Bush's Petro-Cartel Almost Has Iraq's Oil

By Joshua Holland, AlterNet. Posted October 16, 2006.

Editor's note: This is the first of a two-part series. Go here to read the second installment.

Iraq is sitting on a mother lode of some of the lightest, sweetest, most profitable crude oil on earth, and the rules that will determine who will control it and on what terms are about to be set.

The Iraqi government faces a December deadline, imposed by the world's wealthiest countries, to complete its final oil law. Industry analysts expect that the result will be a radical departure from the laws governing the country's oil-rich neighbors, giving foreign multinationals a much higher rate of return than with other major oil producers and locking in their control over what George Bush called Iraq's "patrimony" for decades, regardless of what kind of policies future elected governments might want to pursue.

Iraq's energy reserves are an incredibly rich prize. According to the U.S. Department of Energy, "Iraq contains 112 billion barrels of proven oil reserves, the second largest in the world (behind Saudi Arabia), along with roughly 220 billion barrels of probable and possible resources. Iraq's true potential may be far greater than this, however, as the country is relatively unexplored due to years of war and sanctions." For perspective, the Saudis have 260 billion barrels of proven reserves.

Iraqi oil is close to the surface and easy to extract, making it all the more profitable. James Paul, executive director of the Global Policy Forum, points out that oil companies "can produce a barrel of Iraqi oil for less than $1.50 and possibly as little as $1, including all exploration, oil field development and production costs." Contrast that with other areas where oil is considered cheap to produce at $5 per barrel or the North Sea, where production costs are $12 to $16 per barrel.

And Iraq's oil sector is largely undeveloped. Former Iraqi Oil Minister Issam Chalabi (no relation to the neocons' favorite exile, Ahmed Chalabi) told the Associated Press that "Iraq has more oil fields that have been discovered, but not developed, than any other country in the world." British-based analyst Mohammad Al-Gallani told the Canadian Press that of 526 prospective drilling sites, just 125 have been opened.

But the real gem -- what one oil consultant called the "Holy Grail" of the industry -- lies in Iraq's vast western desert. It's one of the last "virgin" fields on the planet, and it has the potential to catapult Iraq to No. 1 in the world in oil reserves. Sparsely populated, the western fields are less prone to sabotage than the country's current centers of production in the north, near Kirkuk, and in the south near Basra. The Nation's Aram Roston predicts Iraq's western desert will yield "untold riches."

Iraq also may have large natural gas deposits that so far remain virtually unexplored.

But even "untold riches" don't tell the whole story. Depending on how Iraq's petroleum law shakes out, the country's enormous reserves could break the back of OPEC, a wet dream in Western capitals for three decades. James Paul predicted that "even before Iraq had reached its full production potential of 8 million barrels or more per day, the companies would gain huge leverage over the international oil system. OPEC would be weakened by the withdrawal of one of its key producers from the OPEC quota system." Depending on how things shape up in the next few months, Western oil companies could end up controlling the country's output levels, or the government, heavily influenced by the United States, could even pull out of the cartel entirely.

Both independent analysts and officials within Iraq's Oil Ministry anticipate that when all is said and done, the big winners in Iraq will be the Big Four -- the American firms Exxon Mobile and Chevron, the British BP Amoco and Royal Dutch Shell -- that dominate the world oil market. Ibrahim Mohammed, an industry consultant with close contacts in the Iraqi Oil Ministry, told the Associated Press that there's a universal belief among ministry staff that the major U.S. companies will win the lion's share of contracts. "The feeling is that the new government is going to be influenced by the United States," he said.

During the 12-year sanction period, the Big Four were forced to sit on the sidelines while the government of Saddam Hussein cut deals with the Chinese, French, Russians and others (despite the sanctions, the United States ultimately received 37 percent of Iraq's oil during that period, according to the independent committee that investigated the oil-for-food program, but almost all of it arrived through foreign firms). In a 1999 speech, Dick Cheney, then CEO of the oil services company Halliburton, told a London audience that the Middle East was where the West would find the additional 50 million barrels of oil per day that he predicted it would need by 2010, but, he lamented, "while even though companies are anxious for greater access there, progress continues to be slow."

Chafing at the idea that the Chinese and Russians might end up with what is arguably the world's greatest energy prize, industry leaders lobbied hard for regime change throughout the 1990s. With the election of George W. Bush and Dick Cheney in 2000 -- the first time in U.S. history that two veterans of the oil industry had ever occupied the nation's top two jobs -- they would finally get the "greater access" to the region's oil wealth, which they had long lusted after.

If the U.S. invasion of Iraq had occurred during the colonial era a hundred years earlier, the oil giants, backed by U.S. forces, would have simply seized Iraq's oil fields. Much has changed since then in terms of international custom and law (when then-Deputy Secretary of Defense Paul Wolfowitz did in fact suggest seizing Iraq's Southern oil fields in 2002, Colin Powell dismissed the idea as "lunacy").

Understanding how Big Oil came to this point, poised to take effective control of the bulk of the country's reserves while they remain, technically, in the hands of the Iraqi government -- a government with all the trappings of sovereignty -- is to grasp the sometimes intricate dance that is modern neocolonialism. The Iraq oil grab is a classic case study.

It's clear that the U.S.-led invasion had little to do with national security or the events of Sept. 11. Former Treasury Secretary Paul O'Neill revealed that just 11 days after Bush's inauguration in early 2001, regime change in Iraq was "Topic A" among the administration's national security staff, and former Terrorism Tsar Richard Clarke told 60 Minutes that the day after the attacks in New York and Washington occurred, "[Secretary of Defense Donald] Rumsfeld was saying that we needed to bomb Iraq." He added: "We all said … no, no. Al-Qaeda is in Afghanistan."

On March 7, 2003, two weeks before the United States attacked Iraq, the United Nations' chief weapons inspector, Hans Blix, told the U.N. Security Council that Saddam Hussein's cooperation with the inspections protocol had improved to the point where it was "active or even proactive," and that the inspectors would be able to certify that Iraq was free of prohibited weapons within a few months' time. That same day, IAEA head Mohammed ElBaradei reported that there was no evidence of a current nuclear program in Iraq and flatly refuted the administration's claim that the infamous aluminum tubes cited by Colin Powell in making his case for war before the Security Council were part of a reconstituted nuclear program.

But serious planning for the war had begun in February of 2002, as Bob Woodward revealed in his book, "Plan of Attack." Planning for the future of Iraq's oil wealth had been under way for longer still.

In February of 2001, just weeks after Bush was sworn in, the same energy executives that had been lobbying for Saddam's ouster gathered at the White House to participate in Dick Cheney's now infamous Energy Task Force. Although Cheney would go all the way to the Supreme Court to keep what happened at those meetings a secret, we do know a few things, thanks to documents obtained by the conservative legal group JudicialWatch. As Mark Levine wrote in The Nation ($$):

… a map of Iraq and an accompanying list of "Iraq oil foreign suitors" were the center of discussion. The map erased all features of the country save the location of its main oil deposits, divided into nine exploration blocks. The accompanying list of suitors revealed that dozens of companies from 30 countries -- but not the United States -- were either in discussions over or in direct negotiations for rights to some of the best remaining oil fields on earth.

Levine wrote, "It's not hard to surmise how the participants in these meetings felt about this situation."

According to the New Yorker, at the same time, a top-secret National Security Council memo directed NSC staff to "cooperate fully with the Energy Task Force as it considered melding two seemingly unrelated areas of policy." The administration's national security team was to join "the review of operational policies towards rogue states such as Iraq and actions regarding the capture of new and existing oil and gas fields."

At the State Department, planning was also underway. Under the auspices of the "Future of Iraq Project," an "Oil and Energy Working Group" was established. The full membership of the group -- described by the Financial Times as "Iraqi oil experts, international consultants" and State Department staffers -- remains classified, but among them, according to Antonia Juhasz's "The Bush Agenda," was Ibrahim Bahr al-Uloum, who would serve in Iyad Allawi's cabinet during the period of the Iraqi Governing Council, and later as Iraq's oil minister in 2005. The group concluded that Iraq's oil "should be opened to international oil companies as quickly as possible after the war."

But the execs from Big Oil didn't just want access to Iraq's oil; they wanted access on terms that would be inconceivable unless negotiated at the barrel of a gun. Specifically, they wanted an Iraqi government that would enter into production service agreements (PSAs) for the extraction of Iraq's oil.

PSAs, developed in the 1960s, are a tool of today's kinder, gentler neocolonialism; they allow countries to retain technical ownership over energy reserves but, in actuality, lock in multinationals' control and extremely high profit margins -- up to 13 times oil companies' minimum target, according to an analysis by the British-based oil watchdog Platform (PDF).

As Greg Muttit, an analyst with the group, notes:

Such contracts are often used in countries with small or difficult oil fields, or where high-risk exploration is required. They are not generally used in countries like Iraq, where there are large fields which are already known and which are cheap to extract. For example, they are not used in Iran, Kuwait or Saudi Arabia, all of which maintain state control of oil.

In fact, Muttit adds, of the seven leading oil-producing countries, only Russia has entered into PSAs, and those were signed during its own economic "shock therapy" in the early 1990s. A number of Iraq's oil-rich neighbors have constitutions that specifically prohibit foreign control over their energy reserves.

PSAs often have long terms -- up to 40 years -- and contain "stabilization clauses" that protect them from future legislative changes. As Muttit points out, future governments "could be constrained in their ability to pass new laws or policies." That means, for example, that if a future elected Iraqi government "wanted to pass a human rights law, or wanted to introduce a minimum wage [and it] affected the company's profits, either the law would not apply to the company's operations or the government would have to compensate the company for any reduction in profits." It's Sovereignty Lite.

The deals are so onerous that they govern only 12 percent of the world's oil reserves, according to the International Energy Agency. Nonetheless, PSAs would become the Future of Iraq Project's recommendation for the fledgling Iraqi government. According to the Financial Times, "many in the group" fought for the contract structure; a Kurdish delegate told the FT, "everybody keeps coming back to PSAs."

Of course, the plans for Iraq's legal framework for oil have to be viewed in the context of the overall transformation of the Iraqi economy. Clearly, the idea was to pursue a radical corporatist agenda during the period of the Coalition Provisional Authority when the U.S. occupation forces were a de facto dictatorship. And that's just what happened; under L. Paul Bremer, the CPA head, corporate taxes were slashed, a flat tax on income was established, rules allowing multinationals to pull all of their profits from the country and a series of other provisions were enacted. These were then integrated into the Iraqi Constitution and remain in effect today.

Among the provisions in the Constitution, unlike those of most oil producers, is a requirement that the government "develop oil and gas wealth … relying on the most modern techniques of market principles and encouraging investment." The provision mandates that foreign companies would receive a major stake in Iraq's oil for the first time in the 30 years since the sector was nationalized in 1975.

Herbert Docena, a researcher with the NGO Focus on the Global South, wrote that an early draft of the constitution negotiated by Iraqis envisioned a "Scandinavian-style welfare system in the Arabian desert, with Iraq's vast oil wealth to be spent upholding every Iraqi's right to education, healthcare, housing and other social services." "Social justice," the draft declared, "is the basis of building society."

What happened between that earlier draft and the constitution that Iraqis would eventually ratify? According to Docena:

While [U.S. Ambassador to Iraq Zalmay] Khalilzad and his team of U.S. and British diplomats were all over the scene, some members of Iraq's constitutional committee were reduced to bystanders. One Shiite member grumbled, "We haven't played much of a role in drafting the constitution. We feel that we have been neglected." A Sunni negotiator concluded: "This constitution was cooked up in an American kitchen not an Iraqi one."

With a constitution cooked up in D.C., the stage was set for foreign multinationals to assume effective control of as much as 87 percent of Iraq's oil, according to projections by the Oil Ministry. If PSAs become the law of the land -- and there are other contractual arrangements that would allow private companies to invest in the sector without giving them the same degree of control or such usurious profits -- the war-torn country stands to lose up to 194 billion vitally important dollars in revenue on just the first 12 fields developed, according to a conservative estimate by Platform (the estimate assumes oil at $40 per barrel; at this writing it stands at more than $59). That's more than six times the country's annual budget.

To complete the ripoff, the occupying coalition would have to crush Iraqi resistance, make sure it had friendly people in the right places in Iraq's emerging elite and lock the new Iraqi government onto a path that would lead to the Big Four's desired outcome.

See part two tomorrow.

              

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Joshua Holland is an AlterNet staff writer.

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