It's the Oil and Gas, Stupid

World leaders may be condemning the junta's crackdown, but foreign businesses don't want to lose their pieces of Burma's energy pie. Why the latest sanctions are unlikely to work.

At Newsweek, Melinda Liu writes:

Analysts describe it as the Burmese paradox: How can the rulers of a country so rich in energy, teak, minerals and gems be in such financial trouble? Even as it sits on top of 19 trillion cubic feet of natural gas and billions of barrels of crude oil reserves, the junta had to abruptly hike fuel prices so high in August that it triggered the popular uprising led by Buddhist monks.

Part of the explanation is simply bad governance. The Burmese regime is so arrogant—and inept—that it doesn’t expect citizens to rebel even when they watch their hard-won savings disappear overnight. That’s what happened in the summer of 1988, when the regime's surprise demonetization of the local currency, the kyat, meant a lot of money was suddenly not worth the paper it was printed on. (The kyat has a story all its own: on an astrologer’s advice, former Burmese strongman U Ne Win decided the currency should be denominated in multiples of nine, because 9 was a much more auspicious number than 10. As a result 45- and 90-kyat notes still circulate in Burma alongside multiples of 5 and 10. One gauge of the dire economic situation in Burma is the fact that the official exchange rate is 6 kyat to the U.S. greenback, while the unofficial rate is more like 1,350)

But there’s a more important reason for Burma’s predicament. Before the 1962 coup that installed a military regime in power, Burma had one of Southeast Asia’s highest standards of living. It boasted a well-educated intellectual class. It was one of the world biggest exporters of rice. But today, the country’s infrastructure is so decrepit that the regime cannot adequately exploit its own resources without outside help. Despite the country's lucrative oil and gas sectors, the domestic refining industry is a mess due to half a century of mismanagement, lack of investment and neglect. Local refineries aren’t suited to processing the high sulfur content in Burmese oil. As a result, the government has to import nearly all of its diesel, to the tune of nearly 20,000 barrels daily by 2004.

Combine that hunger with today’s high prices, and you can easily see how the need to import diesel could help prompt a price rise. This wasn’t the first time the regime imposed such a hike, either; two years ago fuel prices shot up ninefold. You don’t have to be a rocket scientist—actually Burma’s junta supremo Than Shwe is a former postal clerk—to know people might be mad about the abrupt Aug. 15 doubling of diesel prices and fivefold increase in the cost of compressed natural gas, a hike passed on to passengers using public transport. Or, indeed, that it’s bad PR to throw a lavish wedding ceremony for your daughter—as Than Shwe did—showing how the gem-encrusted elite parties on (while one in three Burmese children is malnourished, according to the World Food Program).

But the excesses don’t stop there. Paranoia has something to do with why the junta is cash-strapped. The nonsensical transfer in November 2005 of government offices to the new administrative capital of remote Naypyidaw, in a jungly wasteland 300 kilometers (about 190 miles) from Rangoon (apparently to boost government secrecy), is believed to have cost hundreds of millions of dollars. Then, to help compel disgruntled civil servants to go along with the move, the government raised their pay 500 percent. For its part, Burma’s 375,000-man Army—key to the junta’s survival—got a tenfold pay raise. And then there's the construction of another big-ticket item called “the Yadanabon Silicon Valley cyber-city.” This from a regime that’s trying to pull the plug on the Internet in a bid to prevent images of its repression from reaching the outside world.

Burma’s economic picture would be depressing enough without the involvement of Big Oil. One of the key reasons why sanctions against the regime are unlikely to work is because the junta's foreign partners hope to maintain business as usual. Foreign firms have been scrambling for a piece of Burma's oil and gas industry since the regime liberalized investment rules in 1988.

These are not obscure players or small-time plays. Burmese natural gas, worth $2.8 billion, generates one fifth of Thailand’s electricity. China wants to build pipelines and roads through Burma that would allow its oil imports to bypass vulnerable chokepoints in the Malacca Straits, which could be blocked by the U.S. Navy in the event of Sino-U.S. tensions.

State-run Chinese firms are also bidding for contracts in Burmese gas fields, as are South Korean and Indian competitors. India’s oil minister, Murli Deora, was present in Rangoon for energy cooperation talks with junta leaders when antigovernment protests broke out last month. Burma’s partners aren’t all Asian either. When earlier European Union and U.S. economic sanctions were levied against Burma, Total of France and Chevron remained involved in the Yadana gasfield. (At the time, existing investments were exempt; Chevron has a 28 percent stake because of its takeover of Unocal, Total’s original partner.)

Now we hear that the EU has just toughened its sanctions against Burma, expanding the visa bans for junta leaders and suspension of some imports such as timber and gems. But such measures—similar to those announced last week by the United States—will be toothless unless key oil and gas firms climb onboard. Today French Foreign Minister Bernard Kouchner hinted that Total—which extracts more than 17 million cubic meters of natural gas daily from its Burmese fields, according to its corporate Web site—“will not be exonerated” from post-crackdown sanctions. Total officials have argued that the firm has made no new capital expenditures in Burma since 1998 and that any “forced withdrawal” by Total would simply pave the way for rivals to take its place. Which is why China, Thailand, India and Russia have been muted in their condemnation of Burma’s recent bloodletting. They may hate the junta’s repression, but they love the thought of biting off a bigger piece of Burma’s energy pie.

The Proposed Iraqi Oil Law

Indymedia reports:
Iraq has the world’s second or third largest proven oil reserves. The proposed Iraqi law (translated pdf) would give Western oil companies control over Iraqi oil. It provides for “exploration risk contracts” allowing foreign companies control of oil exploration, development and production for up to 30 years. If the law is adopted as is, control of the Iraqi oil industry will shift from the public sector, where it’s been since the 1970s, into the hands of the multinational oil companies, especially British and American firms. Under the new law, Iraq will reportedly be breaking away from the normal procedure that is used by all major oil-producing countries, none of whom allow such foreign control. In Saudi Arabia, the country that has the world’s largest oil reserves, oil is fully owned and controlled by the national oil company.

The same is true for Kuwait. The United Arab Emirates and Iran allow some foreign investment but maintain national control.

Prime Minister Nouri al-Maliki endorsed the draft law February 26, 2007, and it was approved by the Iraqi cabinet in March. The law is waiting for a vote in the Iraqi Parliament.

Bush's Interior Department To Announce Plans To Drill For Oil & Gas In Virginia, Alaska & Gulf of Mexico Waters

U.S. Proposal Would Allow Oil Drilling Off Virginia - Five-Year Plan Would Also Open Alaskan, Gulf Waters:
The Interior Department will announce a proposal Monday to allow oil and gas drilling in federal waters near Virginia that are currently off-limits and permit new exploration in Alaska's Bristol Bay and the Gulf of Mexico, according to people who have seen or been told about drafts of the plan.

The department issued a news release yesterday that was lacking details but said that it had finished a five-year plan that will include a "major proposal for expanded oil and natural gas development on the U.S. Outer Continental Shelf." Department officials declined to describe the plan.

Congress would still have to agree to open areas currently off-limits before any drilling could take place off Virginia's coast. Every year since 1982, after an oil spill off Santa Barbara, Calif., Congress has reaffirmed a moratorium on drilling off the nation's Atlantic and Pacific coasts. Last year, after a vigorous push by drilling advocates, Congress opened new waters in the Gulf of Mexico.

The Interior Department might still go ahead with environmental and geological seismic studies off Virginia, but the plan does not envision drilling there before 2011, according to a congressional source who saw an earlier version of the proposal. The sources who described the plan spoke on the condition of anonymity because they didn't want to compromise relationships with people who showed them drafts.

Environmental groups said yesterday that they were troubled by the idea of oil exploration and drilling so near the wildlife refuge on Assateague Island and in an area closely linked to the Chesapeake Bay. Some of the bay's best-known species, such as blue crabs and rockfish, migrate to the ocean.

Activists said that simply looking for oil and gas could cause environmental harm if waste products used to lubricate or cool drill bits are cast overboard. Such materials are often toxic, and could threaten marine life in the area, said Richard Charter of Defenders of Wildlife.

Richard Ayers of the environmental group Virginia Eastern Shorekeeper said he was concerned about development along the state's lightly populated Atlantic shoreline. He said he was worried that oil drilling would create boomtowns, a new influx of people and pollution.

The Virginia shore is dotted with barrier islands and lagoons, most of them largely unspoiled. The Virginia coast has been designated a World Biosphere Reserve by the United Nations, and a National Natural Landmark by the Interior Department.

"This is one of the few places on the East Coast that just never got developed," Ayers said. "A disturbance of any magnitude would be something the place hasn't seen since the '30s," when a hurricane hit the area.

Many drilling advocates say that the oil industry has had a good environmental record in the Gulf of Mexico and that the nation needs to develop domestic oil and gas reserves to bring down prices and reduce reliance on foreign oil.

Advocates of increased drilling have campaigned in several states, many of which are attracted to the prospect of negotiating shares of federal royalties. Bills endorsing more drilling have twice passed the Virginia legislature.

Kevin Hall, a spokesman for Virginia Gov. Timothy M. Kaine (D), said Kaine was "supportive of exploration to see what, if anything, is out there." But Hall said Kaine had received "assurances" from federal officials that the proposed exploration would not violate state law. Last year, the General Assembly and Kaine agreed on a bill to prohibit drilling within 50 miles of Virginia's shoreline.

One place that doesn't need approval from Congress is the area north of the Alaska Peninsula near the Aleutian Islands, known as Bristol Bay. Home to one of the world's largest salmon runs, according to the Sierra Club, Bristol Bay was not covered by the same ban on drilling.

President Bush used his executive power to lift the ban in January. Congress has 60 days to reimpose it, or else drilling preparations could start in Bristol Bay as soon as July 1.

Athan Manuel, offshore drilling expert at the Sierra Club, said, "We need to do more to drill in Detroit by finding more oil efficiency in our cars and trucks rather than drilling off of some of our most sensitive coasts that are important environmentally, but also economically in driving billion-dollar fishing and tourist industries."

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.

Bush's Petro-Cartel Almost Has Iraq's Oil

Iraq is sitting on a mother lode of some of the lightest, sweetest, most profitable crude oil on earth, and the rules that will determine who will control it and on what terms are about to be set. The Iraqi government faces a December deadline, imposed by the world's wealthiest countries, to complete its final Oil Law. Industry analysts expect that the result will be a radical departure from the laws governing the country's oil-rich neighbors, giving foreign multinationals a much higher rate of return than with other major oil producers, and locking in their control over what George Bush called Iraq's "patrimony" for decades, regardless of what kind of policies future elected governments might want to pursue.

At Alternet, Joshua Holland reports:

Iraq is sitting on a mother lode of some of the lightest, sweetest, most profitable crude oil on earth, and the rules that will determine who will control it and on what terms are about to be set. The Iraqi government faces a December deadline, imposed by the world's wealthiest countries, to complete its final Oil Law. Industry analysts expect that the result will be a radical departure from the laws governing the country's oil-rich neighbors, giving foreign multinationals a much higher rate of return than with other major oil producers, and locking in their control over what George Bush called Iraq's "patrimony" for decades, regardless of what kind of policies future elected governments might want to pursue.

Iraq's energy reserves are an incredibly rich prize; according to the US Department of Energy, "Iraq contains 112 billion barrels of proven oil reserves, the second largest in the world (behind Saudi Arabia) along with roughly 220 billion barrels of probable and possible resources. Iraq's true potential may be far greater than this, however, as the country is relatively unexplored due to years of war and sanctions." For perspective, the Saudis have 260 billion barrels of proven reserves.

Iraqi oil is close to the surface and easy to extract, making it all the more profitable. James Paul, Executive Director of the Global Policy Forum, points out that oil companies "can produce a barrel of Iraqi oil for less than $1.50 and possibly as little as $1, including all exploration, oilfield development and production costs." Contrast that with other areas where oil is considered cheap to produce at $5 per barrel, or the North Sea where production costs are $12-16 per barrel.

And Iraq's oil sector is largely undeveloped. Former Iraqi Oil Minister Issam Chalabi (no relation to the neocons' favorite exile, Ahmed Chalabi) told the Associated Press that "Iraq has more oil fields that have been discovered, but not developed, than any other country in the world." British-based analyst Mohammad Al-Gallani told the Canadian Press that of 526 prospective drilling sites, just 125 have been opened.

But the real gem -- what one oil consultant called the "Holy Grail" of the industry -- lies in Iraq's vast Western desert. It's one of the last "virgin" fields on the planet, and it has the potential to catapult Iraq to number one in the world in oil reserves. Sparsely populated, the Western fields are less prone to sabotage than the country's current centers of production in the North, near Kirkuk, and in the South near Basra. The Nation's Aram Roston predicts Iraq's Western desert will yield "untold riches."

Iraq also may have large natural gas deposits that so far remain virtually unexplored. But even "untold riches" don't tell the whole story. Depending on how Iraq's petroleum law shakes out, the country's enormous reserves could break the back of OPEC, a wet dream in Western capitals for three decades. James Paul predicted that "even before Iraq had reached its full production potential of 8 million barrels or more per day, the companies would gain huge leverage over the international oil system. OPEC would be weakened by the withdrawal of one of its key producers from the OPEC quota system." Depending on how things shape up in the next few months, Western oil companies could end up controlling the country's output levels, or the government, heavily influenced by the U.S., could even pull out of the cartel entirely.

Both independent analysts and officials within Iraq's Oil ministry anticipate that when all is said and done, the big winners in Iraq will be the Big Four -- the American firms Exxon-Mobile and Chevron-Texaco, and the British BP-Amoco and Royal Dutch-Shell -- that dominate the world oil market. Ibrahim Mohammed, an industry consultant with close contacts in the Iraqi Oil Ministry, told the Associated Press that there's a universal belief among ministry staff that the major U.S. companies will win the lion's share of contracts. "The feeling is that the new government is going to be influenced by the United States," he said.

During the twelve-year sanction period, the Big Four were forced to sit on the sidelines while the government of Saddam Hussein cut deals with the Chinese, French, Russians and others (despite the sanctions, the U.S. ultimately received 37 percent of Iraq's oil during the period, according to the independent committee that investigated the Oil-for-food program, but almost all of it arrived through foreign firms). In a 1999 speech, Dick Cheney, then CEO of the oil services company Halliburton, told a London audience that the Middle East was where the West would find the additional fifty million barrels of oil per day that he predicted it would need by 2010, but, he lamented, "while even though companies are anxious for greater access there, progress continues to be slow."

Chafing at the idea that the Chinese and Russians might end up with what is arguably the world's greatest energy prize, industry leaders lobbied hard for regime change throughout the 1990s. With the election of George W. Bush and Dick Cheney in 2000 -- the first time in U.S. history that two veterans of the oil industry had ever occupied the nation's top two jobs -- they would finally get the "greater access" to the region's oil wealth after which they had long lusted.

If the U.S. invasion of Iraq had occurred during the colonial era a hundred years earlier, the oil giants, backed by U.S. forces, would have simply seized Iraq's oil fields. Much has changed since then in terms of international custom and law (when then-Deputy Secretary of Defense Paul Wolfowitz did in fact suggest seizing Iraq's Southern oil fields in 2002, Colin Powell dismissed the idea as "lunacy").

Understanding how Big Oil came to this point, poised to take effective control of the bulk of the country's reserves while they remain, technically, in the hands of the Iraqi government -- a government with all the trappings of sovereignty -- is to grasp the sometimes intricate dance that is modern neocolonialism. The Iraq oil-grab is a classic case study.

It's clear that the U.S.-led invasion had little to do with national security or the events of September 11. Former Treasury Secretary Paul O'Neill revealed that just 11 days after Bush's inauguration in early 2001, regime change in Iraq was "Topic A" among the administration's national security staff, and former Terrorism Tsar Richard Clarke told 60 minutes that the day after the attacks in New York and Washington occurred, "[Secretary of Defense Donald] Rumsfeld was saying that we needed to bomb Iraq." He added: "We all said … no, no. Al-Qaeda is in Afghanistan."

On March 7, 2003, two weeks before the U.S. attacked Iraq, the UN's chief weapons inspector, Hans Blix, told the UN Security Council that Saddam Hussein's cooperation with the inspections protocol had improved to the point where it was "active or even proactive," and that the inspectors would be able to certify that Iraq was free of prohibited weapons within a few months' time. That same day, IAEA head Mohammed ElBaradei reported that there was no evidence of a current nuclear program in Iraq and flatly refuted the administration's claim that the infamous aluminum tubes cited by Colin Powell in making his case for war before the Security Council were part of a reconstituted nuclear program.

But serious planning for the war had begun in February of 2002, as Bob Woodward revealed in his book, Plan of Attack. Planning for the future of Iraq's oil wealth had been under way for longer still. In February of 2001, just weeks after Bush was sworn in, the same energy executives that had been lobbying for Saddam's ouster gathered at the White House to participate in Dick Cheney's now infamous Energy Taskforce. Although Cheney would go all the way to the Supreme Court to keep what happened at those meetings a secret, we do know a few things thanks to documents obtained by the conservative legal group JudicialWatch. As Mark Levine wrote in The Nation($$):

… a map of Iraq and an accompanying list of "Iraq oil foreign suitors" were the center of discussion. The map erased all features of the country save the location of its main oil deposits, divided into nine exploration blocks. The accompanying list of suitors revealed that dozens of companies from thirty countries--but not the United States--were either in discussions over or in direct negotiations for rights to some of the best remaining oilfields on earth.

Levine wrote, "It's not hard to surmise how the participants in these meetings felt about this situation."

According to The New Yorker, at the same time, a top-secret National Security Council memo directed NSC staff to "cooperate fully with the Energy Taskforce as it considered melding two seemingly unrelated areas of policy." The administration's national security team was to join "the review of operational policies towards rogue states such as Iraq, and actions regarding the capture of new and existing oil and gas fields."

At the State Department, planning was also underway. Under the auspices of the "Future of Iraq Project," an "Oil and Energy Working Group" was established. The full membership of the group -- described by the Financial Times as "Iraqi oil experts, international consultants" and State Department staffers -- remains classified, but among them, according to Antonia Juhasz's The Bush Agenda, was Ibrahim Bahr al-Uloum, who would serve in Iyad Allawi's cabinet during the period of the Iraqi Governing Council, and later as Iraq's Oil Minister in 2005. The group concluded that Iraq's oil "should be opened to international oil companies as quickly as possible after the war."

But the execs from Big Oil didn't just want access to Iraq's oil; they wanted access on terms that would be inconceivable unless negotiated at the barrel of a gun. Specifically, they wanted an Iraqi government that would enter into Production Service Agreements (PSAs) for the extraction of Iraq's oil. PSAs, developed in the 1960s, are a tool of today's kinder, gentler neocolonialism; they allow countries to retain technical ownership over energy reserves but, in actuality, lock in multinationals' control and extremely high profit margins -- up to thirteen times oil companies' minimum target, according to an analysis by the British-based oil watchdog Platform (PDF).

As Greg Muttit, an analyst with the group, notes:

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, Muttit adds, of the seven leading oil producing countries, only Russia has entered into PSAs, and those were signed during its own economic "shock therapy" in the early 1990s. A number of Iraq's oil-rich neighbors have constitutions that specifically prohibit foreign control over their energy reserves.

PSAs often have long terms -- up to 40 years -- and contain "stabilization clauses" that protect them from future legislative changes. As Muttit points out, future governments "could be constrained in their ability to pass new laws or policies." That means, for example, that if a future elected Iraqi government "wanted to pass a human rights law, or wanted to introduce a minimum wage [and it] 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." It's Sovereignty Lite.

The deals are so onerous that they govern only 12 percent of the world's oil reserves, according to the International Energy Agency. Nonetheless, PSAs would become the Future of Iraq Project's recommendation for the fledgling Iraqi government. According to the Financial Times, "many in the group" fought for the contract structure; a Kurdish delegate told the FT, "everybody keeps coming back to PSAs."

Of course, the plans for Iraq's legal framework for oil have to be viewed in the context of the overall transformation of the Iraqi economy. Clearly, the idea was to pursue a radical corporatist agenda during the period of the Coalition Provisional Authority when the U.S. occupation forces were a de facto dictatorship. And that's just what happened; under L. Paul Bremer, the CPA head, corporate taxes were slashed, a flat-tax on income was established, rules allowing multinationals to pull all of their profits from the country and a series of other provisions were enacted. These were then integrated into the Iraqi Constitution and remain in effect today.

Among the provisions in the Constitution, unlike those of most oil producers, is a requirement that the government "develop oil and gas wealth … relying on the most modern techniques of market principles and encouraging investment." The provision mandates that foreign companies would receive a major stake in Iraq's oil for the first time in the thirty years since the sector was nationalized in 1975.

Herbert Docena, a researcher with the NGO Focus on the Global South, wrote that an early draft of the Constitution negotiated by Iraqis envisioned a "Scandinavian-style welfare system in the Arabian desert, with Iraq's vast oil wealth to be spent upholding every Iraqi's right to education, health care, housing, and other social services." "Social justice," the draft declared, "is the basis of building society."

What happened between that earlier draft and the Constitution that Iraqis would eventually ratify? According to Docena:

While [U.S. Ambassador to Iraq Zalmay] Khalilzad and his team of US and British diplomats were all over the scene, some members of Iraq's constitutional committee were reduced to bystanders. One Shiite member grumbled, 'We haven't played much of a role in drafting the constitution. We feel that we have been neglected.' A Sunni negotiator concluded: 'This constitution was cooked up in an American kitchen not an Iraqi one.'

With a Constitution cooked up in DC, the stage was set for foreign multinationals to assume effective control of as much as 87 percent of Iraq's oil, according to projections by the Oil Ministry. If PSAs become the law of the land -- and there are other contractual arrangements that would allow private companies to invest in the sector without giving them the same degree of control or such usurious profits -- the war-torn country stands to lose up to $194 billion vitally important dollars in revenues on just the first 12 fields developed, according to a conservative estimate by Platform (the estimate assumes oil at $40 per barrel; at this writing it stands at more than $59). That's more than six times the country's annual budget.

To complete the rip-off, the occupying coalition would have to crush Iraqi resistance, make sure it had friendly people in the right places in Iraq's emerging elite and lock the new Iraqi government onto a path that would lead to the Big Four's desired outcome.


With 140,000 U.S. troops on the ground, the largest U.S. embassy in the world sequestered in Baghdad's fortified "Green Zone" and an economy designed by a consulting firm in McLean, Va., post-invasion Iraq was well on its way to becoming a bonanza for foreign investors.
But Big Oil had its sights set on a specific arrangement -- the lucrative production sharing agreements that lock in multinationals' control for long terms and are virtually unheard of in countries as rich in easily accessible oil as Iraq.

The occupation authorities would have to steer an ostensibly sovereign government to the outcome they desired, and they'd have to overcome any resistance that they encountered from the fiercely independent and understandably wary Iraqis along the way. Finally, they'd have to make sure that the Anglo-American firms were well-positioned to win the lion's share of the choicest contracts.

Dealing with the most likely points of opposition began almost immediately. While the Oil Ministry, famously, was one of the few structures the invading forces protected from looters in the first days of the war, the bureaucracy's human assets weren't so lucky. With a stroke of the pen, Coalition Provisional Authority boss L. Paul Bremer fired hundreds of ministry personnel, ostensibly as part of the program of "de-Baathification." But, as Antonia Juhasz, author of "The Bush Agenda," told me, "it wasn't an indication that they were a party to Saddam Hussein's crimes … they were fired because they could have stood in the way of the economic transformation." Some fraction were certainly hard-core Baathists, but they were all veterans of the country's oil sector; they knew the industry, they knew what the norms in neighboring countries were and they had no loyalty to the occupation forces. Some had to go.

That was true at the top as well. Serving as oil minister in the Iraqi Interim Government was Thamir Ghadbhan, a British-trained technocrat who at one time had been chief of planning under Saddam Hussein and was widely respected for his political independence and his opposition to the previous regime (Saddam had ended up imprisoning him at Abu Ghraib). But despite working closely with American advisors, Ghadbhan was replaced with Ibrahim Bahr al-Uloum, a close associate of Ahmed Chalabi, the exile favored by some war planners to run the country as a kindler and gentler -- but no doubt just as corrupt -- version of Saddam Hussein.

According to Greg Muttit, an analyst with the British oil watchdog Platform, Uloum at first seemed to be a malleable figure. He told the Financial Times that he personally favored PSAs and giving priority to U.S. oil companies "and European companies, probably."

But Uloum would later publicly protest the elimination of fuel subsidies, a key provision of the country's economic restructuring, saying, "This decision will not serve the benefit of the government and the people. This decision brings an extra burden on the shoulders of citizens." He was, as the Associated Press reported, given "a forced vacation." It was, in the end, a permanent vacation; Chalabi, who was deputy prime minister at the time, took over the job himself (as "acting" minister for 30 days, but his term would last a year). Chalabi had no previous experience in the oil biz, but was a reliable, pro-Western figure with little in the way of nationalist zeal to get in the way of being a good lap dog. As leader of the Iraqi National Congress, he had said he favored the creation of a U.S.-led consortium to develop Iraq's oil fields. "American companies will have a big shot at Iraqi oil," Chalabi told the Washington Post in 2002.

According to Alexander Cockburn, Chalabi also orchestrated the ouster of Mohammed Jibouri, executive director of the state's oil marketing agency, who had offended the Swiss giant Glencore by telling its executives that they couldn't trade Iraqi oil after their extensive dealings with Saddam Hussein.

An emerging, although still fragile, civil society was another source of potential trouble. Iraqi trade unions were a thorn in the side of the CPA -- shutting down the port of Khor az-Zubayr in protest of a rip-off deal with the Danish shipping giant Maersk, halting oil production in the south to demand the rehire of laid-off Iraqi workers and kicking Halliburton subsidiary Kellogg, Brown and Root out of their refineries. Perhaps it's not a coincidence, then, that the only significant law that Paul Bremer left on the books from the Hussein era was a prohibition against organizing public-sector workers. Raed Jarrar, an Iraqi analyst with the NGO Global Exchange, told me, "They're having a lot of legal problems."

Of course, none of that guaranteed that the Iraqis would stay on the preferred path, especially after the election of an ostensibly sovereign government.

And that's where the most common -- almost ubiquitous -- tool of neocolonialism, debt, came into play. In this case, massive, crushing debt run up by a dictator who treated himself and his cronies to palaces and other luxuries, spent lavishly on weapons for Iraq's war with Iran -- fought in part on behalf of the United States -- and owed Kuwait billions of dollars in reparations for the 1990 invasion.

To put Iraq's foreign debt in perspective, if the country's economy were the size of the United States', then its obligations in 2004, proportionally, would have equaled around $55 trillion, according to IMF figures (and that doesn't include reparations from the first Gulf War).

Clearly, that amount of debt was unsustainable, and the Bush administration launched a full-court press to get creditor nations to forgive at least part of the new government's debt burden. Former Secretary of State James Baker, long the Bush family's "fixer," was dispatched on a tour of the world's capitals to cut deals on behalf of the Iraqis.

The administration raised eyebrows in the NGO community when it adopted the language of debt-relief activists to frame their pitch. Bush, and Baker, called it "odious" debt, debt that financed the whims of a brutal dictator and used against the interests of the Iraqi population. Under international law, "odious" debt, in theory at least, doesn't need to be forgiven; it's written off as a dictator's illicit gains. As one might expect, wealthy creditor nations have long resisted the concept.

Debt-relief activists Basav Sen and Hope Chu wrote that the move "seemed inexplicable at first." But it soon became clear that Iraq's debt-relief program was, in fact, a way of locking in Iraq's economic transformation.

The largest chunk of debt, $120 billion, was owed to the Paris Club, a group of 19 industrialized nations. Baker negotiated a deal whereby the Paris Club would forgive 80 percent of Iraq's debt, but the catch -- and it was a big one -- was that Iraq had to agree to an economic "reform" package administered by the International Monetary Fund, an institution dominated by the wealthiest countries and infamous across the developing world for its painful and unpopular Structural Adjustment Protocols.

The debt would be written off in stages; 30 percent would be cancelled outright, another 30 percent when an elected Iraqi government accepted an IMF structural reform agreement and a final 20 percent after the IMF had monitored its implementation for three years. This gave the IMF the role of watchdog over the country's new economy, despite the fact that its share of the country's debt burden was less than 1 percent of the total.

Among a number of provisions in the IMF agreement, along with privatizing state-run companies (which resulted in the layoffs of an estimated 145,000 Iraqis), slashing government pensions and phasing out the subsidies on food and fuel that many Iraqis depended on, was a commitment to develop Iraq's oil in partnership with the private sector. Then-Finance Minister Adel Abdul Mehdi said, none too happily, that the deal would be "very promising to the American investors and to American enterprise, certainly to oil companies." The Iraqi National Assembly released a statement saying, "the Paris Club has no right to make decisions and impose IMF conditions on Iraq," and called it "a new crime committed by the creditors who financed Saddam's oppression." And Zaid Al-Ali, an international lawyer who works with the NGO Jubilee Iraq, said it was "a perfect illustration of how the industrialized world has used debt as a tool to force developing nations to surrender sovereignty over their economies."

The IMF agreement was announced in December of 2005, along with a new $685 million IMF loan that was to be used, in part, to increase Iraq's oil output. The announcement came a month after Iraqis went to the polls to vote for their first government under the new Constitution in order, according to the Washington Post, to spare Iraqi "politicians from voters' wrath." That was a wise idea; immediately following the agreement, gas prices skyrocketed and Iraqis rioted.

The icing on the cake is that the deal James Baker negotiated with the Paris Club refers to Iraq as an "exceptional situation"; no precedent was set that would allow other highly indebted countries saddled with odious debt from their own past dictators to claim similar relief.

The deadline the Iraqi government must meet for the completion of its final oil law in December is a "benchmark" in the IMF agreement.

In an investigation for the Nation, Naomi Klein discovered that Baker had pursued his mission with an eye-popping conflict of interest. Klein discovered that a consortium that included the Carlyle Group, of which Baker is believed to have a $180 million stake, had contracted with Kuwait to make sure that the money it was owed by Iraq would be excluded from any debt-relief package. When Baker met with the Kuwaiti emir to beg forgiveness for Iraq's odious debt, he had a direct interest in making sure he didn't get it.

Another major creditor was Saudi Arabia. The Carlyle Group has extensive business dealings with the kingdom and Baker's law firm, Baker Botts, was representing the monarchy in a suit brought by the families of the victims of 9/11.

The most recent IMF report (PDF) shows how successfully he failed: "While most Paris Club official creditors have now signed bilateral agreements, progress has been slow in resolving non-Paris Club official claims, especially those of Gulf countries," it says. It's likely that Iraq, a country occupied for three years, devastated by 12 years of sanctions and with a per capita GDP of $3,400, will end up paying reparations to Kuwait, a country with a per capita GDP of over $19,000, for the five months Saddam occupied his neighbor in late 1990 and early 1991.

Iraq will still face a mountain of debt even if it meets all of the "benchmarks" required of it -- the IMF expects the country's debt service to equal five percent of its economic output in 2011 and warns that even a minor price shock in the oil market "would require significant borrowing from the international markets to close the financing gaps."

"Sovereign" debt is transferable between governments; if a new strongman arises or Iraq becomes a loose federation, the debt will remain on the books and defaulting on it, while a possibility, has serious long-term consequences.

All of this is about bringing different forms of pressure onto Iraq's nascent government, not controlling it, and it's an important distinction. Before and since the "handover" to Iraq's government, the Green Zone has been overrun with "advisers" from Big Oil. Aram Roston wrote, "It's clear that there is not just the one Iraqi Oil Ministry, but a parallel 'shadow' ministry run by American advisers." In business, that's known as "positioning."

Phillip Carroll, a former chief executive with Royal Dutch/Shell and a 15-member "board of advisors" were appointed to oversee Iraq's oil industry during the transition period. According to the Guardian, the group "would represent Iraq at meetings of OPEC." Carroll had been working with the Pentagon for months before the invasion -- even while the administration was still insisting that it sought a peaceful resolution to the Iraq crisis -- "developing contingency plans for Iraq's oil sector in the event of war." According to the Houston Chronicle, "He assumed his work was completed, he said, until Defense Secretary Donald Rumsfeld called him shortly after the U.S.-led invasion began and offered him the oil adviser's job." Carroll, in addition to running Shell Oil in the United States, was a former CEO of the Fluor Corp., a well-connected oil services firm with extensive projects in Saudi Arabia and Kuwait, and at least $1.6 billion in contracts for Iraq's reconstruction. He was joined by Gary Vogler, a former executive with ExxonMobile, in Iraq's Office of Reconstruction and Humanitarian Assistance.

After spending six months in the post, Carroll was replaced by Robert E. McKee III, a former ConocoPhillips executive. According to the Houston Chronicle, "His selection as the Bush administration's energy czar in Iraq" drew fire from congressional Democrats "because of his ties to the prime contractor in the Iraqi oil fields, Houston-based Halliburton Co. He's the chairman of a venture partitioned by the … firm."

The administration selected Chevron Vice President Norm Szydlowski to serve as a liaison between the Coalition Provisional Authority and the Iraqi Oil Ministry. Now the CEO of the appropriately named Colonial Pipeline Co., he continues to work with the Iraq Energy Roundtable, a project of the U.S. Trade and Development Agency, which recently sponsored a meeting to "bring together oil and gas sector leaders in the U.S. with key decision makers from the Iraq Ministry of Oil."

Terry Adams and Bob Morgan of BP, and Mike Stinson of ConocoPhillips would also serve as advisors during the transition.

After the CPA handed over the reigns to Iraq's interim government, the embassy's "shadow" oil ministry continued to work closely with the Iraqis to shape future oil policy. Platform's Greg Muttit wrote that "senior oil advisers -- now based within the Iraq Reconstruction Management Office (IRMO) in the U.S. Embassy ... included executives from ChevronTexaco and Unocal." After the handover, a senior U.S. official said: "We're still here. We'll be paying a lot of attention, and we'll have a lot of influence. We're going to have the world's largest diplomatic mission with a significant amount of political weight."

The majors have also engaged in good, old-fashioned lobbying. In 2004, Shell advertised for an Iraqi lobbyist with good contacts among Iraq's emerging elites. The firm sought "a person of Iraqi extraction with strong family connections and an insight into the network of families of significance within Iraq." According to Platform, just weeks after the invasion, in a meeting with oil company execs and Australian Foreign Minister Alexander Downer in London, former British Foreign Secretary Sir Malcolm Rifkind promised to personally lobby Dick Cheney for contracts on behalf of several firms, including Shell.

Meanwhile, major oil firms were positioning themselves so that they'd have the best contacts in the new government. According to the Associated Press, "The world's three biggest integrated oil companies" -- BP, ExxonMobil and Royal Dutch/Shell -- "struck cooperation or training deals with Iraq" in 2005. "It's a way to maintain contact and get the oil officials to know about them," former Iraqi Oil Minister Issam Chalabi told the AP. And it seems to have worked; in May, Iraq's current oil minister, Husayn al-Shahristani, said that one of his top priorities would be to finalize an oil law and sign contracts with "the largest companies."

Washington has its hands all over the drafting of that law. Early on, in 2003, USAID commissioned BearingPoint, Inc. -- the new name for the scandal-plagued Arthur Anderson Consulting -- to submit recommendations for the development of Iraq's oil sector. BearingPoint was the firm that designed the country's economic transformation under a previous USAID contract, so it was no surprise that its report reinforced the preference for PSAs that "everybody [kept] kept coming back to" during meetings of the State Department's "Future of Iraq Project."

In February, just months after the Iraqis elected their first constitutional government, USAID sent a BearingPoint adviser to provide the Iraqi Oil Ministry "legal and regulatory advice in drafting the framework of petroleum and other energy-related legislation, including foreign investment." According to Muttit, the Iraqi Parliament had not yet seen a draft of the oil law as of July, but by that time it had already been reviewed and commented on by U.S. Energy Secretary Sam Bodman, who also "arranged for Dr. Al-Shahristani to meet with nine major oil companies -- including Shell, BP, ExxonMobil, ChevronTexaco and ConocoPhillips -- for them to comment on the draft."

All of these points of pressure are only what we can see in the light of day. There is certainly much more occurring under the table. Raed Jarrar told me that he "was personally familiar with the kind of intimidation that can be brought by both the U.S. military and civilian" personnel, and that he would be shocked if "multiple millions of dollars in bribes" were not changing hands. The IMF noted in its latest report (PDF) that "corruption related to the production and distribution of refined fuel products was rampant." Last March, 450 Oil Ministry employees were fired for suspected corruption, and Mohammed al-Abudi, the Oil Ministry's director general for rrilling, said that "administrative corruption" was pervasive. "The robberies and thefts are taking place on a daily basis on all levels," he said, "committed by low-level government employees and by high officials in leadership positions of the Iraqi state." The same day that the U.N. legitimized the occupation, George Bush signed Executive Order 13303 providing full legal immunity to all oil companies doing business in Iraq in order to facilitate the country's "orderly reconstruction."

Yet, despite a five-year effort, Big Oil still sits on the sidelines, wary of the disorder and violence that's plagued the country. Ironically, it appears that China may well receive the first deal in post-Saddam Iraq (although it's one negotiated with Hussein's government before the war). The Kurdish autonomous zone has signed three PSAs -- none with the majors -- although there is some dispute about their validity (and, at this writing, there are reports that the Kurds are in negotiations with Royal Dutch/Shell and BP, among others).

At this point, the situation is very fluid. Last week, Iraqis were shocked when a controversial measure that might lead to the country's effective breakup was passed by Parliament by one vote. The major Sunni parties and Muqtada al Sadr's ministers boycotted the vote in outrage. Muddying the waters further is a heated debate about whether a somewhat ambiguous provision in the Iraqi Constitution already gives provincial governments the right to hold on to oil revenues rather than send them to the central government. The results of all of these debates will have an enormous impact on Iraq's chances to build an autonomous and potentially prosperous country down the road.

It's possible that the administration and its partners badly overplayed their hand. Iraq's new government stands on the verge of a complete meltdown, faced with a crisis of legitimacy based largely on the fact that it is seen as collaborating with American forces. Overwhelming majorities of Iraqis of every sect believe the United States is an occupier, not a liberator, and is convinced that it intends to stay in Iraq permanently. "If you go in front of Parliament, Raed Jarrar told me, "and ask: 'who is opposed to demanding a timetable for the Americans to withdrawal?' nobody would dare raise their hand." The passage of a sweetheart oil law could prove to be a tipping point. It's also possible Iraq's government won't make it to December; at this writing, rumors of a "palace coup" are swirling around Baghdad, according to Iraqi lawmakers.

What is clear is that the future of Iraq ultimately hinges to a great degree on the outcome of a complex game of chess -- only part of which is out in the open -- that is playing out right now, and oil is at the center of it. It's equally clear that there's a yawning disconnect between Iraqis' and Americans' views of the situation. Erik Leaver, a senior analyst at the Institute for Policy Studies in Washington, told me that the disposition of Iraq's oil wealth is "definitely causing problems on the ground," but the entire topic is taboo in polite D.C. circles. "Nobody in Washington wants to talk about it," he said. "They don't want to sound like freaks talking about blood for oil." At the same time, a recent poll asked Iraqis what they believed was the main reason for the invasion and 76 percent gave "to control Iraqi oil" as their first choice.

Bush's Petro-Cartel Almost Has Iraq's Oil

Iraq is sitting on a mother lode of some of the lightest, sweetest, most profitable crude oil on earth, and the rules that will determine who will control it and on what terms are about to be set. The Iraqi government faces a December deadline, imposed by the world's wealthiest countries, to complete its final Oil Law. Industry analysts expect that the result will be a radical departure from the laws governing the country's oil-rich neighbors, giving foreign multinationals a much higher rate of return than with other major oil producers, and locking in their control over what George Bush called Iraq's "patrimony" for decades, regardless of what kind of policies future elected governments might want to pursue.

At Alternet, Joshua Holland reports:

Iraq is sitting on a mother lode of some of the lightest, sweetest, most profitable crude oil on earth, and the rules that will determine who will control it and on what terms are about to be set. The Iraqi government faces a December deadline, imposed by the world's wealthiest countries, to complete its final Oil Law. Industry analysts expect that the result will be a radical departure from the laws governing the country's oil-rich neighbors, giving foreign multinationals a much higher rate of return than with other major oil producers, and locking in their control over what George Bush called Iraq's "patrimony" for decades, regardless of what kind of policies future elected governments might want to pursue.

Iraq's energy reserves are an incredibly rich prize; according to the US Department of Energy, "Iraq contains 112 billion barrels of proven oil reserves, the second largest in the world (behind Saudi Arabia) along with roughly 220 billion barrels of probable and possible resources. Iraq's true potential may be far greater than this, however, as the country is relatively unexplored due to years of war and sanctions." For perspective, the Saudis have 260 billion barrels of proven reserves.

Iraqi oil is close to the surface and easy to extract, making it all the more profitable. James Paul, Executive Director of the Global Policy Forum, points out that oil companies "can produce a barrel of Iraqi oil for less than $1.50 and possibly as little as $1, including all exploration, oilfield development and production costs." Contrast that with other areas where oil is considered cheap to produce at $5 per barrel, or the North Sea where production costs are $12-16 per barrel.

And Iraq's oil sector is largely undeveloped. Former Iraqi Oil Minister Issam Chalabi (no relation to the neocons' favorite exile, Ahmed Chalabi) told the Associated Press that "Iraq has more oil fields that have been discovered, but not developed, than any other country in the world." British-based analyst Mohammad Al-Gallani told the Canadian Press that of 526 prospective drilling sites, just 125 have been opened.

But the real gem -- what one oil consultant called the "Holy Grail" of the industry -- lies in Iraq's vast Western desert. It's one of the last "virgin" fields on the planet, and it has the potential to catapult Iraq to number one in the world in oil reserves. Sparsely populated, the Western fields are less prone to sabotage than the country's current centers of production in the North, near Kirkuk, and in the South near Basra. The Nation's Aram Roston predicts Iraq's Western desert will yield "untold riches."

Iraq also may have large natural gas deposits that so far remain virtually unexplored. But even "untold riches" don't tell the whole story. Depending on how Iraq's petroleum law shakes out, the country's enormous reserves could break the back of OPEC, a wet dream in Western capitals for three decades. James Paul predicted that "even before Iraq had reached its full production potential of 8 million barrels or more per day, the companies would gain huge leverage over the international oil system. OPEC would be weakened by the withdrawal of one of its key producers from the OPEC quota system." Depending on how things shape up in the next few months, Western oil companies could end up controlling the country's output levels, or the government, heavily influenced by the U.S., could even pull out of the cartel entirely.

Both independent analysts and officials within Iraq's Oil ministry anticipate that when all is said and done, the big winners in Iraq will be the Big Four -- the American firms Exxon-Mobile and Chevron-Texaco, and the British BP-Amoco and Royal Dutch-Shell -- that dominate the world oil market. Ibrahim Mohammed, an industry consultant with close contacts in the Iraqi Oil Ministry, told the Associated Press that there's a universal belief among ministry staff that the major U.S. companies will win the lion's share of contracts. "The feeling is that the new government is going to be influenced by the United States," he said.

During the twelve-year sanction period, the Big Four were forced to sit on the sidelines while the government of Saddam Hussein cut deals with the Chinese, French, Russians and others (despite the sanctions, the U.S. ultimately received 37 percent of Iraq's oil during the period, according to the independent committee that investigated the Oil-for-food program, but almost all of it arrived through foreign firms). In a 1999 speech, Dick Cheney, then CEO of the oil services company Halliburton, told a London audience that the Middle East was where the West would find the additional fifty million barrels of oil per day that he predicted it would need by 2010, but, he lamented, "while even though companies are anxious for greater access there, progress continues to be slow."

Chafing at the idea that the Chinese and Russians might end up with what is arguably the world's greatest energy prize, industry leaders lobbied hard for regime change throughout the 1990s. With the election of George W. Bush and Dick Cheney in 2000 -- the first time in U.S. history that two veterans of the oil industry had ever occupied the nation's top two jobs -- they would finally get the "greater access" to the region's oil wealth after which they had long lusted.

If the U.S. invasion of Iraq had occurred during the colonial era a hundred years earlier, the oil giants, backed by U.S. forces, would have simply seized Iraq's oil fields. Much has changed since then in terms of international custom and law (when then-Deputy Secretary of Defense Paul Wolfowitz did in fact suggest seizing Iraq's Southern oil fields in 2002, Colin Powell dismissed the idea as "lunacy").

Understanding how Big Oil came to this point, poised to take effective control of the bulk of the country's reserves while they remain, technically, in the hands of the Iraqi government -- a government with all the trappings of sovereignty -- is to grasp the sometimes intricate dance that is modern neocolonialism. The Iraq oil-grab is a classic case study.

It's clear that the U.S.-led invasion had little to do with national security or the events of September 11. Former Treasury Secretary Paul O'Neill revealed that just 11 days after Bush's inauguration in early 2001, regime change in Iraq was "Topic A" among the administration's national security staff, and former Terrorism Tsar Richard Clarke told 60 minutes that the day after the attacks in New York and Washington occurred, "[Secretary of Defense Donald] Rumsfeld was saying that we needed to bomb Iraq." He added: "We all said … no, no. Al-Qaeda is in Afghanistan."

On March 7, 2003, two weeks before the U.S. attacked Iraq, the UN's chief weapons inspector, Hans Blix, told the UN Security Council that Saddam Hussein's cooperation with the inspections protocol had improved to the point where it was "active or even proactive," and that the inspectors would be able to certify that Iraq was free of prohibited weapons within a few months' time. That same day, IAEA head Mohammed ElBaradei reported that there was no evidence of a current nuclear program in Iraq and flatly refuted the administration's claim that the infamous aluminum tubes cited by Colin Powell in making his case for war before the Security Council were part of a reconstituted nuclear program.

But serious planning for the war had begun in February of 2002, as Bob Woodward revealed in his book, Plan of Attack. Planning for the future of Iraq's oil wealth had been under way for longer still. In February of 2001, just weeks after Bush was sworn in, the same energy executives that had been lobbying for Saddam's ouster gathered at the White House to participate in Dick Cheney's now infamous Energy Taskforce. Although Cheney would go all the way to the Supreme Court to keep what happened at those meetings a secret, we do know a few things thanks to documents obtained by the conservative legal group JudicialWatch. As Mark Levine wrote in The Nation($$):

… a map of Iraq and an accompanying list of "Iraq oil foreign suitors" were the center of discussion. The map erased all features of the country save the location of its main oil deposits, divided into nine exploration blocks. The accompanying list of suitors revealed that dozens of companies from thirty countries--but not the United States--were either in discussions over or in direct negotiations for rights to some of the best remaining oilfields on earth.

Levine wrote, "It's not hard to surmise how the participants in these meetings felt about this situation."

According to The New Yorker, at the same time, a top-secret National Security Council memo directed NSC staff to "cooperate fully with the Energy Taskforce as it considered melding two seemingly unrelated areas of policy." The administration's national security team was to join "the review of operational policies towards rogue states such as Iraq, and actions regarding the capture of new and existing oil and gas fields."

At the State Department, planning was also underway. Under the auspices of the "Future of Iraq Project," an "Oil and Energy Working Group" was established. The full membership of the group -- described by the Financial Times as "Iraqi oil experts, international consultants" and State Department staffers -- remains classified, but among them, according to Antonia Juhasz's The Bush Agenda, was Ibrahim Bahr al-Uloum, who would serve in Iyad Allawi's cabinet during the period of the Iraqi Governing Council, and later as Iraq's Oil Minister in 2005. The group concluded that Iraq's oil "should be opened to international oil companies as quickly as possible after the war."

But the execs from Big Oil didn't just want access to Iraq's oil; they wanted access on terms that would be inconceivable unless negotiated at the barrel of a gun. Specifically, they wanted an Iraqi government that would enter into Production Service Agreements (PSAs) for the extraction of Iraq's oil. PSAs, developed in the 1960s, are a tool of today's kinder, gentler neocolonialism; they allow countries to retain technical ownership over energy reserves but, in actuality, lock in multinationals' control and extremely high profit margins -- up to thirteen times oil companies' minimum target, according to an analysis by the British-based oil watchdog Platform (PDF).

As Greg Muttit, an analyst with the group, notes:

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, Muttit adds, of the seven leading oil producing countries, only Russia has entered into PSAs, and those were signed during its own economic "shock therapy" in the early 1990s. A number of Iraq's oil-rich neighbors have constitutions that specifically prohibit foreign control over their energy reserves.

PSAs often have long terms -- up to 40 years -- and contain "stabilization clauses" that protect them from future legislative changes. As Muttit points out, future governments "could be constrained in their ability to pass new laws or policies." That means, for example, that if a future elected Iraqi government "wanted to pass a human rights law, or wanted to introduce a minimum wage [and it] 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." It's Sovereignty Lite.

The deals are so onerous that they govern only 12 percent of the world's oil reserves, according to the International Energy Agency. Nonetheless, PSAs would become the Future of Iraq Project's recommendation for the fledgling Iraqi government. According to the Financial Times, "many in the group" fought for the contract structure; a Kurdish delegate told the FT, "everybody keeps coming back to PSAs."

Of course, the plans for Iraq's legal framework for oil have to be viewed in the context of the overall transformation of the Iraqi economy. Clearly, the idea was to pursue a radical corporatist agenda during the period of the Coalition Provisional Authority when the U.S. occupation forces were a de facto dictatorship. And that's just what happened; under L. Paul Bremer, the CPA head, corporate taxes were slashed, a flat-tax on income was established, rules allowing multinationals to pull all of their profits from the country and a series of other provisions were enacted. These were then integrated into the Iraqi Constitution and remain in effect today.

Among the provisions in the Constitution, unlike those of most oil producers, is a requirement that the government "develop oil and gas wealth … relying on the most modern techniques of market principles and encouraging investment." The provision mandates that foreign companies would receive a major stake in Iraq's oil for the first time in the thirty years since the sector was nationalized in 1975.

Herbert Docena, a researcher with the NGO Focus on the Global South, wrote that an early draft of the Constitution negotiated by Iraqis envisioned a "Scandinavian-style welfare system in the Arabian desert, with Iraq's vast oil wealth to be spent upholding every Iraqi's right to education, health care, housing, and other social services." "Social justice," the draft declared, "is the basis of building society."

What happened between that earlier draft and the Constitution that Iraqis would eventually ratify? According to Docena:

While [U.S. Ambassador to Iraq Zalmay] Khalilzad and his team of US and British diplomats were all over the scene, some members of Iraq's constitutional committee were reduced to bystanders. One Shiite member grumbled, 'We haven't played much of a role in drafting the constitution. We feel that we have been neglected.' A Sunni negotiator concluded: 'This constitution was cooked up in an American kitchen not an Iraqi one.'

With a Constitution cooked up in DC, the stage was set for foreign multinationals to assume effective control of as much as 87 percent of Iraq's oil, according to projections by the Oil Ministry. If PSAs become the law of the land -- and there are other contractual arrangements that would allow private companies to invest in the sector without giving them the same degree of control or such usurious profits -- the war-torn country stands to lose up to $194 billion vitally important dollars in revenues on just the first 12 fields developed, according to a conservative estimate by Platform (the estimate assumes oil at $40 per barrel; at this writing it stands at more than $59). That's more than six times the country's annual budget.

To complete the rip-off, the occupying coalition would have to crush Iraqi resistance, make sure it had friendly people in the right places in Iraq's emerging elite and lock the new Iraqi government onto a path that would lead to the Big Four's desired outcome.


With 140,000 U.S. troops on the ground, the largest U.S. embassy in the world sequestered in Baghdad's fortified "Green Zone" and an economy designed by a consulting firm in McLean, Va., post-invasion Iraq was well on its way to becoming a bonanza for foreign investors.
But Big Oil had its sights set on a specific arrangement -- the lucrative production sharing agreements that lock in multinationals' control for long terms and are virtually unheard of in countries as rich in easily accessible oil as Iraq.

The occupation authorities would have to steer an ostensibly sovereign government to the outcome they desired, and they'd have to overcome any resistance that they encountered from the fiercely independent and understandably wary Iraqis along the way. Finally, they'd have to make sure that the Anglo-American firms were well-positioned to win the lion's share of the choicest contracts.

Dealing with the most likely points of opposition began almost immediately. While the Oil Ministry, famously, was one of the few structures the invading forces protected from looters in the first days of the war, the bureaucracy's human assets weren't so lucky. With a stroke of the pen, Coalition Provisional Authority boss L. Paul Bremer fired hundreds of ministry personnel, ostensibly as part of the program of "de-Baathification." But, as Antonia Juhasz, author of "The Bush Agenda," told me, "it wasn't an indication that they were a party to Saddam Hussein's crimes … they were fired because they could have stood in the way of the economic transformation." Some fraction were certainly hard-core Baathists, but they were all veterans of the country's oil sector; they knew the industry, they knew what the norms in neighboring countries were and they had no loyalty to the occupation forces. Some had to go.

That was true at the top as well. Serving as oil minister in the Iraqi Interim Government was Thamir Ghadbhan, a British-trained technocrat who at one time had been chief of planning under Saddam Hussein and was widely respected for his political independence and his opposition to the previous regime (Saddam had ended up imprisoning him at Abu Ghraib). But despite working closely with American advisors, Ghadbhan was replaced with Ibrahim Bahr al-Uloum, a close associate of Ahmed Chalabi, the exile favored by some war planners to run the country as a kindler and gentler -- but no doubt just as corrupt -- version of Saddam Hussein.

According to Greg Muttit, an analyst with the British oil watchdog Platform, Uloum at first seemed to be a malleable figure. He told the Financial Times that he personally favored PSAs and giving priority to U.S. oil companies "and European companies, probably."

But Uloum would later publicly protest the elimination of fuel subsidies, a key provision of the country's economic restructuring, saying, "This decision will not serve the benefit of the government and the people. This decision brings an extra burden on the shoulders of citizens." He was, as the Associated Press reported, given "a forced vacation." It was, in the end, a permanent vacation; Chalabi, who was deputy prime minister at the time, took over the job himself (as "acting" minister for 30 days, but his term would last a year). Chalabi had no previous experience in the oil biz, but was a reliable, pro-Western figure with little in the way of nationalist zeal to get in the way of being a good lap dog. As leader of the Iraqi National Congress, he had said he favored the creation of a U.S.-led consortium to develop Iraq's oil fields. "American companies will have a big shot at Iraqi oil," Chalabi told the Washington Post in 2002.

According to Alexander Cockburn, Chalabi also orchestrated the ouster of Mohammed Jibouri, executive director of the state's oil marketing agency, who had offended the Swiss giant Glencore by telling its executives that they couldn't trade Iraqi oil after their extensive dealings with Saddam Hussein.

An emerging, although still fragile, civil society was another source of potential trouble. Iraqi trade unions were a thorn in the side of the CPA -- shutting down the port of Khor az-Zubayr in protest of a rip-off deal with the Danish shipping giant Maersk, halting oil production in the south to demand the rehire of laid-off Iraqi workers and kicking Halliburton subsidiary Kellogg, Brown and Root out of their refineries. Perhaps it's not a coincidence, then, that the only significant law that Paul Bremer left on the books from the Hussein era was a prohibition against organizing public-sector workers. Raed Jarrar, an Iraqi analyst with the NGO Global Exchange, told me, "They're having a lot of legal problems."

Of course, none of that guaranteed that the Iraqis would stay on the preferred path, especially after the election of an ostensibly sovereign government.

And that's where the most common -- almost ubiquitous -- tool of neocolonialism, debt, came into play. In this case, massive, crushing debt run up by a dictator who treated himself and his cronies to palaces and other luxuries, spent lavishly on weapons for Iraq's war with Iran -- fought in part on behalf of the United States -- and owed Kuwait billions of dollars in reparations for the 1990 invasion.

To put Iraq's foreign debt in perspective, if the country's economy were the size of the United States', then its obligations in 2004, proportionally, would have equaled around $55 trillion, according to IMF figures (and that doesn't include reparations from the first Gulf War).

Clearly, that amount of debt was unsustainable, and the Bush administration launched a full-court press to get creditor nations to forgive at least part of the new government's debt burden. Former Secretary of State James Baker, long the Bush family's "fixer," was dispatched on a tour of the world's capitals to cut deals on behalf of the Iraqis.

The administration raised eyebrows in the NGO community when it adopted the language of debt-relief activists to frame their pitch. Bush, and Baker, called it "odious" debt, debt that financed the whims of a brutal dictator and used against the interests of the Iraqi population. Under international law, "odious" debt, in theory at least, doesn't need to be forgiven; it's written off as a dictator's illicit gains. As one might expect, wealthy creditor nations have long resisted the concept.

Debt-relief activists Basav Sen and Hope Chu wrote that the move "seemed inexplicable at first." But it soon became clear that Iraq's debt-relief program was, in fact, a way of locking in Iraq's economic transformation.

The largest chunk of debt, $120 billion, was owed to the Paris Club, a group of 19 industrialized nations. Baker negotiated a deal whereby the Paris Club would forgive 80 percent of Iraq's debt, but the catch -- and it was a big one -- was that Iraq had to agree to an economic "reform" package administered by the International Monetary Fund, an institution dominated by the wealthiest countries and infamous across the developing world for its painful and unpopular Structural Adjustment Protocols.

The debt would be written off in stages; 30 percent would be cancelled outright, another 30 percent when an elected Iraqi government accepted an IMF structural reform agreement and a final 20 percent after the IMF had monitored its implementation for three years. This gave the IMF the role of watchdog over the country's new economy, despite the fact that its share of the country's debt burden was less than 1 percent of the total.

Among a number of provisions in the IMF agreement, along with privatizing state-run companies (which resulted in the layoffs of an estimated 145,000 Iraqis), slashing government pensions and phasing out the subsidies on food and fuel that many Iraqis depended on, was a commitment to develop Iraq's oil in partnership with the private sector. Then-Finance Minister Adel Abdul Mehdi said, none too happily, that the deal would be "very promising to the American investors and to American enterprise, certainly to oil companies." The Iraqi National Assembly released a statement saying, "the Paris Club has no right to make decisions and impose IMF conditions on Iraq," and called it "a new crime committed by the creditors who financed Saddam's oppression." And Zaid Al-Ali, an international lawyer who works with the NGO Jubilee Iraq, said it was "a perfect illustration of how the industrialized world has used debt as a tool to force developing nations to surrender sovereignty over their economies."

The IMF agreement was announced in December of 2005, along with a new $685 million IMF loan that was to be used, in part, to increase Iraq's oil output. The announcement came a month after Iraqis went to the polls to vote for their first government under the new Constitution in order, according to the Washington Post, to spare Iraqi "politicians from voters' wrath." That was a wise idea; immediately following the agreement, gas prices skyrocketed and Iraqis rioted.

The icing on the cake is that the deal James Baker negotiated with the Paris Club refers to Iraq as an "exceptional situation"; no precedent was set that would allow other highly indebted countries saddled with odious debt from their own past dictators to claim similar relief.

The deadline the Iraqi government must meet for the completion of its final oil law in December is a "benchmark" in the IMF agreement.

In an investigation for the Nation, Naomi Klein discovered that Baker had pursued his mission with an eye-popping conflict of interest. Klein discovered that a consortium that included the Carlyle Group, of which Baker is believed to have a $180 million stake, had contracted with Kuwait to make sure that the money it was owed by Iraq would be excluded from any debt-relief package. When Baker met with the Kuwaiti emir to beg forgiveness for Iraq's odious debt, he had a direct interest in making sure he didn't get it.

Another major creditor was Saudi Arabia. The Carlyle Group has extensive business dealings with the kingdom and Baker's law firm, Baker Botts, was representing the monarchy in a suit brought by the families of the victims of 9/11.

The most recent IMF report (PDF) shows how successfully he failed: "While most Paris Club official creditors have now signed bilateral agreements, progress has been slow in resolving non-Paris Club official claims, especially those of Gulf countries," it says. It's likely that Iraq, a country occupied for three years, devastated by 12 years of sanctions and with a per capita GDP of $3,400, will end up paying reparations to Kuwait, a country with a per capita GDP of over $19,000, for the five months Saddam occupied his neighbor in late 1990 and early 1991.

Iraq will still face a mountain of debt even if it meets all of the "benchmarks" required of it -- the IMF expects the country's debt service to equal five percent of its economic output in 2011 and warns that even a minor price shock in the oil market "would require significant borrowing from the international markets to close the financing gaps."

"Sovereign" debt is transferable between governments; if a new strongman arises or Iraq becomes a loose federation, the debt will remain on the books and defaulting on it, while a possibility, has serious long-term consequences.

All of this is about bringing different forms of pressure onto Iraq's nascent government, not controlling it, and it's an important distinction. Before and since the "handover" to Iraq's government, the Green Zone has been overrun with "advisers" from Big Oil. Aram Roston wrote, "It's clear that there is not just the one Iraqi Oil Ministry, but a parallel 'shadow' ministry run by American advisers." In business, that's known as "positioning."

Phillip Carroll, a former chief executive with Royal Dutch/Shell and a 15-member "board of advisors" were appointed to oversee Iraq's oil industry during the transition period. According to the Guardian, the group "would represent Iraq at meetings of OPEC." Carroll had been working with the Pentagon for months before the invasion -- even while the administration was still insisting that it sought a peaceful resolution to the Iraq crisis -- "developing contingency plans for Iraq's oil sector in the event of war." According to the Houston Chronicle, "He assumed his work was completed, he said, until Defense Secretary Donald Rumsfeld called him shortly after the U.S.-led invasion began and offered him the oil adviser's job." Carroll, in addition to running Shell Oil in the United States, was a former CEO of the Fluor Corp., a well-connected oil services firm with extensive projects in Saudi Arabia and Kuwait, and at least $1.6 billion in contracts for Iraq's reconstruction. He was joined by Gary Vogler, a former executive with ExxonMobile, in Iraq's Office of Reconstruction and Humanitarian Assistance.

After spending six months in the post, Carroll was replaced by Robert E. McKee III, a former ConocoPhillips executive. According to the Houston Chronicle, "His selection as the Bush administration's energy czar in Iraq" drew fire from congressional Democrats "because of his ties to the prime contractor in the Iraqi oil fields, Houston-based Halliburton Co. He's the chairman of a venture partitioned by the … firm."

The administration selected Chevron Vice President Norm Szydlowski to serve as a liaison between the Coalition Provisional Authority and the Iraqi Oil Ministry. Now the CEO of the appropriately named Colonial Pipeline Co., he continues to work with the Iraq Energy Roundtable, a project of the U.S. Trade and Development Agency, which recently sponsored a meeting to "bring together oil and gas sector leaders in the U.S. with key decision makers from the Iraq Ministry of Oil."

Terry Adams and Bob Morgan of BP, and Mike Stinson of ConocoPhillips would also serve as advisors during the transition.

After the CPA handed over the reigns to Iraq's interim government, the embassy's "shadow" oil ministry continued to work closely with the Iraqis to shape future oil policy. Platform's Greg Muttit wrote that "senior oil advisers -- now based within the Iraq Reconstruction Management Office (IRMO) in the U.S. Embassy ... included executives from ChevronTexaco and Unocal." After the handover, a senior U.S. official said: "We're still here. We'll be paying a lot of attention, and we'll have a lot of influence. We're going to have the world's largest diplomatic mission with a significant amount of political weight."

The majors have also engaged in good, old-fashioned lobbying. In 2004, Shell advertised for an Iraqi lobbyist with good contacts among Iraq's emerging elites. The firm sought "a person of Iraqi extraction with strong family connections and an insight into the network of families of significance within Iraq." According to Platform, just weeks after the invasion, in a meeting with oil company execs and Australian Foreign Minister Alexander Downer in London, former British Foreign Secretary Sir Malcolm Rifkind promised to personally lobby Dick Cheney for contracts on behalf of several firms, including Shell.

Meanwhile, major oil firms were positioning themselves so that they'd have the best contacts in the new government. According to the Associated Press, "The world's three biggest integrated oil companies" -- BP, ExxonMobil and Royal Dutch/Shell -- "struck cooperation or training deals with Iraq" in 2005. "It's a way to maintain contact and get the oil officials to know about them," former Iraqi Oil Minister Issam Chalabi told the AP. And it seems to have worked; in May, Iraq's current oil minister, Husayn al-Shahristani, said that one of his top priorities would be to finalize an oil law and sign contracts with "the largest companies."

Washington has its hands all over the drafting of that law. Early on, in 2003, USAID commissioned BearingPoint, Inc. -- the new name for the scandal-plagued Arthur Anderson Consulting -- to submit recommendations for the development of Iraq's oil sector. BearingPoint was the firm that designed the country's economic transformation under a previous USAID contract, so it was no surprise that its report reinforced the preference for PSAs that "everybody [kept] kept coming back to" during meetings of the State Department's "Future of Iraq Project."

In February, just months after the Iraqis elected their first constitutional government, USAID sent a BearingPoint adviser to provide the Iraqi Oil Ministry "legal and regulatory advice in drafting the framework of petroleum and other energy-related legislation, including foreign investment." According to Muttit, the Iraqi Parliament had not yet seen a draft of the oil law as of July, but by that time it had already been reviewed and commented on by U.S. Energy Secretary Sam Bodman, who also "arranged for Dr. Al-Shahristani to meet with nine major oil companies -- including Shell, BP, ExxonMobil, ChevronTexaco and ConocoPhillips -- for them to comment on the draft."

All of these points of pressure are only what we can see in the light of day. There is certainly much more occurring under the table. Raed Jarrar told me that he "was personally familiar with the kind of intimidation that can be brought by both the U.S. military and civilian" personnel, and that he would be shocked if "multiple millions of dollars in bribes" were not changing hands. The IMF noted in its latest report (PDF) that "corruption related to the production and distribution of refined fuel products was rampant." Last March, 450 Oil Ministry employees were fired for suspected corruption, and Mohammed al-Abudi, the Oil Ministry's director general for rrilling, said that "administrative corruption" was pervasive. "The robberies and thefts are taking place on a daily basis on all levels," he said, "committed by low-level government employees and by high officials in leadership positions of the Iraqi state." The same day that the U.N. legitimized the occupation, George Bush signed Executive Order 13303 providing full legal immunity to all oil companies doing business in Iraq in order to facilitate the country's "orderly reconstruction."

Yet, despite a five-year effort, Big Oil still sits on the sidelines, wary of the disorder and violence that's plagued the country. Ironically, it appears that China may well receive the first deal in post-Saddam Iraq (although it's one negotiated with Hussein's government before the war). The Kurdish autonomous zone has signed three PSAs -- none with the majors -- although there is some dispute about their validity (and, at this writing, there are reports that the Kurds are in negotiations with Royal Dutch/Shell and BP, among others).

At this point, the situation is very fluid. Last week, Iraqis were shocked when a controversial measure that might lead to the country's effective breakup was passed by Parliament by one vote. The major Sunni parties and Muqtada al Sadr's ministers boycotted the vote in outrage. Muddying the waters further is a heated debate about whether a somewhat ambiguous provision in the Iraqi Constitution already gives provincial governments the right to hold on to oil revenues rather than send them to the central government. The results of all of these debates will have an enormous impact on Iraq's chances to build an autonomous and potentially prosperous country down the road.

It's possible that the administration and its partners badly overplayed their hand. Iraq's new government stands on the verge of a complete meltdown, faced with a crisis of legitimacy based largely on the fact that it is seen as collaborating with American forces. Overwhelming majorities of Iraqis of every sect believe the United States is an occupier, not a liberator, and is convinced that it intends to stay in Iraq permanently. "If you go in front of Parliament, Raed Jarrar told me, "and ask: 'who is opposed to demanding a timetable for the Americans to withdrawal?' nobody would dare raise their hand." The passage of a sweetheart oil law could prove to be a tipping point. It's also possible Iraq's government won't make it to December; at this writing, rumors of a "palace coup" are swirling around Baghdad, according to Iraqi lawmakers.

What is clear is that the future of Iraq ultimately hinges to a great degree on the outcome of a complex game of chess -- only part of which is out in the open -- that is playing out right now, and oil is at the center of it. It's equally clear that there's a yawning disconnect between Iraqis' and Americans' views of the situation. Erik Leaver, a senior analyst at the Institute for Policy Studies in Washington, told me that the disposition of Iraq's oil wealth is "definitely causing problems on the ground," but the entire topic is taboo in polite D.C. circles. "Nobody in Washington wants to talk about it," he said. "They don't want to sound like freaks talking about blood for oil." At the same time, a recent poll asked Iraqis what they believed was the main reason for the invasion and 76 percent gave "to control Iraqi oil" as their first choice.

Kurdistan's Oil Under The Control Of Foreign Companies?

The publication last month of the draft of the Kurdistan Regional Government’s oil law was intended to mark the region’s assertion of control over the development of natural resources. However, it seems that as quickly as it wins its economic autonomy from Baghdad, the KRG wants to surrender it to foreign companies.

Niqash reports:
International oil companies were certainly pleased. "Congratulations and our compliments, this is a modern petroleum law that covers all relevant points," said an e-mail from one company to the KRG’s Natural Resources Minister, Dr Ashti Hawrami.

Dr Hawrami is no doubt keen to attract investment quickly to the region. Having been starved of investment for decades, the Kurdish political parties see greater economic independence - particularly in the oil sector - as a necessary element of federalism. The question is: At what cost does this investment come?

In the consultation on the draft law, some respondents criticised the proposed role for foreign companies, and the type of contract to be signed with them, for giving too much away. Bizarrely, Dr Hawrami characterises such criticisms as “anti-Kurdish” or “anti-federalism”.

The centrepiece of the draft Act is the decision to sign production sharing contracts of up to 32 years with international oil companies. These would give the companies effective control over oil production, as well as a significant share of the revenue from it.

Alarmingly, the draft Act makes no provision for parliamentary approval of such contracts. It is normal practice around the world for parliaments to be given the ultimate right of approval of production sharing contracts, given their profound effect on a country’s economy, politics and even sovereignty.

On the other hand, one positive feature of the Act is that it requires that such contracts be made available for public scrutiny (albeit only after they have been signed) – something the KRG pointedly refused to do with the four production sharing contracts it has already signed since 2003.

The KRG has made at least some efforts to limit the extent of foreign companies’ power, although in practice, it is not clear how effective these would be. For example, any oilfield development would be overseen by a management committee containing equal representatives of both companies and government.

However, both sides would be given an effective right of veto over the most important decisions – which would make it difficult to regulate the rate of production, in particular in relation to future OPEC quotas. This problem has been consistently experienced by Algeria and Nigeria, two OPEC countries with major foreign involvement in their oil industries.

Meanwhile, any disagreements between the KRG and the foreign companies would be arbitrated not in the courts of Kurdistan or Iraq, but in secretive investment courts in London or Washington, DC – courts that consider only the enforcement of the commercial terms of the contract. In a ‘model’ contract published alongside the draft Act, and intended to form the basis for any actual contract negotiations, it further specifies that any such arbitration would take place in the English language, and under the law of England.

But it is when combined with the decentralisation of authority for signing contracts that the cost of the policy starts to escalate. And while the KRG really insists on such decentralisation, the Oil Ministry in Baghdad is totally opposed. Deputy Prime Minister Barham Salih recently told Reuters that the drafting of the federal oil law has been delayed because of disagreements on this issue.

Part of the goal of the publication of the draft KRG petroleum act is to influence policy Iraq-wide. Indeed, the KRG also drafted an act for the whole of the country, which it has presented to the Ministry of Oil, although not made public.

One of the most striking elements of the KRG’s draft law, and presumably of its proposed federal law, is that it assigns control over oil in disputed territories such as Kirkuk to the KRG, with immediate effect, only offering to return such control to the federal government if the planned December 2007 referendum does not choose Kirkuk to be part of Kurdistan. Such an approach would seem to put the cart before the horses.

It is difficult to see any chance of this being accepted – most likely it is included as a negotiating position, which can be dropped in exchange for keeping the other contentious aspects of the KRG’s policy, with the Kirkuk issues to be resolved after the referendum.

But the dispute over decentralisation of responsibility for contracts is not simply a power struggle – it will have a bearing on the economics of oil production as a whole.

The precise terms of any contract – and in particular how the revenues are shared between state and private company – are determined by negotiation. They thus depend on the relative bargaining power of the two sides.

If the decentralisation arguments are taken to their logical conclusion, each region and province would be encouraged to pursue its own policies and strategies, and carry out its own negotiations, to attract investment. Unrestricted competition for investment could hamper coordination in Iraq’s economy and infrastructure, and could sow the seeds of fracturing the country.

Furthermore, it could create a race to the bottom, where each region or province tries to offer more generous terms to attract companies. Multinational companies would conversely have an opportunity to play different regions off against each other, forcing ever greater concessions – at the expense of the Iraqi people.

The KRG has opted for a major role for foreign companies precisely because the KRG itself does not have sufficient expertise to run its own industry, in contrast to the Oil Ministry and the state-owned operating companies.

But this may be a mistake. It seems to be commonly assumed that if there is a lack of technical capacity, the solution is simply to allow foreign companies to make the investment. What this assumption misses is that the investment must be managed – from negotiation, to regulation, to monitoring. And given the scale – hundreds of millions of dollars or more – this too requires institutional capacity.

It is helpful here to recall the early history of Iraq’s oil industry. In the 1920s, Iraq did not have the capacity to develop its own oil; it had to rely on foreign companies. But by signing very long-term contracts with them, the government remained powerless to adapt to the new circumstances as Iraq built up its indigenous skills.

Now, for Kurdistan, there are two other options: work with Iraq’s experts, or take time to build up expertise in Kurdistan. It seems both options have been rejected.

In fact, the KRG seems even more impatient to sign away its resource wealth than some figures in the Iraqi Oil Ministry. In comments last week, Dr Hawrami announced that the KRG was already negotiating with more companies, aiming to sign contracts soon after the draft Petroleum Act is approved by the Kurdish Parliament in September.

This timing can be expected to get the worst possible deal for Kurdistan.

The issue of whether contract-signing authority should be decentralised to the regions is highly contentious, and federal Oil Minister Husayn al-Shahristani has clearly stated that only Baghdad should have that authority.

For a company to sign with the KRG before a federal oil law has been passed, and before the constitutional review is complete, carries enormous risks that the KRG’s Act will later be found legally invalid. As such, any company will expect very high profits to justify that risk. The two possible outcomes are either chaos if the contract is over-ruled, or the giveaway of a large share of revenue if it survives. These terms, despite reflecting the risk at the time of signing, will persist for 32 years.

The citizens of the Kurdish region have a right to see investment in their economy – something which has been denied them through decades of repression. But to seek economic independence from Baghdad, through complete reliance on foreign capital, may constitute a leap from the frying pan into the fire.