Greg Muttitt | ukwatch.net

Iraq's Oil Wealth on the Block

Ellie Keen — Sun, 13 Jul 2008 16:14:37 +0000

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)*.

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.

———

The Kurdistan Regional Government released details of the federal government’s model exploration and development contract, which included up to 7 years of exploration, 2 years of appraisal, 5 years of development and 2 years of transfer of the field back to the government. The six fields announced last week were for development only – so we are assuming the same duration, minus the exploration period. Similarly, the draft oil law provides for up to 8 years of exploration, followed by 2 years of appraisal and 20 years of development and production.

The White Man's Burden in Iraq

Tim Holmes — Thu, 29 Nov 2007 15:45:45 +0000

Take up the White Man’s burden
The savage wars of peace
Fill full the mouth of Famine
and bid the sickness cease. – Rudyard Kipling, 1899

Pressure for Iraq’s controversial oil law intensified throughout the summer, with increasingly overt threats to topple the Iraqi government if it failed to deliver an oil law and other US “benchmarks”.

President Bush put it bluntly: “The fundamental question is: Will the government respond to the demands of the people?”

Bush probably didn’t see the irony of his comment. For if the “people” he referred to were the Iraqi people, overwhelming majorities in fact demand an end to the occupation, and reject the USA’s plans for their oil.

An opinion poll commissioned by PLATFORM and its partners in July found that Iraqis oppose the opening of the country’s oilfields to foreign investment by a factor of two to one. The poll also found that fewer than a quarter of Iraqis feel adequately informed about the oil law.

Two conferences in early September demonstrated the gulf between what Iraqis want and what the occupation-sponsored oil policy would give them.

“Iraq is open for business”, promised Oil Ministry officials to executives of BP, Shell, Exxon and other oil giants at the Iraq Petroleum 2007 conference in Dubai.

Whilst they trod the soft carpets of the five-star Hyatt Regency hotel, 600 miles away in Basra, over 250 civil society leaders, oilworkers, academics and experts were meeting, under the banner “Oil wealth belongs to the Iraqi people”.

The Basra conference was organised by the Iraqi Federation of Oil Unions (IFOU), which has led the campaign against oil privatisation. That campaign has so far succeeded in stopping an oil law being passed before the major US deadline of General Petraeus’ report to the US Congress.

For its efforts, the IFOU has been threatened with arrest of its leaders, declared an illegal organisation, and physically attacked by troops. Fortunately, a strong solidarity response from the international labour movement has helped restrain the Iraqi government’s and occupation forces’ worst excesses.

However, pressure for the oil law continues. Not to be outdone by the Kurdistan Regional Government, which signed its fifth small-scale production sharing agreement (this time with Texas-based Hunt Oil), the federal Oil Minister has declared that even if the oil law is not passed by parliament, he intends to start signing contracts, potentially by the end of this year – relying on Saddam-era legislation.

The USA’s next move will depend on how legally comfortable oil majors feel signing contracts without an oil law.

The USA justifies its pressure on grounds that an oil law would help bring reconciliation.

Even if that account fitted the facts (which it doesn’t – their oil law barely mentions the revenue sharing they claim is so important), even if the USA were not responsible for sponsoring the sectarianism that is now tearing at the country, the very concept of the US benchmarks is based on a racist premise: that Iraqis are not able to sort out their politics themselves, that they need US pressure to get the country on track. That is a premise almost unanimously accepted by the media.

And White Men continue to pontificate on what’s best for Iraqis. Noteworthy was an opinion piece in the Financial Times entitled “Oil for peace”, by Nick Butler, former Policy Director of BP and New Labour confidante. He argued that “the most useful parting gift that the coalition could leave [...] is a practical model for renewal of the oil sector”.

But the spin is now wearing thin.

It is a matter of record that until 2002 the USA and UK publicly identified their strategic interests in Iraqi and Middle Eastern oil. Equally, both countries do not deny that they have played a central role in shaping Iraqi oil policy, albeit with claims of noble motives.

In his new memoir, former Federal Reserve Chairman Alan Greenspan joined the dots and stated what no-one else is allowed to say: that oil was the main motivation for the Iraq war.

In this spirit, we should understand the “oil for peace” slogan as what it really is: the USA has no intention of giving peace to Iraq, until Iraq gives away control of its oil. In the best interests of Iraqis, of course.

Greg Muttitt is an expert on Iraqi oil and a co-director of PLATFORM.

The Price of Democracy

Alex Doherty — Wed, 18 Oct 2006 22:17:01 +0000

Multinational oil companies have reaped record profits the last two
years due to the high oil price. But behind the scenes, they are playing
a longer game. Civil society should learn from their approach.

Hovering around $70 per barrel – the highest level since the late
1970s – the oil price has sparked focus on the theme of “energy
security”, notably at this July’s G8 meeting. But this term is a
misleading one, a cover for companies to take long-term control over oil
and gas resources, at the expense of genuine security.[1]

What is needed is to replace it with a genuine concept of energy
democracy.

An oil price prediction

In October 2004, the International Energy Agency, which is seen as the
world authority on oil prices, predicted that the oil price would fall
to $22 in 2006.

They missed by a factor of three.

Similarly way-out predictions are repeatedly made by financial analysts,
by the US government and by OPEC, the Organisation of Petroleum
Exporting Countries.

So, asked to write about the high oil price, we decided to limit our
predictions to the following: that those who spend their time predicting
the price will, before too long, end up with egg on their face.

Whenever the oil price is extremely high or extremely low, it seems to
attract talk of a “new era” – in the current case, of permanently high
prices. While some have associated the high price with depletion of the
planet’s reserves, in fact rates of production depend as much on
politics, economics and technology as they do on geology. These other
factors – determining what proportion of the world’s oil is extracted
and by whom – are more difficult to predict.

Major oil and gas companies do not expend a huge amount of effort on
predicting the price. Like predicting the weather, their game is more to
consider what might happen, to be prepared for it, and to calculate how
to use it to their long-term strategic advantage.

Mega-profits

One obvious consequence of the high price is higher profits for oil and
gas companies. At the end of July, ExxonMobil announced profits
amounting to $4.7 million per hour – the second highest in corporate
history.[2]

Such profits raise the question in oil- and gas-producing countries of
whether the state is getting a fair share. Meanwhile, the high price
shifts the balance of market power from company to state: with limited
other available supplies, they have little choice but to accept the
terms offered by producing governments.

The oil price is one of the most important factors behind the change of
contract terms in Venezuela last year (and more recently in Algeria and
Indonesia), the nationalisation in Bolivia this year, and continued
pressure on private companies in Russia and Kazakhstan.

Conversely, during the low price of the late 1990s, the companies took
advantage of the weakness of Asian nations following their financial
crisis, to sign contracts which gave the companies very favourable
terms, but outlasted the crisis and the low oil price.

Thus despite the immediate boon of record profits, the high oil price
creates a long-term challenge to multinational companies’ power over the
energy market.

Pushing the frontier

Far from sitting back on their current windfall, oil companies are
working to turn this dynamic to their longer-term advantage, taking on
oil-producing governments both in their own countries and abroad.

In the 1970s, the oil majors, nationalised out of the world’s largest
oil provinces, moved into the more expensive North Sea and Alaska, a
move enabled by the high oil price. Subsequent increased production in
these areas built up extra capacity, which along with reduction in
demand led to the drop in oil price of the late 1980s – and the
containing of OPEC’s power.

This approach was continued into the 1990s and the start of this
century, with a rash of new oil and gas developments around the globe,
especially offshore and in remote and pristine onshore areas.

However, these projects have mostly been small compared to the giant
provinces of the Middle East, Venezuela and Russia – which between them
contain more than three quarters of the world’s known oil reserves. Oil
production in the rest of the world has flatlined since the mid-1990s – while global demand has accelerated upward.

The only real potential for significant increases outside OPEC and
Russia now lies in “unconventional” fossil fuels – such as oil sands,
oil shales, methane hydrates and gasified or liquefied coal. The Alberta
Energy Board estimates that Canada contains 170 billion barrels of oil,
locked in bituminous sands. If this could be extracted, it would give
Canada about 15% of the world’s oil reserves, the second largest behind
Saudi Arabia.

The oil-soaked sands (usually extracted by strip mining) must be heated
to high temperatures to release the oil. This is highly
energy-intensive, expensive and environmentally damaging.

Now, some oil companies are using the high oil price to develop these
resources.
Shell is one of the frontrunners. Already the operator of Canada’s $10
billion Athabasca Oil Sands project, this year the company bought a
small Canadian oil sands company for $2.2 billion, and spent a further
$400 million just on a set of speculative land leases. It is also
pursuing oil shales in the USA and China.

But while investing in this new frontier, the ultimate prize for oil and
gas companies is to break back into the countries with giant reserves.
The supermajors gained significant positions in Russia in the 1990s. Now
attention is turning to the Middle East.

Spreading “democracy”

US Vice President Dick Cheney famously reflected on the distribution of
oil wealth in 1996, when he was CEO of Halliburton, that “The problem is
that the good Lord didn’t see fit to put oil and gas reserves where
there are democratic governments.”

In fact, the correlation is not the product of God’s mysterious will.
Owing their political success to outside support, many governments – from Saudi Arabia to Azerbaijan to Colombia – have favoured the
interests of the USA and foreign companies over those of their own
populations.

Equally in countries with a high degree of nationalism, oil has been
associated with undemocratic governments, which have used oil income to
fund high social spending with low taxation, dampening pressure for
representation and democracy, and to build up their internal security
forces to ward off protest.

But what Cheney really meant by “democratic governments” was
“governments supporting US interests” – a point echoed in May this year,
when President Bush said he was concerned about “erosion of democracy”
in Bolivia and Venezuela, referring to lack of “respect for property
rights”.

Although oil companies have mostly been cautious of being seen as too
close to politics, one exception keen to show its allegiance to Uncle
Sam has been the British company BP. American companies’ compliance with
US sanctions has passed without comment, but BP made a point of not
dealing with Iran, unlike other European companies.

BP has also tried to link “democracy” with investor rights. At a
conference in Dubai in March, the company’s head of policy Nick Butler
commented: “By 2015 up to 80 per cent of supply will come from just
three areas of the world. West Africa, Russia and overwhelmingly the
Middle East … Few of those countries are democracies and few are open
to international investment.”

But the oil majors have all echoed the call for opening reserves to
foreign investment – often arguing that it is the only way to reduce the
oil price.

ChevronTexaco’s vice chairman Peter Robertson, for example, argued in
March that “We should promote transparency and the free flow of energy
trade and investment on a level playing field. By removing market
barriers, we could increase production significantly and moderate the
price volatility we face today.”

Energy security – for whom?

Companies have also tied access to reserves to “energy security”, the
current buzzword on which this year’s G8 meeting focussed.

Although “security” is a comforting word, and is dressed up in concern
over energy poverty, the G8’s emphasis is on free market structures of
energy provision – which will naturally favour those with most power in
the market, the largest consumers of energy.

Indeed, it is a sad irony that often people in major oil-producing
countries suffer severe energy poverty, and the countries are forced to
import expensive refined products, increasing the risk of smuggling and
corruption. For example, Nigeria, the world’s eighth largest oil
exporter, imports 76% of its gasoline, and 34% of its kerosene, at a
cost of $3.6 billion. In the Niger Delta, the oil-producing region,
firewood is the primary energy source for 73% of people, according to
the UNDP’s Human Development Report.

The G8 insists that the majority of investment must come from the
private sector – in part by breaking open public sector oil and gas
industries. The G8’s official declaration on energy security promised
that “We will work to reduce barriers to energy investment and trade. It
is especially important that companies from energy producing and
consuming countries can invest in and acquire upstream and downstream
assets internationally”.

This model – giving multinational companies control – can worsen local
access to energy in the producing country, as the companies prioritise
exporting the oil to international markets.

Nor does “energy security” lead to physical security. For Russia,
“energy security” was a major reason for its two brutal wars with
Chechnya, an important pipeline corridor.

US policy towards the Middle East has also clearly had a destabilising
effect. While this has pushed up the oil price, it has been to the USA’s
medium-term advantage, with instability leading to governments offering
oil and gas companies investment opportunities in order to help secure
their position. Even Iran is now offering new production contracts, in
an effort to win allies against potential US military action.

Iraq, with 10% of the world’s oil reserves, is seen as the lynchpin.
Since the start of the occupation, oil companies and the US and UK
governments have worked hard to reshape the country’s oil sector. Now,
following the formation of a permanent government, an oil law has been
drafted to allow long-term production contracts to be signed with
multinational companies. The draft law has been reviewed by the US
Energy Secretary and by nine major oil companies – before even being
seen by the Iraqi parliament.

The combination of military force, and legal mechanisms for ensuring
resources are taken to the wealthy consuming countries of the world, at
the expense of local people’s needs, suggests a more accurate phrase
might be not energy security but “energy imperialism”.

Climate change

In theory, a high oil price ought to increase the viability of
alternative, renewable fuels, and of decentralised energy networks, and
to encourage conservation. But such reaction has been limited – in part
because rich country economies are less dependent on oil than 30 years
ago, and so less responsive to the oil price. What response there has
been has focused on securing greater oil and gas supplies, with nuclear
the favoured alternative.

British Prime Minister Tony Blair’s feeble attempt to raise climate
change in last year’s G8 meeting has been subsumed into the energy
security agenda. Now, UK policy, like this year’s G8 declaration, talks
simultaneously about expanding the supply base of fossil fuels while
urgently addressing climate change, apparently seeing no contradiction.

Another reason for the lack of action to move to sustainable power
generation is that energy infrastructure is geared towards centralised
coal, gas and nuclear generation. And in transport, there is no
significant replacement for oil; while ownership of cars, and use of
road and air transport, have continued to rise: a trend most politicians
dare not challenge.[3]

This inertia is as much psychological as it is physical – the leap to
new energies is difficult to imagine, especially for policymakers. And
oil companies still carry a disproportionate sway over policy.

One impact of the high oil price is that it increases public interest in
scrutinising oil companies’ behaviour. Faced with this reputation risk,
the companies have all dramatically scaled up the visibility of their
advertising, not so much to sell products but more to ‘sell’ the
corporations themselves as responsible organisations – including for
some highlighting their role in renewable energy.

BP and Shell are still among the world’s largest renewable energy
companies – which gives them significant influence over the rate of
change of any energy transition. Both companies insist that renewables
will not provide a significant proportion of the energy mix for several
decades. BP invests just 2.7% of its capital – $450 million per year – in renewables, and Shell even less.[4]

Energy democracy

We have noted that oil and gas companies are not just sitting back on
their record profits. Likewise, civil society gains tactical advantages
from the high price, but should use them within the longer-term context.

For example, it would be tempting to surf the wave of resource
nationalism, as a route to restricting the role of multinational
companies. But the longer-term impact may be less democratic, more
repressive governments.

On the other hand, there is an opportunity to steer the rejection of
foreign company control towards a lasting greater democratisation of
decisions on oil policy – in which communities affected by the
developments have a genuine say in how, and whether, they take place.

It would be equally tempting to use the high price to call for an end to
the oil age, hoping that potential supply constraints would get
attention where environmental and social issues have failed. But we have
seen that the policy response will favour not renewables but nuclear
power, and greater interference in other countries’ energy policies.

Conversely, climate change is no longer in any serious doubt – and
presents the most compelling arguments for a transition in energy
sources, and in rich countries a reduction in total use of energy.

To borrow from David Korten, we should worry less about the ‘crisis of
sources’ of fuels – whether the oil is going to run out – and more about
the ‘crisis of sinks’ for their waste products – how much capacity the
atmosphere has to carry greenhouse gases. Making climate change
arguments now, to push for switching of energy use, can be effective, as
environmental advocates within organisations will experience less
resistance from finance managers.

In this too, civil society should be guided by core principles of
democracy and justice. While energy resources under the ground belong to
the citizens who live there, the atmosphere is a global resource owned
by all of the world’s people.

There must be a strong concept of equity in how rights to atmosphere are
divided in future climate regimes, taking into account who bears the
responsibility for, and has benefited from, emissions to date. There
should also be a concept of just transition, in which those most
affected by an energy transition (such as oilworkers or oil-dependent
countries) have a strong say in how that change takes place, and are
supported by those who have gained from the fossil fuel economy.
Meanwhile, the concept of decentralised energy, in which local,
small-scale provision meets people’s needs sustainably, has gained
welcome momentum recently.

The high oil price has renewed talk of “energy security”, calling for
increased supply of energy to wealthy countries and expansion of their
corporations – at the expense of poorer countries that need energy for
development, at the expense of oil-producing countries who deserve a
fair deal for their natural resources, and at the expense of the world’s
whole population which urgently needs serious action to cut greenhouse
gas emissions.

What we really need is energy democracy.

Notes:

[1] In the 1970s, the nominal price was lower than now, but adjusted for
inflation it was higher.

[2] The highest was ExxonMobil six months earlier!

[3] to produce a comparable amount of biofuels would require more land
than is available

[4] BP’s much-publicised announcement of $8 billion investment over 10
years was an aspirational goal. The concrete plan is for $1.8 billion
over the next 3 years. But a quarter of this will go into gas power
generation, so is not counted here.