Deals With Iraq Are Set To Bring Oil Giants Back

The NY Times reports:


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.”

Battling Over The World's Oil Reserves

Alistair Tice looks at the rivalry for access to the world's oil supplies and assesses the likely consequences for the world economy, and the continued dominance of US imperialism.

Alistair Tice reports:
George Bush invaded Iraq for power, prestige and oil. Whilst the catastrophe of the occupation has dealt a huge blow to the prestige of US imperialism around the world and its power in the Middle East has been severely undermined, US and British oil companies are still set to get their hands on Iraq's oil.

Iraq's pro-western cabinet has approved a Hydrocarbon Law that will hand over long-term control of the country's untapped energy fields to foreign multinationals, with profit rates of up to 75 per cent! Iraq has the world's second largest known oil reserves and the Middle East currently supplies two-thirds of the world's oil.
Bush's war for oil was driven by his administration's close links to the major oil companies and by the United States' oil import needs. US oil production peaked in 1970 at ten million barrels per day (bpd); today it is less than five million bpd and the US consumes 20 million bpd. That is 25% of the world's oil consumption, yet the US only has 5% of the world's reserves.

Imports have risen from 36% of its oil needs in 1970 to two-thirds today. A recent submission to the Senate Committee on Energy and Natural Resources stated "there is no economically plausible scenario for a strategically meaningful reduction in the dependence of the Unites States and its allies on imported hydrocarbons during the next quarter century."

The major oil companies, mostly US-owned, are collectively known as 'Big Oil'. Closely connected to the Bush regime, many were originally based in the key oil state of Texas and are an essential element in the 'military-industrial complex'. Their profit-driven objectives have played a decisive role in Bush's aggressive, interventionist policy in the Middle East and Central Asia. Big Oil makes huge profits. In 2005, ExxonMobil became the world's biggest company, overtaking Wal-Mart. Five of the world's top ten corporations are now oil majors.

However, they face long term problems. Last year, the private oil corporations only replaced 75% of their reserves and now they only control 10% of world oil reserves.

State ownership
Despite two decades of neo-liberalism, national oil companies (wholly or partly state owned) control 90% of world oil reserves. And that share is rising.

On 1 May 2006, Evo Morales, the recently elected leftist president, announced the nationalisation of Bolivia's gas industry. Whilst it ended up as only partial state ownership, it was hugely significant after two decades of privatisation and was referred to as "the first nationalisation of the 21st century." Hugo Chávez, the radical president of Venezuela, has announced that by 1 May 2007, PDVSA (the Venezuelan state oil company) will take a 60% majority stake in the extra-heavy oil fields in the Orinoco Basin.

Vladimir Putin, the Russian president, has taken state-capitalist measures against the oil multinationals to increase his government's revenues and standing internationally.

Shell was forced to accept reduced shares in joint ventures in the giant Sakhalin oilfield. And now BP is under pressure from Gazprom, the Russian state gas company, over a new gas field project in Eastern Siberia.

The oil companies are having to accept lesser shares in future profits or risk expropriation and miss out altogether.

Even in the central African country Chad, last year the government created a new national oil company and threatened to expel Chevron for not paying taxes. In less than three years of exploitation of Chad's recently discovered oil resources, in a deal brokered by the World Bank, the foreign consortium had earned $5 billion for a $3 billion investment and Chad only got $588 million!

Globalisation
This retrenchment from globalisation is likely to increase with more governments nationalising or at least taking majority state holdings in their energy resources. Russia is now the world's biggest oil exporter (it overtook Saudi Arabia last year) and Gazprom is now the highest valued company outside the US.

But the Big Oil companies, and through them US imperialism, still control the international oil market: trading, transportation (tankers and pipelines) and refining. So Russia and China are trying to challenge their domination, and their state-owned energy companies could even make hostile takeover bids for Big Oil companies.

These would not be successful for political reasons. Last year for example, the US Congress blocked an attempted take-over of US energy company Unocal by the Chinese state oil company.

However, Russia and China have made a number of bilateral energy agreements and are planning to open their own oil and gas market exchanges to rival the US.

The world oil price peaked at around $80 per barrel last year but has now fallen back to $50-$60, still way above the $20 per barrel before the Iraq war started four years ago.

In the coming world economic slowdown or recession, the oil price is likely to fall further as energy demand falls, although probably not back to $20. However, any significant fall in the oil price below $50 a barrel will cause big economic and social problems for producer countries. It would also lead to another slump (as in the 1990s) in oil exploration and production (the economic viability of reserves is very much conditioned by the oil price) - paving the way for further shortages of supply and refining capacity later.

Would the leftist governments in Bolivia and Venezuela cut back on their social programmes for the poor or would they be forced into more radical policies of expropriation of capitalist interests?

Similarly, would Putin threaten to cut off western energy supplies if the west did not pay more for its gas and oil?

70% of Iran's state revenues comes from its oil exports so any fall in price would undermine President Ahmadinejad's already failing social promises and popular support. Saudi Arabia and the Gulf states too would face big social upheavals.

Whilst these would be the likely consequences of a fall in oil prices in the short term, in the longer run the price is likely to increase and could jump dramatically in response to internal crises.

The four biggest oilfields in the world (which account for 14% of world supplies) are all over 30 years old and in decline.

Saudi Arabia's Ghawar field, the world's largest, is over 50 years old and over half depleted (some observers say 90% depleted but the Saudi oil industry is shrouded in secrecy).

Daqing is the largest oil field in China and its major source of domestic oil; its decline will only make China even more desperate for imports. China is now the world's second biggest oil importer after the US, hence its deals with Iran, Sudan and Venezuela.

Last year, two senior US senators initiated a computerised simulation exercise called ShockWave to study the effects on the US economy if the oil price rose to $100 a barrel. Their inescapable conclusion was that it would lead to recession.

Many analysts believe that due to 'Peak Oil', prices could rise as high as $125-$150 a barrel. The Peak Oil theory is that a time will come when half the discovered and produced oil in the world has been consumed and after then the oil supply will decline. Some oil experts believe that time has already come, others that it may not be for another 30 years.

Either way, the reaction against neo-liberalism already evident in Latin America will spread to other continents as workers and poor people demand action against the super-profits of Big Oil.

There will be pressure from the masses for more windfall taxes and outright nationalisation.

The intensified rivalry between the declining and desperate US empire and energy-rich Russia and energy-hungry China will intensify, most immediately over Iran, and in Central Asia and Africa, leading to trade wars and further military conflicts.

As a consequence oil prices will become increasingly volatile, with falls and big rises, each with the potential to cause economic crises and social upheaval.

Just before the invasion of Iraq, media magnate Rupert Murdoch expressed his support for war to maintain oil prices at $20 a barrel and help sustain world economic growth (and his profits!). Like most things in his media, Murdoch got that one wrong and Iraq and oil will prove to be sources of world economic and political instability for years to come.

Whose Oil Is It, Anyway?

Today more than three-quarters of the world’s oil is owned and controlled by governments. It wasn’t always this way. Until about 35 years ago, the world’s oil was largely in the hands of seven corporations based in the United States and Europe. Those seven have since merged into four: ExxonMobil, Chevron, Shell and BP. They are among the world’s largest and most powerful financial empires. But ever since they lost their exclusive control of the oil to the governments, the companies have been trying to get it back.

In the NYTimes, Antonia Juhasz writes:
Iraq’s oil reserves — thought to be the second largest in the world — have always been high on the corporate wish list. In 1998, Kenneth Derr, then chief executive of Chevron, told a San Francisco audience, “Iraq possesses huge reserves of oil and gas — reserves I’d love Chevron to have access to.” A new oil law set to go before the Iraqi Parliament this month would, if passed, go a long way toward helping the oil companies achieve their goal. The Iraq hydrocarbon law would take the majority of Iraq’s oil out of the exclusive hands of the Iraqi government and open it to international oil companies for a generation or more.

In March 2001, the National Energy Policy Development Group (better known as Vice President Dick Cheney’s energy task force), which included executives of America’s largest energy companies, recommended that the United States government support initiatives by Middle Eastern countries “to open up areas of their energy sectors to foreign investment.” One invasion and a great deal of political engineering by the Bush administration later, this is exactly what the proposed Iraq oil law would achieve. It does so to the benefit of the companies, but to the great detriment of Iraq’s economy, democracy and sovereignty.

Since the invasion of Iraq, the Bush administration has been aggressive in shepherding the oil law toward passage. It is one of the president’s benchmarks for the government of Prime Minister Nuri Kamal al-Maliki, a fact that Mr. Bush, Secretary of State Condoleezza Rice, Gen. William Casey, Ambassador Zalmay Khalilzad and other administration officials are publicly emphasizing with increasing urgency. The administration has highlighted the law’s revenue sharing plan, under which the central government would distribute oil revenues throughout the nation on a per capita basis. But the benefits of this excellent proposal are radically undercut by the law’s many other provisions — these allow much (if not most) of Iraq’s oil revenues to flow out of the country and into the pockets of international oil companies.

The law would transform Iraq’s oil industry from a nationalized model closed to American oil companies except for limited (although highly lucrative) marketing contracts, into a commercial industry, all-but-privatized, that is fully open to all international oil companies. The Iraq National Oil Company would have exclusive control of just 17 of Iraq’s 80 known oil fields, leaving two-thirds of known — and all of its as yet undiscovered — fields open to foreign control. The foreign companies would not have to invest their earnings in the Iraqi economy, partner with Iraqi companies, hire Iraqi workers or share new technologies. They could even ride out Iraq’s current “instability” by signing contracts now, while the Iraqi government is at its weakest, and then wait at least two years before even setting foot in the country. The vast majority of Iraq’s oil would then be left underground for at least two years rather than being used for the country’s economic development.

The international oil companies could also be offered some of the most corporate-friendly contracts in the world, including what are called production sharing agreements. These agreements are the oil industry’s preferred model, but are roundly rejected by all the top oil producing countries in the Middle East because they grant long-term contracts (20 to 35 years in the case of Iraq’s draft law) and greater control, ownership and profits to the companies than other models. In fact, they are used for only approximately 12 percent of the world’s oil. Iraq’s neighbors Iran, Kuwait and Saudi Arabia maintain nationalized oil systems and have outlawed foreign control over oil development. They all hire international oil companies as contractors to provide specific services as needed, for a limited duration, and without giving the foreign company any direct interest in the oil produced.

Iraqis may very well choose to use the expertise and experience of international oil companies. They are most likely to do so in a manner that best serves their own needs if they are freed from the tremendous external pressure being exercised by the Bush administration, the oil corporations — and the presence of 140,000 members of the American military. Iraq’s five trade union federations, representing hundreds of thousands of workers, released a statement opposing the law and rejecting “the handing of control over oil to foreign companies, which would undermine the sovereignty of the state and the dignity of the Iraqi people.” They ask for more time, less pressure and a chance at the democracy they have been promised.