Iraq oil on the block

Article 1 Jul 2008 admin

The real significance of the Oil Ministry’s bid round

July 2008

Published on
Also available in Arabic

Last week saw the biggest step so far towards transferring Iraqi oil into the hands of foreign multinational companies, sparking renewed accusations that the US-UK war on Iraq was really motivated by an oil grab.

The Oil Ministry announced on 30 June that foreign oil companies would be invited to bid for contracts to develop six of Iraq’s largest oilfields, which together contain around half of the country’s known oil reserves.

Yet most commentators missed the significance of the move – that it would give away more to foreign companies than had been planned at any point since the Constitution was written in 2005, and possibly more than any major oil producer has given since the colonial era.

The contracts were (with one exception) for the second stage of development of the oilfields, to come after the one- or two-year no-bid contracts that the Ministry has been privately negotiating with Shell, BP, ExxonMobil, Chevron, Total and four smaller companies. The Ministry had also intended to sign those last week, but has delayed signing to some time this month.

To understand what’s at stake, we need to take a short diversion into some oil industry contract terminology. Last week’s announcement was of longer-term “risk service contracts” (RSCs), a kind of half-way house in the range of contract types.

The shorter (no-bid) contracts that would come first are known as “technical service contracts” (TSCs), where companies simply act as contractors to a government client who calls the shots, for a fixed fee – albeit with some strange features that I described in my last article for niqash.

These are contrasted with what the companies really want in Iraq – the dreaded “production sharing agreements” (PSAs), which would give them control over the fields, a large share of the oil extracted, and the potential for huge profits.

Last week’s RSCs are somewhere between TSCs and PSAs. It’s a model that has been used in Latin America, and is very similar to the “buyback contracts” used in Iran. The foreign company invests the capital (like in a PSA), but rather than getting a share of the oil, it gets a specified rate of return on its investment (say, 15%). And after a number of years, the oilfield reverts to national control. The government has not released the details of the contracts; but it appears they would be for either 7 or 9 years (in contrast to 22 years for a PSA or 1-2 years for a TSC).

The Oil Minister made much of the fact that he was not offering PSAs – to reassure Iraqis that they need not fear a great giveaway.

But that the contracts were not PSAs misses the point. All six of the fields – Rumaila, Kirkuk, West Qurna, Zubair, Maysan and Bai Hasan – are already producing oil, and actually together account for more than 90% of Iraq’s current production. As such, their investment and technology needs are relatively minor, and could easily be provided within the public sector, as they have been for more than 30 years.

Ever since the Constitution was written in 2005, Iraqi oil policy has been that fields already producing oil would stay in Iraqi hands – and that only for new, undeveloped fields would development contracts be offered to foreign companies. Even the draft Oil Law – which has been so controversial for giving away too much – required that fields already producing oil would be “managed and operated” by the Iraq National Oil Company (INOC).

That policy was reversed last week – giving the “backbone of Iraq’s oil production” (in the Minister’s own words) also to foreign companies – fields that were never going to be on offer in any form. It remains to be seen what happens to new fields.

The positive portrayal of a negative step was repeated when the Minister also emphasised that companies would have to “give” at least a 25% stake in each project to INOC. But this was never the companies’ to give – in fact, the true implication of the announcement is that they may take 75% away from INOC.

Even for new fields, a 25% INOC stake would have been derisory. Libya, for instance, requires a public stake of around 80% for new exploration contracts (and for much smaller fields than Iraq’s). Nigeria, which is seen as one of the OPEC members most friendly to western companies, requires that the Nigeria National Petroleum Company take a 55% stake in onshore projects.

It was in the 1950s, as the colonial era was coming to a close, that a minimum of 51% became the norm in major oil producers. Now Iraq appears to be stepping back to the age of subjugation to the interests of foreign powers. Hardly the progressive move the Minister claimed.

For the most part, the international media were willing to accept the spin about how Iraq would get a great deal – some reports even celebrated how the companies were charitably “helping” Iraq rebuild its oil sector. The coverage clearly signified how far the Iraqi oil debate has been twisted over the last five years.

Iraqi oil policy, and mainstream discussion of it, have rested on two assumptions: that Iraq’s oil can only be effectively developed by the western oil majors, and that the contracts offered have to provide for the companies’ needs (or sometimes the oil market’s needs) first and foremost. Consistently absent has been any conception of what is in the best interests of the Iraqi people.

The big question is why the Oil Ministry would want to bring in the multinationals for these fields. The Ministry is not short of cash: in fact, it has been consistently unable to spend the funds provided to it, so is now sitting on billions of dollars that could be invested in the fields. And technology can easily be purchased, whilst Iraqis maintained the management of the fields.

The true explanation seems almost too obvious for most commentators to spot. One radio interviewer asked me “Why shouldn’t the Iraqi government sign these contracts if it wants to? – it’s not as if someone’s holding a gun to their head”.

In fact, that is exactly what is being held to Iraqis’ heads. Or more precisely, over 150,000 guns.

The Iraqi government owes its very existence to the foreign troops that remain in the country. And with the occupiers playing a greater role than the Iraqi electorate in whether the government stands or falls, it is inevitable that the government will respond more to the views of the former.

Last week, the New York Times revealed that US advisers had helped shape the new contracts. The State Department responded that its advice was purely technical, and gave the example of helping draft arbitration clauses. Those clauses, which determine how the contracts will be adjudicated outside the country by secretive investment courts, would probably be seen by most Iraqis as rather more than a technical issue. But for the USA, for multinational companies to run the industry is simply a natural way of doing things.

State Department spokesman Tom Casey added that the US role is similar to that of a lawyer helping a client draw up a will. It was an apt analogy. The USA sees Iraq’s economy as in its dying throes, and is helping the Iraqi government decide how much of its estate to bequeath to BP, Shell or Exxon.

But all is not yet lost for advocates of Iraqi sovereignty over its oil. Companies are not to bid for the contracts until next March, and signing is not expected until summer 2009 – giving plenty of time for the policy to change. During this time, the political landscape will alter significantly following the departure of the Bush/Cheney administration.

And the so-far successful Iraqi campaign against oil privatisation continues to make progress. According to press reports, the Oil Minister has finally agreed to open the technical service contracts to parliamentary scrutiny before they are signed. This is a welcome move, although it needs to be extended: all Iraqis should have a right to know what is being done to their natural resources.

For the US administration, it might seem like a dangerously radical idea to let Iraqis decide the future of their oil. But with Cheney and Bush on their way out, there may even be a prospect that the idea will take hold.

Greg Muttitt is an expert on Iraqi oil policy, which he has been studying since the start of the occupation in 2003. Working for the independent British charity PLATFORM, he has argued throughout that decisions about the future of Iraq’s oil should be made by the Iraqi people, free from external pressure.

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