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Published By: The Washington Independent

July 10, 2008

On Top of Public Outcry -- Western Oil Companies Face Political and Technical Difficulties

Oil field in Kirkuk, Iraq (Jim Gordon, U.S. Army Corps of Engineers)

By Spencer Ackerman 07/10/2008

In mid-June, Iraq's oil minister, Husain Shahristani, announced that he would grant no-bid development contracts for Iraq's oil fields to Western oil giants. Exxon, Shell, BP and Total stood to earn billions off the deals, since Iraq possesses nearly as much potential oil reserve -- and perhaps even more -- as Saudi Arabia, the nation with the world's most oil. Within days, The New York Times reported that a team of U.S. State Dept. advisers urged Shahristani and other ministry officials to grant the contracts to the oil barons.

Almost immediately, it appeared as if the oil-industry friendly Bush administration was playing to stereotype. "We pretend [oil] is not a centerpiece of our motivation," Frederick D. Barton, senior adviser at the Center for Strategic and International Studies in Washington, told The Times, "yet we keep confirming that it is."

Yet oil-industry insiders say that the deal may be less than meets the eye. "There was absolutely no sellout" by the Iraqis, said Michael Makovsky, a former Defense Dept. Iraq adviser and director of foreign-policy studies at the Bipartisan Policy Center, a Washington policy organization. "There hasn't been anything decided yet."

For one thing, Iraq still has no laws in place governing the structure of the oil industry, meaning no arbitration laws exist to resolve potential disputes. For another, bringing increased oil production to market from Iraq is difficult and complicated -- requiring massive revitalization of the existing oil-services infrastructure, that has suffered from decades of neglect and misuse.

Meanwhile, the contracts given to the Western oil giants aren't production contracts, but preliminary technical contracts. Add to that the fact that most companies don't want to send personnel to Iraq, because of the persistent instability. Yet, the contracts could still create political problems for the Iraqi government, if their terms offend a fiercely nationalistic population.

Despite the caricature of the all-powerful oil conglomerate, all this means the oil companies are more beholden to Iraqi's volatile politics than the other way around. "The industry can't control the internal politics of Iraq," said Adam Sieminski, chief energy economist at Deutsche Bank, "and that's what's preventing development."

The major obstacle to development is the instability. Even with violence reduced from its 2006-era highs, analysts say the major oil companies are not eager to send personnel into Iraq's oil fields, lest they become targets for attack. Insurgents have targeted the oil infrastructure -- from pipelines to refineries -- since the beginning of the 2003 U.S.-led invasion. "Obviously, the companies are not ready [to go into Iraq] for security reasons," said  Makovsky.

When they are, the bounty could be enormous. According to U.S. Dept. of Energy estimates, Iraq possesses 115 billion barrels' worth of oil reserves, though that forecast is based on pre-war estimates. Some industry watchers believe the traditionally oil-dry west of the country -- the Sunni Anbar province, for example -- might be worth exploration. This raises the prospect of Iraq eclipsing oil giants like neighbors Iran and Saudi Arabia.

Most analysts believe that the autonomous Iraqi Kurdistan region possesses far more oil than current forecasts hold -- possibly as much as 45 billion barrels, which would put the Iraqi north alone on the level of petro-titans like Nigeria. Kurdistan's "prospectivity is beyond doubt," Micael Gulbenkian of the Canadian Heritage Oil Company, which does business in Kurdistan, said in a 2006 interview.

The trouble lies in getting the oil out of the ground. Decades of sanctions and war prevented Iraq from modernizing its oil infrastructure. In 1990, Iraq produced about three million barrels of oil daily. Today, despite massive U.S. efforts, that number stands at about 2.5 million barrels per day. Shahristani wants to increase production by another million and a half barrels daily in the coming years. But that will take a massive and costly effort -- something for which oil industry experts say Iraq is unprepared.

"You'd have to go back and look at the seismic [forecasts] -- where do you drill, are there reservoirs, have they been damaged, how damaged are they," said one industry insider who did not want to be quoted by name. "To try to get 500,000 barrels over 18 to 24 months uses up the technical resources of [many] companies. Now companies will do it in the hope to be players [when the country is] opened up for full bidding, but there are a lot of technical problems."

The structure of the oil contracts, though, have yet to be determined. Iraq has no hydrocarbon law -- passing the much-delayed measure is one of the so-called "benchmarks" that the U.S. Congress is holding the Bush administration to meeting -- owing to the complicated and contentious sectarian politics of divvying up Iraq's oil bounty. Nor, in a country as plagued by corruption as Iraq -- the Bush administration's special inspector general for Iraq, Stuart Bowen, has called corruption Iraq's "second insurgency" -- is there a solid legal system for the resolution of disputes. As a result, say analysts, oil conglomerates won't enter the country unless they have extremely favorable terms built into their contract.

And that could ultimately spark a popular backlash. The oil conglomerates "are the toughest negotiators," said Martha Brill Olcott, a former Unocal adviser now at the Carnegie Endowment for International Peace. "They'll work out a contract that insulates themselves from political risk. That's where countries get upset -- they paid too great a price to protect Western companies from political risk. That's a problem: Iraqis might agree to one set of terms now, but you can imagine in 2015, if we're lucky and it's stable [in Iraq], then they'll say, 'Why the hell did we agree to these terms?'"

That impulse, as Daniel Yergin documents in his history of the 20th century oil industry, The Prize, is what led many oil-producing countries, from Iran to Venezuela, to nationalize their oil industries. Ironically, the four companies that Shahristani said will receive the no-bid development contracts were the component parts of the old Iraqi Petroleum Company that Saddam Hussein expropriated.

But returning to a national oil company poses its own problem: corruption. Typically, national oil companies only exist in countries with a strong central government -- as with Chavez-era Venezuela or revolutionary Iran -- since control over oil brings wealth and political power. But with Iraq so riven with sectarian competition for power, the government would likely view a national oil company as a political and economic threat.

"In a politically fragmentary country, bringing in foreign companies makes sense," Olcott says. "State oil companies are a potential source of corruption. In fractured state, it's hard to believe they can create a national oil company in a corruption-free environment."

Then comes the question of U.S. intentions. The Bush administration has always denied that it invaded Iraq to control its oil. Indeed, Olcott says, the oil industry largely opposed the war --  its analysts mostly said it would lead to oil supplies being taken off-line and prices skyrocketing. Oil costs about four times per barrel than it did before the Iraq war.

At this point, Olcott said, the U.S. interest in Iraq, wearied by over five years of war, is merely in a country stable enough to leave. Opening the country to large oil firms might "produce a stabilizing effect," she said. "Splintering [Iraq into several pieces] becomes less likely if the same consortium of firms operates across the country, because then you have stakeholders for not splitting up Iraq."

But whatever the Bush administration's intentions, the history of the Iraq war shows that they probably won't materialize.

"I think the U.S. influence in Iraq is highly overstated for the last few years," said Makovsky, the former Pentagon Iraq official. "It's their oil. They're making decisions. And they're clearly not doing some things [the administration] liked. It's been very clear for several years now that they want to cut their own path, conspiracy theories aside."

Deutsche Bank's Sieminski held a similar view. "I don't think we went to Iraq for the oil," he said. "We'd like to see stability in Iraq. If ultimately that means more oil, that'd be good for consumers. But it's up to Iraq. That's a sovereign country."