NY Times pimps the privatization of Iraq's oil

I'm fascinated when ideas that are almost universally embraced as true are also wrong.

Consider the following example, from a New York Times story about Iraq's proposed oil law:

Without such a law, it would also be impossible for Iraq to attract the foreign investment it desperately needs to bolster its oil industry.

Foreign investment is a key ingredient in all kinds of development projects in all kinds of countries. It's also the rationale for the push to open Iraq's oil sector to foreign investment. So the reporter, Edward Wong, believes it must be necessary in this case even though none of the world's top four oil producers -- with 51% of the planet's reserves between them -- have any deals that give foreign companies an equity stake in their production, which is what's being pushed in Iraq (they do make use of the private sector on a straight, for-hire basis).

So he reports that Iraq "desperately" needs foreign investment in the oil sector, and doesn't feel the need to justify or source the claim. What's more, he reports it despite the fact that it defies basic mathematics.

Here's what Platform, the British oil NGO, has to say about Iraq's options for financing the modernization of its oil sector (PDF):

OPTION 1: FINANCING FROM GOVERNMENT BUDGETS

The simplest model would be for the required investment to be provided each year out of government budgets. This is quite possible and appropriate in Iraq's case, because in contrast to many other countries:

• The development cost is low when compared to the return;
• As a consequence, the payback period is very quick;
• Since there are considerable proven but currently undeveloped oil reserves, risk to capital is very low (as no exploration is required for immediate field development). In the longer term, Iraq will explore but even this is relatively cheap and low-risk.

Iraq's investment requirement is expected to peak at around $3 billion per year. This is well within the range of current budgetary allocations: the 2005 Iraqi oil investment budget is $3 billion (out of a total Iraqi budget of around $30 billion). Furthermore, within at most three years from the start of development, revenues from new production would well exceed the ongoing investment requirements, and could therefore provide this finance. In other words, at worst Iraq would have to invest $2.5 - 3.0 bn of its existing budget for three years.

OPTION 2: GOVERNMENT / STATE OIL COMPANY BORROWING

An alternative option would be for state oil companies (or the government) to borrow the money, either as

1. loans from banks, using future oil production as collateral;

2. concessionary loans from multilateral agencies, such as the World Bank; or

3. the issue of government bonds.

As with the direct funding option above, the low cost of development and quick payback make this quite an attractive option.

Helmut Merklein, a former senior official of the US Department of Energy, comments that the foreign investment/PSA approach, "would be like securing a $300 loan by pledging a fully paid-for $300,000 residence as collateral. In contrast he notes: "With that kind of collateral, there will be no shortage of commercial or governmental (bilateral or multilateral) credit institutions eager to supply the required capital needed to rehabilitate oil production in Iraq."

Muhammad Ali Zainy, an expert on Iraqi oil at the Centre for Global Energy Studies, looks specifically at the Majnoon field as an example, noting that: "If INOC [Iraq National Oil Company]borrows the $3 billion amount to be repaid over 20 years at 10% interest compounded annually, the debt service (principal and interest) would be around $352 million/year, or around $1.6 per barrel per day. … [Combining this capital cost with production and transportation costs] the total FOBb cost to INOC would be $3.5 per barrel. If this oil is sold at $35 per barrel, the rent to INOC would be $31.5 per barrel. With these prices and costs, it should not be very difficult for INOC to borrow from the banks, with incremental oil as the collateral."

Iraq's oil sector is "in desperate need" of an end to the sabotage and graft that's hobbled its rehabilitation. Foreign investment on equitable terms would be just one of three options available to the Iraqis to finance the work.