THE PRIZE: IRAQ'S OIL

by Michael Schwartz

The struggle over Iraqi oil has been going on for a long, long time. One could date it back to 1980 when President Jimmy Carter -- before his Habitat for Humanity days -- declared that Persian Gulf oil was "vital" to American national interests. So vital was it, he announced, that the U.S. would use "any means necessary, including military force" to sustain access to it. Soon afterwards, he announced the creation of a Rapid Deployment Joint Task Force, a new military command structure that would eventually develop into United States Central Command (CENTCOM) and give future presidents the ability to intervene relatively quickly and massively in the region.

Or we could date it all the way back to World War II, when British officials declared Middle Eastern oil "a vital prize for any power interested in world influence or domination," and U.S. officials seconded the thought, calling it "a stupendous source of strategic power and one of the greatest material prizes in world history."

The date when the struggle for Iraqi oil began is less critical than our ability to trace the ever growing willingness to use "any means necessary" to control such a "vital prize" into the present. We know, for example, that, before and after he ascended to the Vice-Presidency, Dick Cheney has had his eye squarely on the prize. In 1999, for example, he told the Institute of Petroleum Engineers that, when it came to satisfying the exploding demand for oil, "the Middle East, with two thirds of the world's oil and the lowest cost, is still where the prize ultimately lies." The mysterious Energy Task Force he headed on taking office in 2001 eschewed conservation or developing alternative sources as the main response to any impending energy crisis, preferring instead to make the Middle East "a primary focus of U.S. international energy policy." As part of this focus, the Task Force recommended that the administration put its energy, so to speak, into convincing Middle Eastern countries "to open up areas of their energy sectors to foreign investment" -- in other words, into a policy of reversing 25 years of state control over the petroleum industry in the region.

The Energy Task Force set about planning how to accomplish this historic reversal. We know, for instance, that it scrutinized a detailed map of Iraq's oil fields, together with the (non-American) oil companies scheduled to develop them (once the UN sanctions still in place on Saddam Hussein's regime were lifted). It then worked jointly with the administration's national security team to find a compatible combination of military and economic policies that might inject American power into this equation. According to Jane Mayer of The New Yorker, the National Security Council directed its staff "to cooperate fully with the Energy Task Force as it considered the 'melding' of two seemingly unrelated areas of policy: 'the review of operational policies towards rogue states,' such as Iraq, and 'actions regarding the capture of new and existing oil and gas fields.'"

While we cannot be sure that this planning itself was instrumental in setting the U.S. on a course toward invading Iraq, we can be sure that plenty of energy was being expended in Washington, planning for the disposition of Iraq's massive oil reserves once that invasion was successfully executed. In 2002, just a year after Cheney's Task Force completed its work, and before the U.S. had officially decided to invade Iraq, the State Department "established a working group on oil and energy," as part of its "Future of Iraq" project. It brought together influential Iraqi exiles, U.S. government officials, and international consultants. Later, several Iraqi members of the group became part of the Iraqi government. The result of the project's work was a "draft framework for Iraq's oil policy" that would form the foundation for the energy policy now being considered by the Iraqi Parliament.

The specific prize in Iraq is certainly worthy of almost any kind of preoccupation. Indeed, Iraq could someday become the most important source of petrochemical energy on the planet.

According to the U.S. Energy Information Administration, Iraq possesses 115 billion barrels of proven oil reserves, third largest in the world (after Saudi Arabia and Iran). About two-thirds of its known oil reserves are located in Shia southern Iraq, and the final third in Kurdish northern Iraq. However, in energy terms, only about 10 percent of the country has actually been explored and there is good reason to believe that modern methods -- which have not been applied since the beginning of the Iraq-Iran War in 1980 -- might well uncover magnitudes more oil. Estimates of the possible new finds offered by officials of various interested governments range from 45 billion to 214 billion additional barrels, depending on the source; but some non-governmental experts see the final treasure exceeding 400 billion barrels. If the latter figure is correct, then Iraq would likely become the world's largest source of oil.

For the most part, Iraq's petroleum has "attractive chemical properties;" that is, its oil is considered to be of very high quality. Moreover, both its current fields and many of the potential new discoveries would be extremely cheap to access, if security weren't such a problem today in Iraq. James Paul of the international policy monitoring group, the Global Policy Forum, offers this positive view: "According to Oil and Gas Journal, Western oil companies estimate that they can produce a barrel of Iraqi oil for less than $1.50 and possibly as little as $1.... This is similar to production costs in Saudi Arabia and lower than virtually any other country."

With the price of a barrel of crude oil today above $64 a barrel, the potential for profits is stupendous and the only question is: Who will pocket them -- the oil companies or the Iraqi government -- and, if the former, which oil companies those will be? It is not inconceivable that any major oil companies able to claim a large portion of the Iraqi oil spoils could double, triple, or even quintuple their already gigantic global profits.

Under Saddam Hussein, Iraqi oil never fulfilled the potential of even its proven oil fields. A modest goal for the country's oil industry would have been producing 3.5 million barrels per day, but the temporary disruptions caused by the Iraq-Iran War and the more permanent ones caused by UN sanctions imposed after the Gulf War in 1991 severely limited production. From the late 1990s until the American invasion in 2003, Iraq averaged around 2.5 million barrels per day.

Knowledge of this level of underproduction was certainly one factor in Deputy Secretary of Defense Paul Wolfowitz's pre-war prediction that the administration's invasion and occupation of Iraq would pay for itself; he hoped for a quick postwar increase in production to 3.5 million barrels per day or, at the $30 per barrel price of oil at that time, close to $40 billion per year in revenues. An expected expansion in production levels (once the oil giants were brought into the mix) to perhaps 6.5 million barrels, through the development of new oil fields or more efficient exploitation of existing fields, had the potential to more than cover the expected American short-term military costs and leave the new Iraqi government flush as well.

This, then, was the allure of melding energy policy and military policy, as Cheney's energy group and allied administration officials envisioned it.

With all this history, the particular way the U.S. sprang into action as soon as its forces arrived in Baghdad was hardly surprising. While American troops simply stood by as unrestrained looting severely damaged the dawn-of-civilization treasures in the National Museum, compromised the ability of hospitals to deliver health care, and destroyed many government offices, large numbers of American soldiers were deployed to protect the Oil Ministry and its associated holdings. This effort was certainly emblematic of the newly established occupation's priorities.

Not long after President Bush declared "major combat operations in Iraq have ended" under a "Mission Accomplished" banner on the deck of the aircraft carrier, the USS Abraham Lincoln, Paul Bremer, the new head of the American occupation, promulgated a series of laws designed, among other things, to kick-start the development of Iraqi oil. In addition to attempting to transfer management of existing oil facilities (well heads, refineries, pipelines, and shipping) to multinational corporations, he also set about creating an oil-policy framework, unique in the region, that would allow the major companies to develop the country's proven reserves and even to begin drilling new wells.

All these plans were, however, quickly frustrated, both by the growing Sunni insurgency and by civil resistance. Iraq's oil workers quickly unionized -- even though Bremer extended Saddam's prohibition on unions in state-owned companies -- and effectively resisted the transfer of management duties to foreign companies. In one noteworthy moment, the oil workers actually refused to take orders from Bechtel officials in the oil hub of Basra, thus preserving their own jobs as well as the right of the Iraqi state-owned Southern Oil Company to continue to control the operation in that region. Bechtel's management contract was subsequently voided.

At the same time, the growing insurgency, acting on a general Iraqi understanding that a major goal of the occupation was to "steal" Iraqi oil, systematically began to attack the oil pipelines that traveled through the Sunni areas of the country. Within a few months, all oil exports in the northern part of Iraq were interrupted -- and the northern export pipelines have remained generally unusable ever since.

To resistance of various sorts must be added the "contribution" of the major American corporations involved in "reconstructing" Iraq, notably Halliburton and Bechtel. These crony corporations, with close ties to the Bush administration, accepted huge fees to rehabilitate dilapidated or damaged oil facilities. Almost without fail, they chose not to repair existing plants locally or to employ the raft of skilled Iraqi technicians who had used remarkable ingenuity in maintaining these facilities during a dozen years of UN sanctions. Working under cost-plus agreements that guaranteed a fixed profit rate no matter how much an operation ultimately cost, they preferred instead to install expensive new proprietary equipment. Then, in the absence of any outside oversight, they ran up huge expenses and frequently failed to complete their contracts, leaving the oil facilities they were servicing in states of disrepair or partial repair -- and equipped with technology that local technicians could not service.

Meanwhile, the major oil companies refused Bremer's invitation to invest their own money in Iraqi projects, pointing out the obvious -- that the insurgency and the spreading chaos made such investments unwise. In addition, they were well aware that Bremer's regime in Baghdad lacked clear authority to sign contracts with them. This, in turn, meant that their investments might be in jeopardy once a legitimate government took power. When technical sovereignty was finally handed over to an appointed Iraqi government headed by the CIA's favorite Iraqi exile, Iyad Allawi, in June 2004, the new premier embraced Bremer's policy, but to no avail. The international oil companies were no more impressed with his future than they had been with Bremer's. Like Wolfowitz, they knew that Iraq "floats on a sea of oil"; unlike him, they were no dreamers. They weren't willing to risk their capital in the dangerous and legally ambiguous circumstances then prevailing.

As a result, the first two years of Bush administration efforts to "access" Iraqi oil failed -- and dismally so at that. Average production never exceeded the bottom-of-the-barrel 2.5 million barrels Saddam's regime managed to extract on its worst days. By 2006, production had slipped below 2 million barrels per day.

It is difficult to judge how much Bremer's inability to implement the pre-planned oil policy contributed to the Bush administration decision to reverse its plans for Iraqi "democracy" -- which, as Juan Cole has pointed out, involved council-based elections, an electorate restricted to a small elite, and Bremer as "a MacArthur in Baghdad for years" -- and push for an elected Iraqi government. It certainly is true, however, that this change triggered a campaign aimed at the "capture of new and existing oil and gas fields."

As soon as the first elections for a temporary Iraqi government were completed in January 2005 American officials in Iraq began lobbying forcefully for adoption of the very policy that the State Department's pre-invasion Future of Iraq project had drafted. The State Department planners had concluded that Production Sharing Agreements -- a method that granted multinational oil companies effective control of oil fields without transferring permanent ownership to them -- would be the basic instrument through which a future "independent" Iraq would develop new oil fields. Wary by now of being seen as the chief advocate of this policy, which it so desperately wanted in place, the Bush administration concocted a strategy that would enlist the international community in pressuring Iraq to adopt its program.

This was done by making the International Monetary Fund (IMF) a key player in Iraqi oil policy. Through loans in the 1980s and reparations imposed for his invasion of Kuwait in 1990, Saddam had accumulated $120 billion in external debt, the largest per capita debt in the world and a potentially insurmountable obstacle to economic recovery, even in oil-rich Iraq. One option available to the new government was to declare this debt "odious," a technical term in international law referring to debt accumulated by authoritarian rulers for their own personal or political aggrandizement.

Saddam's expansionist war against Iran, his use of public funds to build ostentatious monuments and palaces, his transfer of billions to his personal accounts, and his failure to maintain the infrastructure of the country all were excellent evidence that the debt was indeed odious; and the U.S. claimed as much for almost $40 billion of it, held by 19 industrialized countries known as the Paris Club. Instead of seeking to cancel this debt (and the remaining $80 billion) entirely, however, the Bush administration sent James Baker, former Secretary of State under George H. W. Bush, to the Paris Club to negotiate conditional forgiveness. The resulting agreement immediately forgave $12 billion, but left $28 billion on the books. A second $12 billion would be abrogated when the Iraqi government signed onto "a standard International Monetary Fund program," and a further $8 billion three years later, after the IMF confirmed Iraqi compliance. Even if "successful," almost $8 billion would still be outstanding to the Paris Club -- together with $80 billion not covered by the agreement.

The "standard International Monetary Fund program," not surprisingly, included the now familiar American policies regarding Iraqi oil, as well as the use of Profit Sharing Agreements and a host of other provisions that would open the Iraqi economy as a whole, and the oil sector in particular, to investment by multinational corporations. Among the most punitive of the provisions was a demand for an end to the economic breadbasket that guaranteed all Iraqi families low prices for fuel and food staples. In a country with, by 2005, somewhere between 30 percent and 70 percent unemployment, average wage levels under $100 per month, and escalating inflation, these Saddam-era subsidies meant the difference between basic subsistence and disaster for a large proportion of Iraqis.

Independent journalists Basav Sen and Hope Chu summarized the new agreement: "A move that appears on the surface to be beneficial for Iraq -- debt cancellation -- is being used as a tool of control by the World Bank, the IMF and the wealthy creditor countries. What is more, it is a tool of control that will last long after the withdrawal of U.S. combat forces."

Zaid Al-Ali, an international lawyer working on development issues in Iraq, described the agreement as 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 newly elected Iraqi National Assembly promptly denounced this agreement as "a new crime committed by the creditors who financed Saddam's oppression." This forceful expression reflected the opinions of the Assembly's constituents. After all, 76 percent of Iraqis believed that the main reason for the Bush administration's invasion was "to control Iraqi oil."

As it happened, the protest did not prevent that government from endorsing the deal. Otherwise, it faced the prospect of the U.S. -- which still had operational control over Iraqi finances -- simply appropriating most of its revenues for debt service. When the agreement was announced, interim Oil Minister Thamir Ghadbhan, a British-trained technocrat, publicly protested the provisions eliminating fuel and food subsidies. He was subsequently pushed out.

The U.S. then began pressuring the Iraqi government to draft a definitive petrochemical law that would conform to the IMF guidelines. Given the levels of resistance to the very idea, this work was conducted in secret and took until the end of 2006 to complete. As independent journalist Joshua Holland described the process:

"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'.... The Iraqi Parliament had not yet seen a draft of the oil law as of July [2006], 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.'"

Even the Iraqi Study Group, James Baker's Commission, got into the act at the end of 2006, devoting three pages of its proposal for a partial redeployment of American forces from Iraq to exhorting the Iraqis to enact a petrochemical bill that would place its oil reserves in the hands of the major oil companies.

When the "Draft Hydrocarbon Law" was finally delivered to the Iraqi Parliament on February 18, 2007, key provisions had already been leaked and immediately denounced by the full spectrum of the Iraqi opposition. Taking turns registering dismay were the majority of the Parliament, a wide range of government officials, the leadership of major Sunni political parties, the union of oil workers, the Sadrists -- the most powerful Shia grouping -- and the visible leadership of the insurgency.

All this led to many changes in the law, including the removal of all mention of either privatization or Production Sharing Contracts, which would have given multinational oil companies 15-25 years of basically unregulated operational control over Iraqi oil facilities. The amended version in no way excluded the use of PSAs, but it removed the explosive designation from the actual wording of the law.

1953 Iraq oil infrastructure (Iraq Directorate-General of Propaganda, Baghdad, 1953)

It is worth reviewing the logic of PSAs to understand why the U.S. was so determined to make them a part of the law, and why many Iraqis were so ferociously opposed.

Production sharing agreements are generally applied in circumstances where there is a strong possibility that oil exploration will be extremely costly or even fail, and/or where extraction is likely to prove prohibitively expensive. To offset huge and risky investments, the contracting company is guaranteed a proportion of the profits, if and when oil is extracted and sold. In the most common of these agreements, the proportion remains very high until all development costs are amortized, allowing the investing company to recoup its investment expenditures (if oil is found), and then to be rewarded with a larger-than-normal profit margin for the remainder of the contract which, in the Iraqi case, could extend for up to 25 years.

This is perhaps a reasonably fair, or at least necessary, bargain for a country which cannot generate sufficient investment capital on its own, where exploration is difficult (perhaps underwater or deep underground), where the actual reserves may prove small, and/or where ongoing costs of extraction are very high.

None of these conditions apply in Iraq: huge reservoirs of easily accessible oil are already proven to exist, with more equally accessible fields likely to be discovered with little expense. This is why none of Iraq's neighbors utilize PSAs. Saudi Arabia, Kuwait, Iran, and the United Arab Emirates all pay the multinationals a fixed rate to explore and develop their fields; and all of the profits become state revenues.

The advocates of PSAs in Iraq justify their use by arguing that $20 billion would be needed to develop the Iraqi fields fully and that favorable PSAs are the only way to attract such heavy doses of finance capital under the current highly dangerous circumstances. This assertion seems, however, to be little more than a smokescreen. No major oil companies are willing to invest in Iraq now, no matter how sweet the deal. If order is restored, on the other hand, Iraq would have no trouble attracting vast amounts of finance capital to develop reserves that could well be worth in excess of $10 trillion and hence would have no need whatsoever for PSAs.

Based on leaked information, journalists reported that the PSAs envisioned by the Iraqi petrochemical law contained extremely favorable provisions for the oil companies, in which they would be entitled to 70 percent of profits until development expenses were amortized and 20 percent afterwards. This would have guaranteed them at least twice the typical profit margin over the long run and many times that figure during the initial years.

There are other elements in the law (and the possible PSA contracts) that have also roused resistance inside Iraq. Among the most controversial:

Insofar as PSAs or their legal equivalent were enacted, Iraq would lose control over what levels of oil the country produced with the potential to substantially weaken the grip of OPEC on the oil market.

The law would allow the oil companies to fully repatriate all profits from oil sales, almost insuring that the proceeds would not be reinvested in the Iraqi economy.

The Iraqi government would not have control over oil company operations inside Iraq. Any disputes would be referred instead to pro-industry international arbitration panels.

No contracts would be public documents.

Contacting companies would not be obliged to hire Iraqi workers, and could pursue the current policy of employing American technicians and South Asian manual laborers.

Several African countries with vast mineral riches have been subjected to these sorts of conditions, with large multinational companies extracting both minerals and profits while returning only a tiny fraction of the proceeds to the local population. As the resources are taken out of the ground and the country, the local population actually becomes poorer, while the potential for future prosperity is drained.

The draft petrochemical law, if enacted and implemented, could ensure that Iraq would remain in a state of neoliberal poverty in perpetuity, even if order did return to the country.

The petrochemical law is hardly assured of successful passage, and -- even if passed -- is in no way assured of successful implementation. Resistance to it, spread as it is throughout Iraqi society, has already shown itself to be a formidable opponent to the dwindling power of the American occupation.

The Parliament itself may be the first line of defense. It challenged the original IMF agreement and has refused to consider the bill for two months, already missing a March deadline for passage that American politicians of both parties had pronounced an important "benchmark" by which to judge the viability of Prime Minister Nouri al-Maliki's government.

In addition, the government officials responsible for administering the oil industry could prove formidable opponents. Rafiq Latta, a London-based oil analyst, told Nation reporter Christian Parenti, "The whole culture of the ministry opposes [the law].... Those guys ran the industry very well all through the years of sanctions. It was an impressive job, and they take pride in 'their' oil."

Perhaps most formidable of all is the Federation of Oil Unions, with 26,000 members and allies throughout organized labor. The oil workers overturned contracts in 2003 and 2004 that would have placed substantial oil facilities under multinational corporate control; and they initiated a vigorous campaign against the U.S. sponsored oil program as early as June 2005 -- calling a conference to oppose privatization attended by "workers, academics, and international civil-society groups." In January 2006, they convened a convention composed of all major Iraqi union groups in Amman, Jordan, which issued a manifesto opposing the entire neo-liberal U.S. program for Iraq, including any compromise on national control of oil production.

At a second Amman labor meeting in December of 2006, the Federation of Oil Unions announced its opposition to the pending law even before it was released. Iraq's trade unions, speaking in a single voice, declared that:

"Iraqi public opinion strongly opposes the handing of authority and control over the oil to foreign companies, that aim to make big profits at the expense of the people. They aim to rob Iraq's national wealth by virtue of unfair, long term oil contracts that undermine the sovereignty of the State and the dignity of the Iraqi people."

When the bill was made public, oil union president Hassan Jumaa denounced it before yet another protest meeting, stating:

"History will not forgive those who play recklessly with our wealth... We consider the new law unbalanced and incoherent with the hopes of those who work in the oil industry. It has been drafted in a great rush in harsh circumstances."

He then called on the government to consult Iraqi oil experts (who had not participated in drafting the law) and "ask their opinion before sinking Iraq into an ocean of dark injustice."

If the oil workers and their union allies decide to organize protests or strikes, they are likely to have the Iraqi public on their side. Fully three-quarters of Iraqis believe that the United States invaded in order to gain control of Iraqi oil, and most observers believe they will surely agree with the oil workers that this law is a vehicle for that control. Even Iyad Allawi has now publicly taken a stand opposing it, perhaps the best indication that opposition will be virtually unanimous.

Finally -- and no small matter -- the armed resistance is also against the oil law. The Sunni insurgency underscored its opposition by assassinating Vice President Adel Abdul Mahdi, a major advocate of the pending law, on the day the bill was made public. The significance of the opposition of the Sunni insurgency is amplified by the stance of the Sadrists, the most rebellious segment of the Shia majority. Sadr spokesman Sheikh Gahaith Al Temimi warned journalist Christian Parenti that while the Sadrists would "welcome" foreign investment in oil, they would do so only "under certain conditions. We want our oil to be developed, not stolen. If a bad law were to be passed, all people of Iraq would resist it."

It seems clear that what the oil law has the power to do is substantially escalate the already unmanageable conflict in Iraq. Active opposition by the Parliament alone, or by the unions alone, or by the Sunni insurgency alone, or by the Sadrists alone might be sufficient to defeat or disable the law. The possibility that such disparate groups might find unity around this issue, mobilizing both the government bureaucracy and overwhelming public opinion to their cause, holds a much greater threat: the possibility of creating a unified force that might push beyond the oil law to a more general opposition to the American occupation.

Like so many American initiatives in Iraq, the oil law, even if passed, might never be worth more than the paper it will be printed on. The likelihood that any future Iraqi government which takes on a nationalist mantel will consider such an agreement in any way binding is nil. One day in perhaps the not so distant future, that "law," even if briefly the law of the land, is likely to find itself in the dustbin of history, along with Saddam's various oil deals. As a result, the Bush administration's "capture of new and existing oil and gas fields" is likely to end as a predictable fiasco.

2003 Iraq oil infrastructure (Map: CIA)