Oil Leaders' Private Debate Televised By Mistake

'Kill the cable, kill the cable,' shouted the security guard as he burst through the double doors into the media room at the Intercontinental Hotel in Riyadh, followed by Saudi police. It was too late.

The Observer reports:

A private meeting of Opec leaders, gathered this weekend in Riyadh for the cartel's third meeting in its 47-year history, had just been broadcast to the world's media for more than half an hour after a technician had mistakenly plugged the TV feed into the wrong socket. The facade of unity that the cartel so carefully cultivates to a world spooked by soaring oil prices was shattered.

Sometimes, such innocent mistakes can have far-reaching economic and political consequences. Commodity and currency traders said this weekend that oil prices would surge again tomorrow - possibly breaking the $101 per barrel record set in the late 1970s - while the already battered dollar would fall further on the back of the unintentional broadcast.
On Friday night, during what the participants thought were private talks, Venezuela's oil minister Venezuela Rafael Ramirez and his Iranian counterpart Gholamhossein Nozari, argued that pricing - and selling - oil using the crippled dollar was damaging the cartel.

They said Opec should formally express its concern about the weakness of the dollar when the cartel makes its official declaration at the close of the summit today. But the Saudis, the world's largest oil producers and de facto head of Opec, vetoed the proposal. Saud al-Faisal, the Saudi foreign minister, warned that even the mere mention to journalists of the fact that leaders were discussing the weak dollar would cause the US currency to plummet.

Unfortunately his words and those of everyone at the meeting were being broadcast via a live television feed to a group of astonished reporters. 'I couldn't believe it,' said one who was there. 'When I realised they didn't know they were being broadcast live, I frantically started taking notes.'

Opec only realised that the leaders' row was being broadcast to the world when the Reuters news agency put out a report of the argument.

The weakness of the dollar is one reason why oil prices are so high, as cartel members seek to compensate for their lower earnings. This means a further drop in the dollar is likely to be accompanied by a rise in oil prices.

A Perfect Oil Storm on The Horizon

New Europe reports:

In the 2005 television docudrama “Oil Storm,” a hurricane that destroys a vital US pipeline, a tanker collision which closes a busy port, terrorist attacks and tension with Saudi Arabia lead to wild speculation, crude oil prices around USD 150 per barrel and an oil crisis that paralyses America.

It’s just fiction, but not far from the truth!

Excessive oil market speculation, uncertainty about future supplies, increasing nationalism by major oil-producing countries, hurricanes and storms, refining capacity problems in the US and around the world, and growing demand, allowed oil to close above USD 80 per barrel for the first time on September 13, 2007.

“It’s convergence of almost a perfect storm where everything that could possibly push oil prices higher has taken place,” Fadel Gheit, a senior energy analyst at Oppenheimer in New York, told New Europe on September 14.

In London, Dr. Fadhil Chalabi, executive director of the Centre for Global Energy Studies, said the main reason for the price hike is that there hasn’t been enough oil in the market to meet world demand. “The stock build-up has been falling continuously, which means that refiners seek more crude to replenish a depleting stock,” he told New Europe on September 14.

He said Organisation of Petroleum Exporting Countries (OPEC), especially Saudi Arabia, have been cutting back their production and this has caused the high prices.

A day earlier, OPEC oil ministers agreed on a slight increase in output by 500,000 barrels per day, starting from November 1. But the increase is too little, too late to bring down oil prices. “It is not enough. The importance of this increase is that it stabilised the price at the present level. This half million barrels a day, if it is entirely pumped in the oil market, will prevent a further increase in the price, but it will not cause a decline in the price. The price may continue to be in the area of USD 75-76,” Chalabi said.

OPEC on September 13 rejected responsibility for the latest oil price hike. OPEC chief analyst Hasan Qabazard was quoted as saying by the press in Vienna other factors were also influencing the market, ranging from attacks on oil facilities in Mexico, and hurricane Humberto, to the effects of the US mortgage crisis.

The rising oil prices are also compensating for the current weakness in the dollar.

Gheit shares OPEC’s view. The US-based analyst told New Europe the oil market is very highly speculative. “I share the view of OPEC that current oil prices do not reflect the market fundamentals. There is at least a USD 25 premium in oil prices as we’ve seen them,” he said, adding that this premium is not going to disappear any time soon unless something drastic happens in the oil market like, for example, regulators scrutinise how oil is traded around the world. “For every dollar of oil consumed around the world, there is about 10 dollars traded. And this volume has increased almost tenfold in the last five years which leads me to believe it must be a very profitable operation to speculate,” he said.

Global inventories are still high, yet the market is concerned about potential supply disruption. “Assuming the largest producing country in the world -- that’s Saudi Arabia -- stops producing oil, the global market has enough inventory to make up for the short-fall for the next 15 months. If Iran chooses tomorrow to stop producing oil, hypothetically speaking, the world oil inventory will make up for the Iranian production shortfall for the next three years. So, there is no reason, in my view, for people, traders or government officials in any country around the world to really worry too much about security of supply. But in this current market, logic is not in the mix. The market is very highly speculated,” Gheit said.

Justin Urquhart Stewart, of Seven Investment Management in London, agreed there is a lot of speculation in the oil market. He said other reasons for the high oil price include constriction in terms of refining, Humberto, and “the continuing sabre-rattling that is going on with Iran.” The situation with Tehran is making the market nervous. “A lot of people don’t trust the Bush administration at the moment,” he told New Europe on September 14. “There is a very good chance we could see a flight between now and Christmas that could take it up, at least for a short time, up to close to USD 100 (per barrel).”

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.