Michael Schwartz: The Iraqi Oil Conundrum
In 2007, under direct U.S. pressure, virtually the same law was reluctantly endorsed by Prime Minister Maliki and forwarded to the Iraqi parliament for legislative consideration. Instead of passing it, the parliament established itself as a new center of resistance to the U.S. plan, raising myriad familiar complaints and repeatedly refusing to bring it to a vote. It lies dormant to this day.
This stalemate continued unabated through the Obama administration’s first year in office, as illustrated by a continuing conflict around the pipeline that carries oil from Iraq to Turkey, a source of about 20% of the country’s oil revenues. During the Bremer administration, the U.S. had ended the Saddam-era tradition of allowing local tribes to siphon off a proportion of the oil passing through their territory. The insurgents, viewing this as an act of American theft, undertook systematic sabotage of the pipeline, and -- despite ferocious U.S. military offensives -- it remained closed for all but a few days throughout the next five years.
The pipeline was re-opened in the fall of 2009, when the Iraqi government restored the Saddam-era custom in exchange for an end to sabotage. This has been only partially successful. Shipments have been interrupted by further pipeline attacks, evidently mounted by insurgents who believe oil revenues are illegitimately funding the continuing U.S. occupation. The fragility of the pipeline’s service, even today, is one small sign of ongoing resistance that could be an obstacle to any significant increase in oil production until the U.S. military presence is ended.
The entire six-year saga of American energy dreams, policies, and pressures in Iraq has so far yielded little -- no significant increase in Iraq’s oil production, no increase in its future capacity to produce, and no increase in its energy exports. The grand ambition of transferring actual control of the oil industry into the hands of the international oil companies has proven no less stillborn.
Over the years since the U.S. began its energy campaign, production has actually languished, sometimes falling as much as 40% below the pre-invasion levels of an industry already held together by duct tape and ingenuity. In the Brookings Institution’s latest figures for December 2009, production stood at 2.4 million barrels per day, a full 100,000 barrels lower than the pre-war daily average.
To make matters worse, the price of oil, which had hit historic peaks in early 2008, began to decline. By 2009, with the global economy in tatters, oil prices sank radically and the Iraqi government lacked the revenues to sustain its existing expenditures, let alone find money to repair its devastated infrastructure.
As a result, in early 2009, Maliki’s government began actively, even desperately, seeking ways to hike oil production, even without an oil law in place. That, after all, was the only possible path for an otherwise indigent country with failing agriculture in the midst of a drought of extreme severity to increase the money available for public projects -- or, of course, even more private corruption.
The Oil Companies Make Their Move
In January 2009, the government opened a new chapter in the history of oil production in Iraq when it announced its intention to allow a roster of several dozen international oil firms to bid on development contracts for eight existing oil fields.
The proposed contracts did not, in fact, offer them the kind of control over development and production that the Cheney task force had envisioned back in 2001. Instead, they would be hired to finance, plan, and implement a vast expansion of the country’s production capacity. After repaying their initial investment, the government would reward them at a rate of no more than two dollars for every additional barrel of oil extracted from the fields they worked on. With oil prices expected to remain above $70 a barrel, this meant, once initial costs were repaid, the Iraqi government could expect to take in more than $60 per barrel, which promised a resolution to the country’s ongoing financial crisis.
The major international oil companies initially rejected these terms out of hand, demanding instead complete control over production and payments of approximately $25 per barrel. This initial resistance began to erode, however, when the Chinese National Petroleum Corporation (CNPC), a government-owned operation, induced its partner, BP, the huge British oil company, to accept government terms for expanding the Rumaila field near Basra in southern Iraq to one million barrels a day.
The Chinese company, experts believed, could afford to accept such meager returns because of Beijing’s desire to establish a long-term energy relationship with Iraq. This foot-in-the-door contract, China’s leaders evidently hoped, would lead to yet more contracts to explore Iraq’s vast, undeveloped (and possibly as yet undiscovered) oil reserves.
Perhaps threatened by the possibility that Chinese companies might accumulate the bulk of the contracts for Iraq’s richest oil fields, leaving other international firms in the dust, by December a veritable stampede had begun to bid for contracts. In the end, the major winners were state-owned firms from Russia, Japan, Norway, Turkey, South Korea, Angola, and -- of course -- China. The Malaysian national company, Petronas, set a record by participating with six different partners in four of the seven new contracts the Maliki government gave out. Shell and Exxon were the only major oil companies to participate in winning bids; the others were outbid by consortia led by state-owned firms. These results suggest that national oil companies, unlike their profit-maximizing private competitors, were more willing to forego immediate windfalls in exchange for long-term access to Iraqi oil.
On paper, these contracts hold the potential to satisfy one aspect of Washington’s oil hunger, while frustrating another. If fully implemented, they could collectively boost Iraqi production from 2.5 million to 8 million barrels per day in just a few years. They would not, however, deliver control over production (or the bulk of the revenues) to foreign companies, so that Iraq and OPEC could continue, if they wished, to limit production, keep prices high, and wield power on the world stage.
Nevertheless, the centers of resistance to the original U.S. oil policies have voiced opposition to these new contracts. Members of parliament immediately demanded that all contracts be submitted for their approval, which they declared would be withheld unless ironclad protections of Iraqi workers, technicians, and management were included. Iraq’s own state-owned oil companies demanded guarantees that their technicians, engineers, and administrators be trained in the new technologies the foreign companies brought with them, and given escalating operational control over the fields as their skills developed.
The powerful Iraqi oil union opposed the contracts unless they included guarantees that all workers be recruited from Iraq. Local tribal leaders voiced opposition unless they guaranteed a full complement of local workers, and subcontracts for locally based businesses during the development phase. Then there were the insurgents, who continued to oppose oil exports until the U.S. fully withdraws from the country, and expressed their opposition by the 26 bombing attacks they’ve launched on pipelines and oil facilities since September 2009.
Some of these same groups have successfully blocked previous oil initiatives. Unless they are satisfied, they may frustrate the government’s latest bid to make oil gush in Iraq. One warning sign can be seen in the fate of a contract signed with the CNPC in early 2009 that called for the development of the relatively small (one billion barrel) Ahdab oil field near the Iranian border. The language of the original contract met conditions demanded by local leaders and workers, but the work, once begun, generated few local jobs and even fewer local business opportunities. The Chinese instead brought in foreign workers, following the pattern established by U.S. companies involved in Iraqi reconstruction. Eventually, equipment was sabotaged, work undermined, and the project’s viability remains threatened.
The end is not in sight and the outcome still unclear. Will the vast Iraqi oil reserves be developed and sent into the hungry world market any time soon? If they are, who will determine the rate of flow, and so wield the power this decision-making confers? And once this ocean of oil is sold, who will receive the potentially incredible revenues? As with so much else, when it comes to Iraqi oil, the American war has generated so many problems and catastrophes -- and so few answers.