The ‘Oil for war’ deal – Iraq

Article 1 Sep 2008 admin

This article was first published in Platform’s Carbon Web newsletter, issue 10.

In 2002 the future Oil Minister of Iraq, Ibrahim Bahr al-Uloum, enthusiastically described the occupation as both a “sort of life insurance for continuing the social and political changes” and “a great incentive for attracting the international oil companies”.

On one hand, the ongoing occupation would allow the US to shape Iraqi politics in its own interests, especially on oil policy. On the other hand, oil companies wanted US forces to remain to defend their operations, as admitted by French company Total in a rare candid moment in 2007. Now, in 2008, the occupation looks set to be extended, partly to hold the door open for foreign oil companies, which in turn would need the occupation to be extended further… a cycle of war without end.

But the power of the USA to impose unpopular policies has been dramatically weakened. Remarkably, a civil society campaign (led by Iraq’s unions and oil professionals) has prevented passage of an oil law that would effectively privatise Iraqi oil reserves – in spite of extreme pressure from the USA.
As the prospect of passing the oil law recedes from the grasp of the outgoing Bush/Cheney government, efforts are being concentrated on the Status of Forces Agreement (SOFA), which would maintain the occupation beyond expiry of the UN mandate at the end of 2008.

The SOFA, whose main purpose is to place US troops under US rather than Iraqi jurisdiction, and hence to protect them from having to comply with Iraqi law, is being negotiated alongside a broader strategic framework agreement, covering political, economic and security issues. Rumours are circulating in Baghdad that the agreement will include provisions allowing control of the oilfields to be privatised. The original November 2007 declaration of principles included “Facilitating and encouraging the flow of foreign investments to Iraq, especially American investments”. But any investment provisions in the SOFA are unlikely to have either the detail or the binding force of an oil law. Instead the strategy is to keep the troops in place, and play long. The flaw in the strategy is that the longer the troops stay, the more unpopular US agendas become.

However, the US approach is looking less like a show of strength and more like an act of desperation. The shift in politics in Baghdad was again illustrated by the recent termination of nearly a year’s negotiations over technical service contracts for some of Iraq’s largest fields. The talks – with BP, Shell, ExxonMobil, Chevron, Total and three smaller companies – collapsed largely because of the greed of the companies. Not interested in service contracts that only last for a year or two, the companies insisted on extension rights to give them what they really wanted: first preference on longer-term contracts to subsequently manage the fields and take a large slice of the revenues. But in the changed politics, the Oil Ministry was able to stand firm, and quite rightly deny them such unfair advantages.

The next phase will be the formal launch – in London rather than Baghdad – of a round of bidding for those same fields on 13 October, with the aim of signing contracts in June 2009.

Meanwhile, the first two major contracts are about to be signed: a $1.2 bn contract with China National Petroleum Company to develop the al-Ahdab field in Wasit province, and a $3-4 bn contract with Shell to extract and market associated gas from the oilfields in Basra province. Both have resulted from long-running negotiations, without any competitive bidding process.

The Oil Ministry says that all of these deals will be on a service contract model – where the foreign company is paid a fee rather than taking a share of production. If true, this is a significant improvement on policy since two years ago, when Iraq looked set to give everything away.

Yet, they are still set to offer the companies more generous terms than are to be found in Iraq’s neighbours. These Iraqi contracts allow the foreign companies to manage and operate the oilfield – rather than simply carry out a service or install some equipment as in Saudi Arabia or Kuwait.

But the biggest problem is that no-one knows what the terms really are – and in these contracts, the devil is in the detail. Unless the contracts themselves are published, Iraqis will not know what their government has signed away.

The Iraqi Oil Ministry criticised the Kurdistan Regional Government for signing contracts without transparency, and without a competitive process. The standards the Ministry demanded should form its own starting point.

More fundamentally, Iraq’s history demonstrates the danger of signing long-term contracts while the country is still occupied. Any contracts signed now must be short-term, so that a sovereign Iraqi government can make its own decisions once the troops are withdrawn. It may be the only way to break out of the occupation-oil-occupation cycle of violence.

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