Big Oil Returns to Iraq

Nearly four decades after the four biggest Western oil companies were expelled from Iraq by Saddam Hussein, they are negotiating their return. By the end of the month, Royal Dutch Shell, BP, Exxon Mobil and Total will sign agreements with the Baghdad government, Iraq's first with big Western oil firms since the U.S.-led invasion in 2003.

The deals are for repair and technical support in some of the country's largest oilfields, the Oil Ministry in Baghdad said yesterday. The return of "Big Oil" will add to the suspicions of those in the Middle East who claimed that the overthrow of Saddam was secretly driven by the West's desire to gain control of Iraq's oil. It will also be greeted with dismay by many Iraqis who fear losing control of their vast oil reserves.

Iraq's reserves are believed to be second only to Saudi Arabia in the Middle East, but their exploitation has long been hampered by U.N. sanctions, imposed on Iraq after Saddam Hussein invaded Kuwait in 1990.

The major oil companies have been eager to go back to Iraq but are concerned about their own security and the long-term stability of the country. The two-year no-bid agreements are service agreements that should add another 500,000 barrels of crude a day of output to Iraq's present production of 2.5 million barrels a day (b/d).

The companies have the option of being paid in cash or crude oil for the deals, each of which will reportedly be worth $500 million (£250million). For Iraq, the agreements are a way of accessing foreign expertise immediately, before the Iraqi parliament passes a controversial new hydrocarbons law.

But they mean that the four oil companies, which originally formed the Iraq Petroleum Co. to exploit Iraqi oil from the 1920s until the industry's nationalization in 1972, will be well-placed to bid for contracts for the long-term development of these fields. The oilfields affected are some of the largest in Iraq, from Kirkuk in the north to Rumaila, on the border with Kuwait. Although there is oil in northern Iraq, most of the reserves are close to Basra, in the far south.

Since the U.S. invasion, Iraqis have been wary of foreign involvement in their oil industry. Many are convinced that the hidden purpose of the U.S. invasion was to take over Iraqi oil, but the Iraqi oil minister, Hussein Shahristani, has said that Iraq will hold on to its natural resources. "If Iraq needs help from international oil companies, they will be invited to cooperate with the Iraqi National Oil Co. [Inoc], on terms and conditions acceptable to Iraq, to generate the highest revenue for Iraq."

Inoc's technical expertise has deteriorated sharply during the long years of sanctions. Iraq is currently exporting 2.1 million b/d and is expecting to have oil revenues of $70 billion this year, but its government administration is too dysfunctional and corrupt to rebuild the electricity or water supply systems. The government has $50 billion in the Federal Bank of New York.

Shahristani has been highly critical of the Kurdistan Regional Government (KRG) for auctioning off oil concessions in Iraqi Kurdistan without reference to the oil ministry in Baghdad. In an interview with the Independent last year, he said Inoc would never do business with any oil company that signed up with the KRG and he also doubted if the oil could be exported without pipelines. "Are they going to carry it out in buckets?" he asked.

Several of the small oil companies who have signed contracts in Kurdistan are hoping that in the long term there will be an agreement between the Kurds and the central government and they will then sell out to the majors at a large profit.

The technical support agreements, as the service agreements are known, may open the door to Iraq for the majors. Shahristani has said that Iraq will open up the same fields for bidding for long-term development projects soon. "We're going to announce the first licensing round by the end of this month or early next month," he said.