How the West will make a killing on Iraqi oil riches
By Danny Fortson, Andrew Murray-Watson and Tim Webb Published: 07 January 2007
Iraq's massive oil reserves, the third-largest in the world, are about to be thrown open for large-scale exploitation by Western oil companies under a controversial law which is expected to come before the Iraqi parliament within days.
The US government has been involved in drawing up the law, a draft of which has been seen by The Independent on Sunday. It would give big oil companies such as BP, Shell and Exxon 30-year contracts to extract Iraqi crude and allow the first large-scale operation of foreign oil interests in the country since the industry was nationalised in 1972.
The huge potential prizes for Western firms will give ammunition to critics who say the Iraq war was fought for oil. They point to statements such as one from Vice-President Dick Cheney, who said in 1999, while he was still chief executive of the oil services company Halliburton, that the world would need an additional 50 million barrels of oil a day by 2010. "So where is the oil going to come from?... The Middle East, with two-thirds of the world's oil and the lowest cost, is still where the prize ultimately lies," he said.
Oil industry executives and analysts say the law, which would permit Western companies to pocket up to three-quarters of profits in the early years, is the only way to get Iraq's oil industry back on its feet after years of sanctions, war and loss of expertise. But it will operate through "production-sharing agreements" (or PSAs) which are highly unusual in the Middle East, where the oil industry in Saudi Arabia and Iran, the world's two largest producers, is state controlled.
Opponents say Iraq, where oil accounts for 95 per cent of the economy, is being forced to surrender an unacceptable degree of sovereignty.
Proposing the parliamentary motion for war in 2003, Tony Blair denied the "false claim" that "we want to seize" Iraq's oil revenues. He said the money should be put into a trust fund, run by the UN, for the Iraqis, but the idea came to nothing. The same year Colin Powell, then Secretary of State, said: "It cost a great deal of money to prosecute this war. But the oil of the Iraqi people belongs to the Iraqi people; it is their wealth, it will be used for their benefit. So we did not do it for oil."
Supporters say the provision allowing oil companies to take up to 75 per cent of the profits will last until they have recouped initial drilling costs. After that, they would collect about 20 per cent of all profits, according to industry sources in Iraq. But that is twice the industry average for such deals.
Greg Muttitt, a researcher for Platform, a human rights and environmental group which monitors the oil industry, said Iraq was being asked to pay an enormous price over the next 30 years for its present instability. "They would lose out massively," he said, "because they don't have the capacity at the moment to strike a good deal."
Iraq's Deputy Prime Minister, Barham Salih, who chairs the country's oil committee, is expected to unveil the legislation as early as today. "It is a redrawing of the whole Iraqi oil industry [to] a modern standard," said Khaled Salih, spokesman for the Kurdish Regional Government, a party to the negotiations. The Iraqi government hopes to have the law on the books by March.
Several major oil companies are said to have sent teams into the country in recent months to lobby for deals ahead of the law, though the big names are considered unlikely to invest until the violence in Iraq abates.
James Paul, executive director at the Global Policy Forum, the international government watchdog, said: "It is not an exaggeration to say that the overwhelming majority of the population would be opposed to this. To do it anyway, with minimal discussion within the [Iraqi] parliament is really just pouring more oil on the fire."
Vince Cable, the Liberal Democrat Treasury spokesman and a former chief economist at Shell, said it was crucial that any deal would guarantee funds for rebuilding Iraq. "It is absolutely vital that the revenue from the oil industry goes into Iraqi development and is seen to do so," he said. "Although it does make sense to collaborate with foreign investors, it is very important the terms are seen to be fair."
Rice: US government not involved in Iraq no-bid oil contracts
Rice said that "the Iraqis, even though they need to pass an oil law, are beginning to attract investment"
Hussein al-Shahristani (L)
June 19, 2008
WASHINGTON (AFP) — Secretary of State Condoleezza Rice said Thursday the US government was not involved in Iraq's no-bid oil contracts that could see four major western oil firms start their first commercial work there since the war began five years ago.
"The United States government has stayed out of the matter of awarding the Iraq oil contracts. It's a private sector matter," Rice said in an interview on Fox news network.
But she did stress that the likely awarding of contracts "demonstrates that it's starting to get interesting in Iraq and recognizes the potential for Iraq to become an even more major oil supplier."
Earlier this month Iraq's Oil Minister Hussein Shahristani was cited as saying his country intended to sign technical support agreements with foreign oil majors including ExxonMobil, BP, Shell and Total by the end of June that would help boost output capacity by 500,000 barrels per day.
Citing an improving security situation in the strife-ridden country, Rice said that "the Iraqis, even though they need to pass an oil law, are beginning to attract investment.
"That's really a good sign. It will be a good sign if Iraq can increase oil production because, of course, the supply and demand of oil is a major concern to all of us."
Since a US-led coalition invaded Iraq in 2003, suspicion has swirled particularly in the Arab world that Washington pursued a war footing with Iraq in order to gain access to the country's massive oil reserves.
US President George W. Bush has consistently stated that the war was necessary to combat terrorism.
On Thursday the New York Times reported that ExxonMobil, Shell, Total and BP -- the original foreign partners in the Iraq Petroleum Company (IPC) -- were in the final stages of negotiations on contracts that would see them return to Iraq 36 years after their oil concessions were lost due to the nationalization of IPC spearheaded by Saddam Hussein.
The firms' offers prevailed over those by more than 40 other companies including those from Russia, China and India, the Times reported.
The Iraqi Oil Ministry said the contracts were intended to bring modern skills and technology to its oil fields as the country finalized its oil law in parliament, the daily said.
The new no-bid, two-year contracts are relatively small by international standards but open the door to potentially lucrative work for the western firms as they put the companies at an advantage on future contracts, the paper said.
Middle East oil expert Leila Benali of Cambridge Energy Research Associates said the current contracts are a "foothold" in Iraq for firms eyeing long-term contracts.
"The bigger prize everybody is waiting for is development of the giant new fields," Benali was quoted as saying.
Oil fields in the Iraqi province of Basra. Iraq produces about 2.5 million barrels of oil per day. Moises Saman for The New York Times
By ANDREW E. KRAMER Published: June 19, 2008
BAGHDAD — Four Western oil companies are in the final stages of negotiations this month on contracts that will return them to Iraq, 36 years after losing their oil concession to nationalization as Saddam Hussein rose to power.
Exxon Mobil, Shell, Total and BP — the original partners in the Iraq Petroleum Company — along with Chevron and a number of smaller oil companies, are in talks with Iraq’s Oil Ministry for no-bid contracts to service Iraq’s largest fields, according to ministry officials, oil company officials and an American diplomat.
The deals, expected to be announced on June 30, will lay the foundation for the first commercial work for the major companies in Iraq since the American invasion, and open a new and potentially lucrative country for their operations.
The no-bid contracts are unusual for the industry, and the offers prevailed over others by more than 40 companies, including companies in Russia, China and India. The contracts, which would run for one to two years and are relatively small by industry standards, would nonetheless give the companies an advantage in bidding on future contracts in a country that many experts consider to be the best hope for a large-scale increase in oil production.
There was suspicion among many in the Arab world and among parts of the American public that the United States had gone to war in Iraq precisely to secure the oil wealth these contracts seek to extract. The Bush administration has said that the war was necessary to combat terrorism. It is not clear what role the United States played in awarding the contracts; there are still American advisers to Iraq’s Oil Ministry.
Sensitive to the appearance that they were profiting from the war and already under pressure because of record high oil prices, senior officials of two of the companies, speaking only on the condition that they not be identified, said they were helping Iraq rebuild its decrepit oil industry.
For an industry being frozen out of new ventures in the world’s dominant oil-producing countries, from Russia to Venezuela, Iraq offers a rare and prized opportunity.
While enriched by $140 per barrel oil, the oil majors are also struggling to replace their reserves as ever more of the world’s oil patch becomes off limits. Governments in countries like Bolivia and Venezuela are nationalizing their oil industries or seeking a larger share of the record profits for their national budgets. Russia and Kazakhstan have forced the major companies to renegotiate contracts.
The Iraqi government’s stated goal in inviting back the major companies is to increase oil production by half a million barrels per day by attracting modern technology and expertise to oil fields now desperately short of both. The revenue would be used for reconstruction, although the Iraqi government has had trouble spending the oil revenues it now has, in part because of bureaucratic inefficiency.
For the American government, increasing output in Iraq, as elsewhere, serves the foreign policy goal of increasing oil production globally to alleviate the exceptionally tight supply that is a cause of soaring prices.
The Iraqi Oil Ministry, through a spokesman, said the no-bid contracts were a stop-gap measure to bring modern skills into the fields while the oil law was pending in Parliament.
It said the companies had been chosen because they had been advising the ministry without charge for two years before being awarded the contracts, and because these companies had the needed technology.
A Shell spokeswoman hinted at the kind of work the companies might be engaged in. “We can confirm that we have submitted a conceptual proposal to the Iraqi authorities to minimize current and future gas flaring in the south through gas gathering and utilization,” said the spokeswoman, Marnie Funk. “The contents of the proposal are confidential.”
While small, the deals hold great promise for the companies.
“The bigger prize everybody is waiting for is development of the giant new fields,” Leila Benali, an authority on Middle East oil at Cambridge Energy Research Associates, said in a telephone interview from the firm’s Paris office. The current contracts, she said, are a “foothold” in Iraq for companies striving for these longer-term deals.
Any Western oil official who comes to Iraq would require heavy security, exposing the companies to all the same logistical nightmares that have hampered previous attempts, often undertaken at huge cost, to rebuild Iraq’s oil infrastructure.
And work in the deserts and swamps that contain much of Iraq’s oil reserves would be virtually impossible unless carried out solely by Iraqi subcontractors, who would likely be threatened by insurgents for cooperating with Western companies.
Yet at today’s oil prices, there is no shortage of companies coveting a contract in Iraq. It is not only one of the few countries where oil reserves are up for grabs, but also one of the few that is viewed within the industry as having considerable potential to rapidly increase production.
David Fyfe, a Middle East analyst at the International Energy Agency, a Paris-based group that monitors oil production for the developed countries, said he believed that Iraq’s output could increase to about 3 million barrels a day from its current 2.5 million, though it would probably take longer than the six months the Oil Ministry estimated.
Mr. Fyfe’s organization estimated that repair work on existing fields could bring Iraq’s output up to roughly four million barrels per day within several years. After new fields are tapped, Iraq is expected to reach a plateau of about six million barrels per day, Mr. Fyfe said, which could suppress current world oil prices.
The contracts, the two oil company officials said, are a continuation of work the companies had been conducting here to assist the Oil Ministry under two-year-old memorandums of understanding. The companies provided free advice and training to the Iraqis. This relationship with the ministry, said company officials and an American diplomat, was a reason the contracts were not opened to competitive bidding.
A total of 46 companies, including the leading oil companies of China, India and Russia, had memorandums of understanding with the Oil Ministry, yet were not awarded contracts.
The no-bid deals are structured as service contracts. The companies will be paid for their work, rather than offered a license to the oil deposits. As such, they do not require the passage of an oil law setting out terms for competitive bidding. The legislation has been stalled by disputes among Shiite, Sunni and Kurdish parties over revenue sharing and other conditions.
The first oil contracts for the majors in Iraq are exceptional for the oil industry.
They include a provision that could allow the companies to reap large profits at today’s prices: the ministry and companies are negotiating payment in oil rather than cash.
“These are not actually service contracts,” Ms. Benali said. “They were designed to circumvent the legislative stalemate” and bring Western companies with experience managing large projects into Iraq before the passage of the oil law.
A clause in the draft contracts would allow the companies to match bids from competing companies to retain the work once it is opened to bidding, according to the Iraq country manager for a major oil company who did not consent to be cited publicly discussing the terms.
Assem Jihad, the Oil Ministry spokesman, said the ministry chose companies it was comfortable working with under the charitable memorandum of understanding agreements, and for their technical prowess. “Because of that, they got the priority,” he said.
In all cases but one, the same company that had provided free advice to the ministry for work on a specific field was offered the technical support contract for that field, one of the companies’ officials said.
The exception is the West Qurna field in southern Iraq, outside Basra. There, the Russian company Lukoil, which claims a Hussein-era contract for the field, had been providing free training to Iraqi engineers, but a consortium of Chevron and Total, a French company, was offered the contract. A spokesman for Lukoil declined to comment.
Charles Ries, the chief economic official in the American Embassy in Baghdad, described the no-bid contracts as a bridging mechanism to bring modern technology into the fields before the oil law was passed, and as an extension of the earlier work without charge.
To be sure, these are not the first foreign oil contracts in Iraq, and all have proved contentious.
The Kurdistan regional government, which in many respects functions as an independent entity in northern Iraq, has concluded a number of deals. Hunt Oil Company of Dallas, for example, signed a production-sharing agreement with the regional government last fall, though its legality is questioned by the central Iraqi government. The technical support agreements, however, are the first commercial work by the major oil companies in Iraq.
The impact, experts say, could be remarkable increases in Iraqi oil output.
While the current contracts are unrelated to the companies’ previous work in Iraq, in a twist of corporate history for some of the world’s largest companies, all four oil majors that had lost their concessions in Iraq are now back.
But a spokesman for Exxon said the company’s approach to Iraq was no different from its work elsewhere.
“Consistent with our longstanding, global business strategy, ExxonMobil would pursue business opportunities as they arise in Iraq, just as we would in other countries in which we are permitted to operate,” the spokesman, Len D’Eramo, said in an e-mailed statement.
But the company is clearly aware of the history. In an interview with Newsweek last fall, the former chief executive of Exxon, Lee Raymond, praised Iraq’s potential as an oil-producing country and added that Exxon was in a position to know. “There is an enormous amount of oil in Iraq,” Mr. Raymond said. “We were part of the consortium, the four companies that were there when Saddam Hussein threw us out, and we basically had the whole country.”
James Glanz and Jad Mouawad contributed reporting from New York.
A US soldier stands guard in front of an Iraqi oil refinery near Baiji AFP/Getty Images
Shell, BP, Exxon Mobil and Total set to sign deal with Baghdad
By Patrick Cockburn Friday, 20 June 2008
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 US-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 UN 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 $500m (£250m). 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 Company to exploit Iraqi oil from the 1920s until the industry's nationalisation 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 US invasion, Iraqis have been wary of foreign involvement in their oil industry. Many are convinced that the hidden purpose of the US 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 co-operate with the Iraqi National Oil Company [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 $70bn this year, but its government administration is too dysfunctional and corrupt to rebuild the electricity or water supply systems. The government has $50bn in the Federal Bank of New York.
Mr 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. Mr 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.
The high price of oil means that Iraq is not under immediate pressure to maximise its oil revenues. The Iraqi parliament has suspected anything which looks like giving foreign companies ownership of Iraq's oil through a production sharing agreement.
The nationalisation of Iraq's oil is one the few acts of Saddam Hussein's long years in power which is still highly popular, and Iraqi members of parliament are fearful of anything that looks like back-door privatisation in the interests of foreigners.
Big four have history of control
For the four oil giants, the new agreements will bring them back to a country where they have a long history. BP, Exxon Mobil, Total and Shell were co-owners of a British, American and French consortium that kept Iraq's oil reserves in foreign control for more than 40 years.
The Iraq Petroleum Company (once the Turkish Petroleum Company) was formed in 1912 by oil companies eager to grab the resources in parts of the Ottoman Empire.
The company was formalised in 1928 and each of the four shareholders had a 23.75 per cent share of all the oil produced. The final 5 per cent went to Calouste Gulbenkian, an Armenian businessman.
In 1931, an agreement was signed with Iraq, giving the company complete control over the oi fields of Mosul in return for annual royalties. After Saddam's coup in 1958, nationalisation came in 1972.
Two-Year, No-Bid Contracts Aimed at Boosting Production
By Ernesto Londoño and Simone Baribeau Washington Post Foreign Service Friday, June 20, 2008; Page A12
BAGHDAD, June 19 -- Iraq is preparing to award contracts to several Western energy companies to help develop its vast oil resources, allowing them to consolidate their positions in a country that has seemed less threatening in recent months as security has improved.
The two-year, no-bid contracts will be awarded to companies that have been advising the Iraqi Oil Ministry in recent years, said Asim Jihad, a spokesman for the ministry. He said officials expect that U.S.-based Exxon Mobil and Chevron, Royal Dutch Shell, France's Total and British oil company BP will secure the biggest contracts.
"We have had discussions since last year" regarding deals that would formalize the advisory role some of them are already playing, Jihad said. "The discussions have now ended."
The contracts will be presented to Prime Minister Nouri al-Maliki's cabinet for approval in coming days and could be announced by the end of the month, Jihad said. He added that more than 30 contracts will be signed but declined to describe their scope or provide other details.
He said the Iraqi government informed oil companies several months ago of its needs. Subsequent negotiations led to the contracts, which would allow the government to step up efforts to increase production while legislation setting guidelines for foreign investment in the oil sector remains deadlocked in parliament.
The contracts would expand relationships between the Iraqi government and the energy giants, which have eyed the country's oil fields with interest and apprehension since the U.S.-led invasion in 2003. Some companies have been working with the ministry under memorandums of understanding.
While the contracts would limit the companies' role to infrastructure refurbishment and technical support, the agreements would also position the firms for future deals in Iraq that could include exploration and drilling.
The impending signing of the contracts, which was reported in the New York Times on Thursday, comes as members of Iraq's parliament remain at loggerheads over legislation to regulate the country's oil reserves.
Iraq's largest oil fields are in the heavily Shiite south and predominantly Kurdish areas in the north. Parliament members and leaders have argued over whether oil revenue should be distributed evenly across the country or whether oil-rich provinces should be entitled to a larger share.
They also have squabbled over the role foreign companies should play in Iraq, particularly whether they should be given licenses to drill.
A higher-profile role for Western companies in Iraq's oil industry is likely to revive speculation that the Iraq war was motivated by a desire to tap into reserves that were controlled by foreigners until the 1960s, when the industry was nationalized. The belief is widespread in the Arab world.
Secretary of State Condoleezza Rice on Thursday said the U.S. government played no role in securing the deals. She called the impending contracts a sign that security gains are attracting foreign investment in Iraq.
"It demonstrates that the private sector is beginning to get interested in Iraq, that it recognizes the tremendous potential for Iraq to become an even more major oil supplier," Rice told Fox News. "That's really a good sign, and it will be a good sign if Iraq can increase its oil production, because of course the supply and demand of oil is a major concern to all of us."
Iraq's oil reserves are among the largest in the world, but years of economic sanctions, war and political turmoil have taken a toll on the industry. During the first few months of this year, output reached 2 million barrels a day. Hussein al-Shahristani, Iraq's oil minister, told parliament this year that output could more than double within five years.
Officials at some of the oil companies that are expected to sign contracts issued muted statements.
A spokeswoman for Exxon Mobil, regarded as one of the most risk-adverse players in the industry, said the company would be interested in working in Iraq.
Toby Odone, a BP spokesman, said the company has been providing technical assistance to Iraq for years and is formalizing its role in the country.
Shell spokesman Adam Newton said that the company is negotiating "service agreements" with the Iraqi Oil Ministry but that the details are confidential.
Total spokesman Kevin Church confirmed that the company is discussing its future role in West Qurna, one of Iraq's largest oil fields in the south.
Large energy companies have in recent years lost ground in oil-rich countries such as Russia and Venezuela, as governments have tightened their control over the industry.
Manouchehr Takin, a senior analyst at the London-based Center for Global Energy Studies, said the names of the companies negotiating contracts is not surprising.
"They're the big international companies," he said. "They're qualified and experienced."
Baribeau reported from Washington. Special correspondent Dalya Hassan in Baghdad and staff researcher Robert E. Thomason in Washington contributed to this report.
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