[R-G] Analysis of Iraq's new oil deals

[Anthony Fenton]

http://www.handsoffiraqioil.org/2008/07/analysis-of-iraqs-new-oil-deals.html

Thursday, 17 July 2008
Analysis of Iraq's new oil deals

Iraq’s oil wealth on the block

The real implications of last week’s Oil Ministry announcement

By Greg Muttitt, Co-Director of PLATFORM

Published on niqash.org, 9 July 2008
Available in English, Arabic and Kurdish at http://www.niqash.org/content.php?contentTypeID=171&id=2243&lang=1

Last week saw the biggest step so far towards transferring Iraqi oil  
into the hands of foreign multinational companies, sparking renewed  
accusations that the US-UK war on Iraq was really motivated by an oil  
grab.

The Oil Ministry announced on 30 June that foreign oil companies would  
be invited to bid for contracts to develop six of Iraq’s largest  
oilfields, which together contain around half of the country’s known  
oil reserves.

Yet most commentators missed the significance of the move – that it  
would give away more to foreign companies than had been planned at any  
point since the Constitution was written in 2005, and possibly more  
than any major oil producer has given since the colonial era.

The contracts were (with one exception) for the second stage of  
development of the oilfields, to come after the one- or two-year no- 
bid contracts that the Ministry has been privately negotiating with  
Shell, BP, ExxonMobil, Chevron, Total and four smaller companies. The  
Ministry had also intended to sign those last week, but has delayed  
signing to some time this month.

To understand what’s at stake, we need to take a short diversion into  
some oil industry contract terminology. Last week’s announcement was  
of longer-term “risk service contracts” (RSCs), a kind of half-way  
house in the range of contract types.

The shorter (no-bid) contracts that would come first are known as  
“technical service contracts” (TSCs), where companies simply act as  
contractors to a government client who calls the shots, for a fixed  
fee – albeit with some strange features that I described in my last  
article for niqash.

These are contrasted with what the companies really want in Iraq – the  
dreaded “production sharing agreements” (PSAs), which would give them  
control over the fields, a large share of the oil extracted, and the  
potential for huge profits.

Last week’s RSCs are somewhere between TSCs and PSAs. It’s a model  
that has been used in Latin America, and is very similar to the  
“buyback contracts” used in Iran. The foreign company invests the  
capital (like in a PSA), but rather than getting a share of the oil,  
it gets a specified rate of return on its investment (say, 15%). And  
after a number of years, the oilfield reverts to national control. The  
government has not released the details of the contracts; but it  
appears they would be for either 7 or 9 years (in contrast to 22 years  
for a PSA or 1-2 years for a TSC).[1]

The Oil Minister made much of the fact that he was not offering PSAs –  
to reassure Iraqis that they need not fear a great giveaway.

But that the contracts were not PSAs misses the point. All six of the  
fields – Rumaila, Kirkuk, West Qurna, Zubair, Maysan and Bai Hasan –  
are already producing oil, and actually together account for more than  
90% of Iraq’s current production. As such, their investment and  
technology needs are relatively minor, and could easily be provided  
within the public sector, as they have been for more than 30 years.

Ever since the Constitution was written in 2005, Iraqi oil policy has  
been that fields already producing oil would stay in Iraqi hands – and  
that only for new, undeveloped fields would development contracts be  
offered to foreign companies. Even the draft Oil Law – which has been  
so controversial for giving away too much – required that fields  
already producing oil would be “managed and operated” by the Iraq  
National Oil Company (INOC).

That policy was reversed last week – giving the “backbone of Iraq’s  
oil production” (in the Minister’s own words) also to foreign  
companies – fields that were never going to be on offer in any form.  
It remains to be seen what happens to new fields.

The positive portrayal of a negative step was repeated when the  
Minister also emphasised that companies would have to “give” at least  
a 25% stake in each project to INOC. But this was never the companies’  
to give – in fact, the true implication of the announcement is that  
they may take 75% away from INOC.

Even for new fields, a 25% INOC stake would have been derisory. Libya,  
for instance, requires a public stake of around 80% for new  
exploration contracts (and for much smaller fields than Iraq’s).  
Nigeria, which is seen as one of the OPEC members most friendly to  
western companies, requires that the Nigeria National Petroleum  
Company take a 55% stake in onshore projects.

It was in the 1950s, as the colonial era was coming to a close, that a  
minimum of 51% became the norm in major oil producers. Now Iraq  
appears to be stepping back to the age of subjugation to the interests  
of foreign powers. Hardly the progressive move the Minister claimed.

For the most part, the international media were willing to accept the  
spin about how Iraq would get a great deal – some reports even  
celebrated how the companies were charitably “helping” Iraq rebuild  
its oil sector. The coverage clearly signified how far the Iraqi oil  
debate has been twisted over the last five years.

Iraqi oil policy, and mainstream discussion of it, have rested on two  
assumptions: that Iraq’s oil can only be effectively developed by the  
western oil majors, and that the contracts offered have to provide for  
the companies’ needs (or sometimes the oil market’s needs) first and  
foremost. Consistently absent has been any conception of what is in  
the best interests of the Iraqi people.

The big question is why the Oil Ministry would want to bring in the  
multinationals for these fields. The Ministry is not short of cash: in  
fact, it has been consistently unable to spend the funds provided to  
it, so is now sitting on billions of dollars that could be invested in  
the fields. And technology can easily be purchased, whilst Iraqis  
maintained the management of the fields.

The true explanation seems almost too obvious for most commentators to  
spot. One radio interviewer asked me “Why shouldn’t the Iraqi  
government sign these contracts if it wants to? – it’s not as if  
someone’s holding a gun to their head”.

In fact, that is exactly what is being held to Iraqis’ heads. Or more  
precisely, over 150,000 guns.

The Iraqi government owes its very existence to the foreign troops  
that remain in the country. And with the occupiers playing a greater  
role than the Iraqi electorate in whether the government stands or  
falls, it is inevitable that the government will respond more to the  
views of the former.

Last week, the New York Times revealed that US advisers had helped  
shape the new contracts. The State Department responded that its  
advice was purely technical, and gave the example of helping draft  
arbitration clauses. Those clauses, which determine how the contracts  
will be adjudicated outside the country by secretive investment  
courts, would probably be seen by most Iraqis as rather more than a  
technical issue. But for the USA, for multinational companies to run  
the industry is simply a natural way of doing things.

State Department spokesman Tom Casey added that the US role is similar  
to that of a lawyer helping a client draw up a will. It was an apt  
analogy. The USA sees Iraq’s economy as in its dying throes, and is  
helping the Iraqi government decide how much of its estate to bequeath  
to BP, Shell or Exxon.

But all is not yet lost for advocates of Iraqi sovereignty over its  
oil. Companies are not to bid for the contracts until next March, and  
signing is not expected until summer 2009 – giving plenty of time for  
the policy to change. During this time, the political landscape will  
alter significantly following the departure of the Bush/Cheney  
administration.

And the so-far successful Iraqi campaign against oil privatisation  
continues to make progress. According to press reports, the Oil  
Minister has finally agreed to open the technical service contracts to  
parliamentary scrutiny before they are signed. This is a welcome move,  
although it needs to be extended: all Iraqis should have a right to  
know what is being done to their natural resources.

For the US administration, it might seem like a dangerously radical  
idea to let Iraqis decide the future of their oil. But with Cheney and  
Bush on their way out, there may even be a prospect that the idea will  
take hold.

Greg Muttitt is an expert on Iraqi oil policy, which he has been  
studying since the start of the occupation in 2003. Working for the  
independent British charity PLATFORM, he has argued throughout that  
decisions about the future of Iraq’s oil should be made by the Iraqi  
people, free from external pressure.