Major Events That Have Affected The Iraqi Oil Industry

Before coming to the Iraq war of 2003, I want to review the history of oil in Iraq and of conflicts over there.

The British established Iraq as a state after World War I from three separate provinces—Basra in the south, Baghdad in the middle, and Mosul in the north. In area, Iraq is only slightly larger than California and Maryland put together. But it is historically important as it embraces most of the old Biblical lands, covering the valleys of the Euphrates and the Tigris Rivers. Inside it are such ancient places as the Ur de Chaldees (or birthplace of Abraham), Hit (from where bitumen that built the walls of Babylon came), Nineveh (the tomb of Jonah and former capital of Syria), and even the traditional site of the Garden of Eden. It's a land rich in history as the birthplace of prophets and, as we shall see, oil. The Greeks called it Mesopotamia, meaning "middle rivers."6

Iraq in Arabic language means "banks of a river," and unlike the Nile, the world's second longest river, which cuts across Africa, floods from the Euphrates and the Tigris meander through Iraq, causing great damage to property and lives in the neighborhoods. It's said that Noah, who was forewarned of such floods, built the Ark to perpetuate life in Biblical times. With its location between the Euphrates and the Tigris, Iraq was a favored trading center. Then as now, vessels plied the Persian Gulf waters from India and China, and traveled up the rivers to the head of navigation, from where caravans of loaded camels trekked across the deserts and mountains westward to the Mediterranean Sea or northward to the Caspian Sea. Medieval Baghdad became the trading center for all the Middle East.

The Ottoman Turks conquered Mesopotamia in 1534 and dominated it until 1918, when they were driven out by the British army at the end of World War I, allowing Britain to take control of the area. In Baghdad, on October 17, 1920, Sir Percy Cox, a British representative, declared his government's intention to establish a national government of Iraq. A plebiscite was held and on August 23, 1921, Faisal bin Husayn was proclaimed King of Iraq.7

At the turn of the twentieth century, the Ottomans ruled a vast empire of mountains and desert lands, which has since been proven to hold the largest oil reserves in the world, covering what is now Turkey, Syria, Iraq, Lebanon, Palestine, Jordan, and the Arabian peninsula. Around 1890, Calouste Sarkis Gulbenkian, a young Armenian Turk, who had grown up mostly in England, was working as an aide to Hagop Pasha, the financial advisor of the Ottoman Sultan. He reported to his boss the prospects of oil in Mesopotamia, based on rumors from the people he met who had been to the region.8

As his father had been a petroleum merchant, Gulbenkian probably was aware of the economic opportunity Mesopotamia presented for the Sultan. Impressed by the report, the Sultan obtained possession of a swath of oilfield in Mesopotamia right away. Today, Gulbenkian is credited with laying the foundation for oil exploitation in Iraq and the entire Middle East in the same way George Bissell and Drake Edwin are credited with starting the oil industry in the United States.

By 1912 European and U.S. business groups—Deutsche Bank from Germany, Royal Dutch Shell Group from the Netherlands, the Chester Group from the United States, and the British D'Arcy—began to seek oil concessions in Mesopotamia. The British formed a company called the Turkish Petroleum Co. and gave a few shares of that company to the Dutch and the Germans, but froze out the Americans altogether. Turkish Petroleum Co. was charged with exploitation of oil in Mosul and Baghdad.

After World War I, Iraq was mandated to the British to administer. With Germany defeated by the allied powers, the German shares in the oil company were redistributed to the French. At that point, the Chester Group, which had the support of U.S. presidents Theodore Roosevelt and Woodrow Wilson, claimed shares of the company because the Big War was won with the help of American oil. In Washington, Herbert Hoover, the secretary of commerce, invited U.S. oil executives to his office in 1921 and told them to go get Iraq oil reserves. In August 1922, the Turkish Petroleum Co. offered 12 percent interest to the Americans, an offer that was promptly rejected because the Americans felt entitled to more.

Meanwhile, after losing oil reserves in Eastern Europe to the Russians during the war, the Western powers thought the Middle East offered the best prospects of finding new oil reserves, and Iraq in particular was the most attractive part of the region. In essence, we can see that for the first time Americans began to clamor for the Middle East, and in this case, they demanded an equal share with the British, the Dutch, and the French in the country's oil reserves.

Eventually in 1923, the Americans were given 25 percent interest in Turkish Petroleum Co., but no agreement was signed until eight years later, when the name Turkish Petroleum Co. was changed to Iraq Petroleum Ltd. This new company came to hold rights to oil in all of Iraq, but it was British in outlook and had its offices in London. From 1929 through 1953, the company's chief geologists were Americans, and they led the discoveries of new fields all over Iraq, including near Mosul in the north and near Basra in the south. By 1960, they had dug 57 wells all across the country.9

In the spring of 2005, I had an interview with James Paul, a man who has spent the past several years following the Iraq debate at the U.N. and elsewhere. Mr. Paul is a tall, slim, polite man, a Paul Newman lookalike, with an effortless smile on his face most of the time. Widely traveled, bookish, with a masterful grasp of policy issues, he represents the finest of what I would call an activist intellectual. Over a buffet lunch at an Indian restaurant in Manhattan later in the summer of that year, we talked at length about Iraq. He told me how he got into his advocacy work, which sounded impressively high-minded.

Soon after the first Gulf War in 1990, which drove Iraqi forces from occupied Kuwait, Paul decided to start a nonprofit organization, Global Policy Forum, based in New York, to focus on debates at the United Nations. He told me that he wanted to know what was being discussed and why, and also whether he could help inform some of those debates or get U.N. members to talk about certain issues that were not getting any attention. The more he studied Iraq, he said, the more he came to realize that he would have to learn more about oil because of Iraq's position as a major oil producer. Over the years, he has written a lot of policy papers on Iraq and its oil industry, and most of these papers are posted on the website of his organization, at globalpolicy.org. They detail the problems of oil and war as well as the close personal ties between oil companies and various U.S. governments since the 1950s, but also note that those ties are more intense in recent years, especially with the election in 2000, of George W Bush, whom The Economist has called America's first second-generation oil president.

Quoting a New York Times report published August 16, 1990, Paul notes that following the Iraqi invasion of Kuwait in early 1990, President George H.W. Bush talked of Saddam's threat to U.S. energy security, concluding, "Our jobs, our way of life, our own freedom and the freedom of friendly countries around the world would all suffer if control of the world's oil reserves fell into the hands of Saddam Hussein."

For the next 12 years after the liberation of Kuwait, the United Nation's embargo continued, although Saddam was able to bribe his way around the sanctions, which debilitated Iraq's economy and restricted oil sales. Still, the United States declared its goal of removing Saddam, and President George W. Bush launched a military campaign against Iraq in March 2003, despite international opposition.

The war brought the United States into direct rule over Iraq and its oilfields nearly a century after America first fell in love with Iraq's oil. Because there was less resistance from Iraq's military than feared, the war initially didn't affect much of the oil infrastructure, which the United States wanted as much as possible to protect, because the United States wanted to use that oil for reconstruction. But the insurgency and sabotage that followed did just as much damage to Iraq's oil supply as military action might have.

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