Of Oil, War and Power – Learning From History

Article 10 Jun 2006 admin

One year before he became US Vice President, Dick Cheney told an audience of oil company executives in London that, “[b]y 2010 we will need on the order of an additional fifty million barrels a day … While many regions of the world offer great oil opportunities, the Middle East with two thirds of the world’s oil and the lowest production cost, is still where the prize ultimately lies.”

Now, seven years after Cheney’s speech, Iraq’s new oil minister is writing an oil law to open the way for contracts to be signed with multinational oil companies – contracts that could last for several decades. The law will be voted on by parliament by the end of this year. With such a long-term impact on Iraq’s economy, development and politics, politicians would be wise to observe the lessons of the history of Iraq’s oil.

Cheney’s speech echoed a comment 91 years earlier, by a member of the world’s then superpower, Great Britain. The Secretary of the War Cabinet, Maurice Hankey, wrote in a memo in 1918, “Oil in the next war will occupy the place of coal in the present war, or at least a parallel place to coal. The only big potential supply that we can get under British control is the Persian and Mesopotamian supply … Control over these oil supplies becomes a first class British war aim.”

Maurice Hankey also had to wait seven years for his aim to be realised. In 1925 a concession contract was signed between the British-installed Iraqi government of King Faisal and the Turkish Petroleum Company (later renamed the Iraq Petroleum Company). The IPC was jointly owned by the companies that would later become Shell, BP, ExxonMobil and Total, some of the very same companies that are pushing for contracts in Iraq now.

At the time the contract was signed, Iraq was occupied by Britain under a League of Nations mandate. The state of Iraq was new and weak, and the country’s leaders dependent on the British. The contract followed a model widely applied in Britain’s colonies, lasting for a period of 75 years. Combined with two further contracts in the 1930s, the same consortium of oil companies gained control over all of the oil in Iraq.

The extent to which Iraq had signed away its opportunities for development became clear over the following decades. But no Iraqi government could change the unfair terms of the contract.

A similar deal had been signed with British Petroleum (then called the Anglo-Persian Oil Company) in Iran in 1901, which was equally controversial for its unbalanced terms. In that case, the company even refused an audit to check that the government was receiving the royalties it was due. While the company repeatedly refused to compromise to accommodate the government’s demands, ultimately the Prime Minister Mohammed Mossadegh nationalised the company’s assets in 1951.

That nationalisation was short-lived. In 1953, urged by Britain, the CIA organised a coup which overthrew Mossadegh and reinstalled the Shah to power. The following year, British Petroleum returned but this time sharing the oil concession with American companies.

The history of the oil-producing world is littered with stories of social problems and political failure – where foreign companies make huge profits, a small elite in the country is enriched and made more powerful, and the majority of people remain poor.

At the same time as the crisis in Iran, the Iraqi authorities were also pushing for renegotiation with the Iraq Petroleum Company. IPC was restricting production in Iraq to boost its member companies’ profits elsewhere in the world. It was also using its monopoly on information to fix prices and deprive the Iraqi state of revenue.

The situation finally changed in 1961, when the revolutionary government passed Law 80, nationalising the oil in 99.5% of Iraq. By wisely leaving the foreign companies with their existing assets in the remaining 0.5% the move was sustained, unlike in the Iranian episode.

The impact of Law 80 went far beyond Iraq. It was the start of, and much of the inspiration for, the reclaiming of national control of oil across the Middle East resulting ultimately in nationalisation of oil resources throughout the region in the 1970s. The remainder of Iraq’s oil was brought into public ownership between 1972 and 1975. The following period – until the war with Iran began in 1980 – was the most successful in Iraq’s history. Oil production was more than doubled and so too was Iraq’s reserve base through major exploration successes.

But now, in 2006, multinational companies are again waiting on Iraq’s doorstep. They know that the economic and legal terms of a contract fundamentally depend on a negotiation between government and company. The government of Iraq is still new and weak; the country is racked with terrible violence and is still under military occupation. In these circumstances, it is impossible for the government to cut a deal favourable to the Iraqi people. Yet, if contracts are signed Iraq will be stuck with them for decades to come.

The companies have learned their lessons from the 1970s. Their language is now less arrogant: they are careful to give the impression of state sovereignty in their public messages, and to make small strategic compromises where necessary. On the other hand, they have developed far more robust contracts, which will make it virtually legally impossible for a country to deviate from them.

At present, the US Embassy and other elements of the US administration are increasing their efforts to influence the drafting of the oil law – at a time when 130,000 US troops are still stationed in Iraq. This is an unreasonable – and potentially illegal – use of military might.

It would be a grave mistake for the Iraqi government to succumb to this pressure, and repeat the experience of 1925, by signing long-term contracts while still under occupation.

The current Oil Minister and Iraqi government will not want to go down in the history books as the ones who reversed Law 80 of 1961. But nor do they have to.

The nationalisations of the 1970s were possible for two reasons. Firstly, because they happened across the oil-producing world: unlike Mossadegh’s Iran, countries could not be isolated and pushed into reversing their decisions. Secondly, the oil price was high, giving oil consuming countries little flexibility in where to source their supplies.

Now again, the oil price is at record levels, and the trend among oil-producing countries is towards greater national control. In the last two years, countries in Latin America have forced companies into renegotiating the economic terms of their operations. Meanwhile, Russia and Kazakhstan, both having signed contracts during their rapid political change of the 1990s, have now recognised what they have lost and are both looking to claw back control of their oil.

There is plenty to do in Iraq’s oil sector. The Oil Minister has rightly prioritised the fight against corruption. And there is much rehabilitation and development to be carried out on Iraq’s existing fields using the nation’s own capital and expertise, perhaps with technical advice from international players where required.

But one should not make long-term decisions at a time of weakness. Decisions on long-term contracts with foreign companies should only be made when the country can obtain a fair deal on its own terms. That requires full sovereignty, stability, and rebuilt capacity in the oil industry.

The German philosopher Georg Hegel said that, “What experience and history teach us is this – that nations and governments have never learned anything from history, or acted upon any lessons they might have drawn from it.” Will the Iraqi government be an exception?

Greg Muttit – Niqash

10 June 2006

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