to ConocoPhillips, giving the project a solid U.S. connection. ConocoPhillips holds a 10 percent stake in Lukoil.

PART THREE

THE OIL BOOM

CHAPTER 6

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