Parenti on the Iraqi oil law
http://www.thenation.com/docprint.mhtml?i=20070319&s=parenti
The Nation - March 19, 2007
Who Will Get the Oil? by Christian Parenti
Iraq’s postwar oil bonanza remains a mirage. The country has the
second- or third-largest reserves in the world, making petroleum the
heart and vast bulk of its economy. Thus in March 2003 did Paul
Wolfowitz assure Congress that Iraq would “finance its own
reconstruction, and relatively soon.” American planners predicted
that Iraq’s oil production would triple to a feverish 6 million
barrels per day by 2010.
Instead war, corruption, sectarian slaughter and a massive crime wave
have reduced the country’s once mighty petroleum sector to an
industrial zombie: still ambulatory, functional but essentially dead.
Despite this, oil majors and the International Monetary Fund have
been pressuring Iraq to pass a thoroughly free-market hydrocarbons
law that would allow foreign companies to make huge profits from
Iraq’s petroleum. A draft of the law has just been released; the
Iraqi Cabinet has approved it and sent it on to Iraq’s Parliament for
debate and approval in March.
But is Big Oil really poised for total victory in Iraq? Such an
outcome is hard to imagine, at least in the near term, given the
likelihood of opposition from Iraqis and, more important, the
spiraling chaos: Iraq is a society in meltdown with no real state to
speak of. Many politicians have fled Iraq, rarely risking trips back
to Baghdad, so even achieving a basic parliamentary quorum can be
difficult. Controlling and profiting from Iraq’s oil has been the
goal of the oil majors, but they do not write history unmolested by
the momentum of events and competing agendas.
Nor does the proposed oil law simply serve Iraq up on a plate to the
oil giants. One London-based oil analyst who expected a more
decentralized and free-market law called it “bloody confused.” On key
questions of foreign investment and regional decentralization versus
centralized control, the law is vague but not all bad. In general
terms it reaffirms state control over oil and binds Iraq’s Sunni
center and Shiite south to the Kurdish north by re-creating a single
Iraqi National Oil Company, which will in turn dole out oil income to
the regions on a per-capita basis. This might help de-escalate
sectarian conflict.
But the law leaves plenty of problematic wiggle room: All its
important details are left for later resolution by a new Federal Oil
and Gas Council to be controlled by the prime minister, which will
effectively bypass Parliament. And while the law asserts a set of
generally nationalist economic goals, it sets no minimum level for
state participation, nor does it cap the amount of profits allowed to
foreign firms.
Among the Iraqi political class there is pervasive confusion about
the new law, but there is also a deep resource nationalism that
opposes selling off the country’s patrimony. My interviews with Iraqi
oil experts, politicians and regular people revealed a quite
reasonable and balanced view of the situation: Most felt that foreign
participation in the oil sector could be helpful in reviving an
industry battered by a fifteen-year nightmare of war, sanctions, more
war and now anarchy. But no one felt Iraq should have to enslave
itself to the will of Shell, BP or ExxonMobil.
If an aggressively liberalizing and decentralizing interpretation of
the oil law is eventually pursued, it is not at all clear that it
will, in fact, shape the future (if there is one) of Iraq’s petroleum
sector. “If an unfair oil law is passed, it will be a bone of
contention for years to come,” says Kamil Mahdi, an Iraqi academic
now at the University of Exeter in Britain. “It will be remembered as
something forced through during the worst period of violence. It will
sow the seeds of instability throughout the whole region.”
So what will the new oil law actually stipulate? Will it be passed
into law and accepted by the people? And what are the real conditions
and potential of the Iraq oil industry?
“The situation is pretty dire and going to get worse before it gets
better,” says oil analyst George Orwel, of Energy Intelligence. Orwel
follows the Iraq oil industry from New York, working the phones to
reach contacts that range from ministers in Baghdad to oil terminal
engineers in Basra. He and other analysts paint a horrifically bleak
picture.
Before the 1991 Gulf War the country’s oil sector produced as much as
3.5 million barrels per day. But after four years of occupation, Iraq
has only recently and momentarily managed to reach an output of 2.1
million barrels per day. And it can rarely manage to export more than
1.5 million barrels per day. Iraq’s current oil production is
concentrated in the north and the south. But since the US-led
invasion, production in the northern fields has been almost totally
off-line because of constant sabotage: 400 major attacks have been
recorded on the pipelines that connect the Kirkuk fields to the Baiji
refinery and both of those to the Turkish port of Ceyhan. Last year
attacks on oil installations and employees killed 289 people and
wounded 179.
The Oil Ministry–controlled by the Shiite government–is mired in
corruption. Shoddy record keeping, limited accountability, little
investment and endemic brain drain set the tone. Many of Iraq’s
petroleum engineers and geologists have escaped. “Most of those guys
are either hiding in Sunni cities, driving cabs or they have fled
abroad because they were listed on death-squad death sheets,” said
chief engineer Abdullah of Saladin Province.
Last year the Oil Ministry allotted $3.5 billion for projects like
repairing pipelines, but because of abysmal security and a lack of
skilled technicians and managers, the ministry had spent only $40
million as of August 2006. The work was assigned to the ministry’s
besieged State Company for Oil Projects, which has taken over
responsibility for construction, exploration and repair now that
Halliburton and Parsons, having been paid billions but done little,
have fled.
Exports are now so low and the flow of oil is so intermittent that
last year the Iraqi government paid more than $100 million in
demurrage charges, or compensation fees to oil tankers that were
delayed waiting to load at Basra.
Until the middle of 2006 most of Iraq’s oil pipelines were not even
equipped with working meters. Earlier in the occupation US viceroy L.
Paul Bremer refused to install new ones–why, no one knows. Now the
few meters installed at Basra are not working properly and
maintenance was just delayed for another month. Analysts are left to
estimate Iraq’s production levels by adding up the amount of
petroleum purchased by international shippers.
Smuggling is rampant, with methods ranging from the use of truck
convoys and small tankers to legitimate tankers that top up their
loads off the books and pay kickbacks to officials to under-record
the size of the cargoes.
At the Kurdish-Turkish border oil tanker trucks wait in rows parked
three and four abreast, stacked in lines as long as eight miles. The
truckers sit by their rigs for days playing cards, drinking tea and
tinkering with their engines, waiting for higher-ups to pay bribes
and doctor paperwork so they might pass. The Iraqi Oil Ministry’s
inspector general recently estimated that a petroleum truck driver
willing to brave the country’s highways could expect to pay $500 in
bribes and would make about $8,400 profit once he resold his load in
a safer country.
The subsidized price of Iraqi gasoline, which is less than half the
regional price, makes the resale of legally purchased Iraqi fuels in
Jordan or Syria very profitable. But according to the US Government
Accountability Office, about 10 percent of Iraq’s refined fuels are
stolen. Revenue Watch estimates that this cost the state $4.2 billion
in lost income in 2005.
Sunni politicians accuse the dominant Shiite parties of controlling
most of this sub rosa petroleum traffic. “Iraqi oil is regularly
smuggled out of the country in many different ways,” said an oil
merchant in Amman. “Emir al-Hakim [head of SCIRI] is spending all his
time in Basra selling oil as if it were his own. People there call
him Uday al-Hakim, meaning he is behaving the same way Uday Saddam
Hussein was acting. Other merchants like myself have to work through
him with the big deals or smuggle small quantities on our own. The
petroleum is now divided among political parties in power.”
Given the level of violence in Iraq, it is amazing that any oil gets
produced and exported. The industry runs in part on ordinary Iraqis’
desperate attempts to cling to some semblance of normalcy. One
engineer at the Oil Ministry who refuses to flee the country now
lives in his office with his wife.
The rising mayhem means there is almost no foreign investment in
Iraq’s oil sector, other than five small deals between the Kurdistan
Regional Government and a mix of independent drilling and exploration
firms. Only one of these has panned out; Norway’s DNO operates one
well near the Turkish border.
Against this smoldering vista of general disintegration, a small
group of Iraqi politicians spent a year secretly drafting the new
hydrocarbons law. Weighing in from the outside was the US consulting
firm BearingPoint, as well as the American and British embassies, and
the US energy secretary, Samuel Bodman, who supposedly showed early
versions of the draft law to several major petroleum firms. To add
further pressure, the IMF has made passage of a liberalizing
hydrocarbons law a condition for canceling about 6 percent of Iraq’s
outstanding debt.
It is estimated that Iraq would need $20 billion to $30 billion in
new investment to get its petroleum sector back in order. After
initial outside loans and technical support from oil service
companies, Iraq could again be self-financing and could lure back its
engineers. But large oil companies want to use Iraq’s current
weakness to gain as much access as possible to Iraqi petroleum. And
the Iraqi politicians working on the hydrocarbons law–led by Oil
Minister Hussain al-Shahristani, a prominent former exile–have taken
a bullishly free-market position.
In an e-mail to me, Minister Shahristani explained the mood toward
foreign companies as follows: “Opening the Iraqi oil upstream sector
for investment to reputable International Oil Companies with state-of-
art technologies and financial resources to fast-track oil and gas
fields development through transparent bid rounds that offer the best
return to the Iraqi people is not disputed by any party in the
government, or outside the government. Even under the previous
regime, such cooperation was encouraged.”
But unlike other Iraqi politicians who in recent years attempted to
restructure Iraq’s oil industry, Shahristani’s committee had to back
away from some of the draft law’s more controversial elements. Early
on, US-appointed Prime Minister Iyad Allawi floated a radical
privatization plan: giving foreign corporations ownership of the
subsoil petroleum. That sort of arrangement is used only in the
United States; in all other countries oil is state property, even if
private firms drill and sell it. The Allawi plan lasted about as long
as the failed plan to redesign Iraq’s flag. (The “new” flag
championed by Bremer was rendered in blue and white, like the Israeli
flag. It flew for one day in the summer of 2004.) Similar plans to
privatize the state-owned vegetable oil and soap industry were
quietly dropped when unknown assailants gunned down the company’s pro-
privatization manager.
The draft law will leave ownership of the oil in state hands. But
according to several reports, early versions of the law included
contracts called Production Sharing Agreements (PSAs) that would
allow an unusually high average profit rate of 25 percent. PSAs are
widely disparaged because they are often predatory and long term.
Private oil companies prefer PSAs because they allow the firms to
count petroleum reserves on their books–boosting their stock on
international markets.
Several weeks ago Minister Shahristani told me, “There is no
reference to PSAs in the draft, and there has never been any
reference to it in the draft that the ministry proposed to the Energy
Committee. The Federal Council for Oil and Gas will decide what type
of agreement for which field will maximize revenues for Iraq.”
Indeed, the new law does not mention PSAs and it stipulates that
firms will have to negotiate on a field-by-field basis.
The law will restructure the oil industry in other important ways: It
will appoint a Federal Oil and Gas Council led by the prime minister
to oversee all future contracts as well as review existing deals.
Those agreements include the five contracts signed by the Kurdish
Regional Government and six outstanding PSAs signed between Saddam
Hussein and a mix of companies–most notably Lukoil of Russia, Total
of France, the China National Petroleum Corporation and Italy’s Eni.
A single state-owned Iraqi National Oil Company will be reconstituted
under central government control. This commitment to recentralizing
the oil industry could placate Sunni fears that they will be left
with no petroleum income, and as such it represents a serious
compromise by the Kurds. More generally, centralization could pull
the various leadership factions into some sort of corrupt
cooperation, de-escalating the centrifugal forces of civil war.
So how will the law be received? Even the cleverest Green-Zone-
hatched plans are counterbalanced by anarchy and the still-deep
nationalism of the people. As one exiled Iraqi oilman, Dr. Muhammad-
Ali Zainy, told me, “For us, oil is a very emotional issue.”
“The whole culture of the ministry opposes liberalization,” says
Rafiq Latta, a London-based oil analyst with Argus Energy. “Those
guys ran the industry very well all through the years of sanctions.
It was an impressive job, and they take pride in ‘their’ oil.” The
political parties still wield considerable power over the oil issue
and not all of them are so friendly to the Oil Majors. The main Sunni
parties adamantly oppose liberalization and decentralization, both of
which could allow the north and the south to keep revenues away from
the more heavily Sunni center of the country.
“We think that any decision that would be passed in these exceptional
circumstances…would be a mistake,” says Saleh Mutlaq, of the Iraqi
Front for National Dialogue, a Sunni party that opposes any moves
toward breaking Iraq into regional blocs. “It will further complicate
the Iraqi scene as well, and it will face a wide public refusal from
the Iraqi people.”
A representative from the Islamic Party, a prominent Sunni formation,
speculated that the Shiite bloc of Muqtada al-Sadr’s followers would
unite with them in opposing any oil law that was excessively
permissive toward foreign oil companies.
“In fact, we are scared of the oil investment issue because we don’t
trust the political process that was formed during Bremer,” concurs
Sheikh Ghaith Al Temimi, a key Sadr spokesman. He accuses most Iraqi
politicians of “stealing oil” and “collaborating” with the
occupation, but he was not uniformly hostile to foreign participation
in the oil sector. His sentiments seem to summarize the position of
most Iraqis: “We would welcome any investment in our oil but under
certain conditions. We want our oil to be developed, not stolen. If a
bad law were to be passed, all people of Iraq would resist it.”
Iraq’s General Union of Oil Employees deeply opposes any moves toward
selling off national resources. The GUOE has shut down Iraq’s oil
production on several occasions, and they have called on Iraqi
parliamentarians to reject the law.
Many regular Iraqis now seem to view oil as a curse. “We are being
punished because Saddam nationalized Iraqi oil. I heard from my
teachers at school in the 1970s that Europe and America would not let
that go unpunished,” said Salim Alwan, a police officer in Falluja.
“I wish we did not have oil in this country,” said Numan Hany, a
teacher from Mosul. “That way the United States would not have
invaded our country, and we would have lived on the two great rivers
and the land on which our grandfathers lived in dignity.”