Oil Privatization Through The Back Door

At Niqash, Greg Muttit writes:

In a survey in July 2003, Baghdad residents were asked what they thought was the main reason for America and Britain to go to war in Iraq. The most popular answer, with 47% of responses, was “to secure oil supplies”.

At first glance, it would seem that America and Britain have failed in this aim. Post-war Iraqi oil production peaked in April 2004 at 2.3 million barrels per day – still below the pre-war level of 2.5 mbpd – and has since dropped to around 2 mbpd.

But this reading would misunderstand the foreign oil interest. The aim for Iraq’s oil was not simply to obtain greater supplies – that could have been done by purchasing more oil from the former regime, and by removing sanctions. Rather, the US/UK interest was in controlling oil over the long term, through multinational companies based in their own countries.

In this respect, things now seem to be moving fast. On US President George Bush’s recent visit to Baghdad, oil was one of the key topics discussed. And last week, Bush’s Energy Secretary Sam Bodman called for an Iraqi oil law to lay out the rules of private investment.

The new Iraqi Oil Minister plans to pass an oil law through parliament by the end of the year – the timescale imposed by the International Monetary Fund – to enable the Iraqi government to sign contracts with “the largest oil companies”.

It seems the most likely type of contract being considered is the one advocated by the oil companies themselves, known as a ‘production sharing agreement’ (PSA). Four PSA contracts have already been signed by the Kurdistan Regional Government, with Norwegian, Turkish and Canadian companies.

So, what is a PSA? It is a structure which allows a foreign company to invest capital in developing an oilfield, in exchange for managing the oil production, and keeping a share of the oil.

Such contracts are often used in countries with small or difficult oilfields, or where high-risk exploration is required. They are not generally used in countries like Iraq, where there are large fields which are already known and which are cheap to extract. For example, they are not used in Iran, Kuwait or Saudi Arabia, all of which maintain state control of oil.

In fact, of the top seven countries with the largest oil reserves, only Russia – which has the World’s seventh largest – has any PSAs. Russia signed three PSAs in the early 1990s, during its own rapid political and economic transition, but has signed no more since then. Those PSAs have been so controversial, due to the poor deal they give the state, that it is unlikely any more will be signed.

Now some of the very same people who pushed PSAs in Russia and the other former Soviet states of Kazakhstan and Azerbaijan are advocating their use in Iraq.

Part of the appeal of PSAs is that they give the appearance of sovereignty over natural resources: the state is described as “owner” of the resource, and the foreign company as its “contractor”. However, in practice, most oil industry analysts acknowledge that the terms of the contract can be written so as to have exactly the same effect as a more traditional privatisation, giving the company management control, and potentially huge profits.

And with PSAs commonly lasting for 30 or 40 years, or even longer, decisions made now could sow the seeds of economic and political difficulties for decades to come.

The most obvious impact of this is that the state would obtain less revenue, as a share would go to the foreign companies. The cost to the Iraqi economy over the length of the contracts could be in the hundreds of billions of dollars. Given that oil provides more than 90% of government revenue, giving away a significant chunk of this could have a major effect on public programmes of health, education and infrastructure.

A second consequence would be the effect on the workforce. Whereas publicly-owned enterprises can include employment or the development of the national skills base among their objectives, private companies’ sole aim is to maximise profit. The international oil companies have consistently done this by reducing the size of the workforce. Similarly, they bring in many of their workers from abroad. Although the government may negotiate a percentage of local workers to be specified in a PSA contract, generally the technical and management roles go to foreigners: the Iraqis would be left with the lowest-paid and least-skilled jobs.

Furthermore, the companies would have control over the rate of oil production. For an oil-dependent country such as Iraq, the rate of depletion of its non-renewable resources – the balance between maximising production now versus saving some for later – is one of the most important economic decisions.

This may also undermine Iraq’s future relationship with OPEC. Two OPEC members with major foreign investment, Algeria and Nigeria, have repeatedly failed to control foreign companies’ production in order to comply with OPEC quotas.

If this is not worrying enough, PSAs frequently contain a ‘stabilisation clause’, making the companies effectively immune to any future legislation or regulation. As a result, future governments for the next 40 years could be constrained in their ability to pass new laws or policies.

For example, imagine that in ten years’ time a new Iraqi government wanted to pass a human rights law, or wanted to introduce a minimum wage. If this affected the company’s profits, either the law would not apply to the company’s operations, or the government would have to compensate the company for any reduction in profits.

Perhaps the government might insist that the law must be applied. In that case the company could apply to an international investment court – most likely in Geneva or Washington, DC – whichever is specified in the contract. These courts, which often sit in secret, cannot consider the body of Iraqi law, let alone the Iraqi public interest: they only consider the commercial terms of the contract. If such a court found against the Iraqi government, the government would either have to comply, or would face having its assets seized in other countries.

The human rights organisation Amnesty International has described such contracts as having a “chilling effect” on human rights, meaning that the financial disincentives are likely to discourage governments from passing any progressive human rights policies.

Production sharing agreements thus make a pretence of preserving national control, while in fact handing it over to foreign companies – in effect, privatising by the back door.

No-one doubts that the Iraqi oil sector needs investment. The advocates of PSAs argue that, because PSAs are favoured by oil companies, they are the only way to provide investment. But this ignores a range of other options: investment could be provided from public budgets, by borrowing from international banks, or by inviting foreign companies under less extreme forms of contract – for example, the buyback contract used in Iran or the risk service contracts being considered in Kuwait. Indeed, in both of those countries foreign ownership of oil is forbidden by their constitutions.

The oil companies insist that to finance oil development from public expenditure would deprive the Iraqi government of the opportunity to spend its limited funds on other public priorities. It is true that if foreign companies provide the investment now, the government would not have to.

But the Iraqi people must ask whether relinquishing future revenue and surrendering sovereignty over Iraq’s natural resources are a fair price to pay.

The Black Gold Rush In Iraq

It is an old cliché that politics is too important to be left to the politicians. But are new moves to decide the future shape of Iraq’s oil industry happening too fast to achieve public consensus – on issues that could both redraw the map and rewrite the history of Iraq?

In Niqash, Greg Muttitt writes:
The new Oil Minister, Husayn al-Sharistani, announced on Saturday that within two months he will draft legislation to govern Iraq’s oil sector, and aims to have his oil law passed by Parliament by the end of the year. The law will define the relative roles of the federal government, of the regions and governorates, and of private companies.

The issues could hardly be more important.

The degree of centralisation in the control of oil, and the revenues from it, are important aspects of the question of federalism. If misjudged – either by denying a fair share to the regions in which oil is located, or by giving regions too much autonomy at the expense of national cohesion – these oil decisions could fracture, and ultimately break apart, the country. However, given that the federalism issue is one of the most contentious aspects of the constitution, it is surprising that the oil law will be drafted – and possibly even passed – before the constitutional review process is complete.

Meanwhile, while there has been discussion on the question of the split of revenues between the centre and the regions, there has been almost no debate on the split between state entities and private companies.

Just three days after his appointment, Mr Al-Shahristani told a press conference that he planned to sign contracts with “the largest oil companies”. This would be the first time for more than thirty years that foreign companies have a major stake in Iraq’s oil. Oil was brought into public ownership and control in a process that began with Law 80 of 1961, to be completed in 1975. Public ownership of natural resources and industry is an issue about which many Iraqis feel very strongly. Yet decisions made in the coming months will not be reversible, as once contracts are signed, they will have a major bearing on Iraq’s economy and politics for decades to come, especially as oil accounts for more than 90% of government revenue.

“Federalism” and “privatisation” are not the only potentially divisive issues. The oil industry – like the rest of the country – has been plagued by corruption, and by the worsening security situation. The oil law will have an impact on both problems. A transparent and coordinated approach will be necessary in the fight against corruption. On the other hand, if deals with foreign companies are seen as secretive or unfair, they will only feed resentment, and in consequence the violence that has gripped the country.

Mr Al-Shahristani’s desire to move forward decisively and assertively may be his antidote to the ministry’s stagnation over recent months, hampered by political infighting. However, to do so before political and public consensus is achieved would create more problems than it would solve. Throughout Iraq’s history, the management of oil has been carried out in favour of narrow interests, whether foreign companies, the dictatorship or more recently, criminal elements and certain political interests.

That is not to say the government should do nothing. There is certainly an urgent need to address corruption, to improve security, and to carry out the technical rehabilitation of Iraq’s existing fields. On these issues, there is no major dispute. But before making the bigger decisions, proper public consultation and participation is vital.

Some interest groups have already insisted on having a say in the oil law. Most major international oil companies have been in contact with the Oil Ministry. And the International Monetary Fund required that it be involved in the drafting of the oil law, as part of the economic conditions it imposed on Iraq in December 2005. The fulfilment of these conditions is a requirement of the Paris Club of wealthy creditor nations, in exchange for relief of another portion of the international debts accumulated by the former regime.

The US government is also ensuring that its views are represented. It has appointed an adviser to work with the Oil Ministry on the law, from BearingPoint, the company that was hired by the Coalition Provisional Authority in 2003 to design the blueprint for the privatisation of the Iraqi economy.

But the oil in Iraq belongs to the Iraqi people – as is stated in the constitution. If that clause of the constitution is not to be considered meaningless, it should be the Iraqi people who decide how oil is managed, and the Oil Ministry should make provision for genuine public consultation.

The Oil Ministry should request and consider the views not just of political parties, but of civil society groups, experts, trade unions and others. It should open a process of informing and seeking the opinions of the general public, through workshops and meetings around the country, through publicising proposals in newspapers and on TV.

This is not a process that can be completed in two months. While the impatience is understandable, it is dangerous. Will oil be a blessing or a curse for Iraq? Public debate could make a difference.

IMF Occupies Iraq, Riots Follow

Bad enough that the U.S. military is occupying Iraq: Now the IMF is occupying the country.

For the Progressive, Matthew Rothschild writes:
In December, the International Monetary Fund, in exchange for giving a loan of $685 million to the Iraqi government, insisted that the Iraqis lift subsidies on the price of oil and open the economy to more private investment.

As the IMF said in a press release of December 23, the Iraqi government must be committed to “controlling the wage and pensions bill, reducing subsidies on petroleum products, and expanding the participation of the private sector in the domestic market for petroleum products.”

The impact of the IMF extortion was swift and brutal.

“Since the Dec. 15 parliamentary election, fuel prices have increased five-fold, mostly because the outgoing government of Prime Minister Ibrahim Jafari has cut subsidies as part of a debt-forgiveness deal it signed with the International Monetary Fund,” the Los Angeles Times reported on December 28.

“The move has shocked Iraqis long accustomed to hefty subsidies of gasoline, kerosene, cooking gas, and other fuels.”

Iraqis are getting a nasty taste of the IMF’s medicine. “Over the summer, gas was selling for about five cents a gallon,” the LA Times noted. “Now it’s about 65 cents, and at the end of the price increases, gasoline will cost about the same in Iraq as it does in other countries in the Persian Gulf, about $1 per gallon. The prices of kerosene, diesel, and cooking gas have seen similar or steeper increases.” The price of public transportation has also gone up significantly.

Not surprisingly, these enormous price hikes have led to riots around the country, with police firing on 3,000 protesters in Nassiryeh, according to an account on Daily Kos.

Iraq’s oil minister quit to protest the government’s capitulation to the IMF. According to Daily Kos, Oil Minister Ibrahim Bahr al-Uloum asked, “Is this how we repay the Iraq citizens who risked their lives to participate in the elections, by raising fuel prices in this way?”

The indestructible Ahmad Chalabi, a longtime favorite of Donald Rumsfeld and Dick Cheney, replaced al-Uloum.

The Bush Administration is four-square behind the IMF deal.

“This arrangement will underpin economic stability and help lay the foundation for an open and prosperous economy in Iraq,” said U.S. Treasury Secretary John Snow.

What it is actually underpinning is economic instability. “It’s crazy, socially and politically,” Robert Mabro, former chairman of the Oxford Institute of Energy Studies, told the LA Times.

Even the Pentagon’s “National Strategy for Victory in Iraq” recognized the need for “balancing the need for economic reform—particularly of bloated fuel and food subsidies—with political realities.”

But “political realities” on the ground—such as inciting riots and increasing discontent—don’t appear to concern Bush.

For the Bush Administration, the endorsement of the IMF price increase represents a schizophrenia that’s almost clinical.

Bush is desperate to rescue his floundering Iraq policy, and yet backing the IMF plan is like throwing a drowning patient both ends of a lifeline.

The Iraqi people are sick and tired of the U.S. occupation already, to put it mildly.

Now that they are seeing their standard of living plummet, thanks to the IMF, they are going to be even more irate at the United States, which they know controls the IMF.

Caught between deciding whether to try to win hearts and minds or whether to cling to free market fantasies, Bush has once again chosen to live in fantasyland.

Why is War-Torn Iraq Giving $190,000 to Toys R Us?

For the Guardian, Naomi Klein reports:

Next week, something will happen that will unmask the upside-down morality of the invasion and occupation of Iraq. On October 21, Iraq will pay $200m in war reparations to some of the richest countries and corporations in the world.

If that seems backwards, it's because it is. Iraqis have never been awarded reparations for any of the crimes they suffered under Saddam, or the brutal sanctions regime that claimed the lives of at least half a million people, or the US-led invasion, which the UN secretary general, Kofi Annan, recently called "illegal". Instead, Iraqis are still being forced to pay reparations for crimes committed by their former dictator.
Quite apart from its crushing $125bn sovereign debt, Iraq has paid $18.8bn in reparations stemming from Saddam Hussein's 1990 invasion and occupation of Kuwait. This is not in itself surprising: as a condition of the ceasefire that ended the 1991 Gulf war, Saddam agreed to pay damages stemming from the invasion. More than 50 countries have made claims, with most of the money awarded to Kuwait. What is surprising is that even after Saddam was overthrown, the payments from Iraq have continued.

Since Saddam was toppled in April, Iraq has paid out $1.8bn in reparations to the United Nations Compensation Commission (UNCC), the Geneva-based quasi tribunal that assesses claims and disburses awards. Of those payments, $37m have gone to Britain and $32.8m have gone to the United States. That's right: in the past 18 months, Iraq's occupiers have collected $69.8m in reparation payments from the desperate people they have been occupying. But it gets worse: the vast majority of those payments, 78%, have gone to multinational corporations, according to statistics on the UNCC website.

Away from media scrutiny, this has been going on for years. Of course there are many legitimate claims for losses that have come before the UNCC: payments have gone to Kuwaitis who have lost loved ones, limbs, and property to Saddam's forces. But much larger awards have gone to corporations: of the total amount the UNCC has awarded in Gulf war reparations, $21.5bn has gone to the oil industry alone. Jean-Claude Aimé, the UN diplomat who headed the UNCC until December 2000, publicly questioned the practice. "This is the first time as far as I know that the UN is engaged in retrieving lost corporate assets and profits," he told the Wall Street Journal in 1997, and then mused: "I often wonder at the correctness of that."

But the UNCC's corporate handouts only accelerated. Here is a small sample of who has been getting "reparation" awards from Iraq: Halliburton ($18m), Bechtel ($7m), Mobil ($2.3m), Shell ($1.6m), Nestlé ($2.6m), Pepsi ($3.8m), Philip Morris ($1.3m), Sheraton ($11m), Kentucky Fried Chicken ($321,000) and Toys R Us ($189,449). In the vast majority of cases, these corporations did not claim that Saddam's forces damaged their property in Kuwait - only that they "lost profits" or, in the case of American Express, experienced a "decline in business" because of the invasion and occupation of Kuwait. One of the biggest winners has been Texaco, which was awarded $505m in 1999. According to a UNCC spokesperson, only 12% of that reparation award has been paid, which means hundreds of millions more will have to come out of the coffers of post-Saddam Iraq.

The fact that Iraqis have been paying reparations to their occupiers is all the more shocking in the context of how little these countries have actually spent on aid in Iraq. Despite the $18.4bn of US tax dollars allocated for Iraq's reconstruction, the Washington Post estimates that only $29m has been spent on water, sanitation, health, roads, bridges, and public safety combined. And in July (the latest figure available), the Department of Defence estimated that only $4m had been spent compensating Iraqis who had been injured, or who lost family members or property as a direct result of the occupation - a fraction of what the US has collected from Iraq in reparations since its occupation began.

For years there have been complaints about the UNCC being used as a slush fund for multinationals and rich oil emirates - a backdoor way for corporations to collect the money they were prevented from making as a result of the sanctions against Iraq. During the Saddam years, these concerns received little attention, for obvious reasons.

But now Saddam is gone and the slush fund survives. And every dollar sent to Geneva is a dollar not spent on humanitarian aid and reconstruction Iraq. Furthermore, if post-Saddam Iraq had not been forced to pay these reparations, it could have avoided the $437m emergency loan that the International Monetary Fund approved on September 29.

With all the talk of forgiving Iraq's debts, the country is actually being pushed deeper into the hole, forced to borrow money from the IMF, and to accept all of the conditions and restrictions that come along with those loans. The UNCC, meanwhile, continues to assess claims and make new awards: $377m worth of new claims were awarded last month alone.

Fortunately, there is a simple way to put an end to these grotesque corporate subsidies. According to United Nations security council resolution 687, which created the reparations programme, payments from Iraq must take into account "the requirements of the people of Iraq, Iraq's payment capacity, and the needs of the Iraqi economy". If a single one of these three issues were genuinely taken into account, the security council would vote to put an end to these payouts tomorrow.

That is the demand of Jubilee Iraq, a debt relief organisation based in London. Reparations are owed to the victims of Saddam Hussein, the group argues - both in Iraq and in Kuwait. But the people of Iraq, who were themselves Saddam's primary victims, should not be paying them. Instead, reparations should be the responsibility of the governments that loaned billions to Saddam, knowing the money was being spent on weapons so he could wage war on his neighbours and his own people. "If justice, and not power, prevailed in international affairs, then Saddam's creditors would be paying reparations to Kuwait as well as far greater reparations to the Iraqi people," says Justin Alexander, coordinator of Jubilee Iraq.

Right now precisely the opposite is happening: instead of flowing into Iraq, reparations are flowing out. It's time for the tide to turn.