The Iraqi Oil Conundrum
Energy and Power in the Middle East
By Michael Schwartz
TomDispatch.com
February 2, 2010
http://www.tomdispatch.com/post/175199/tomgram%3A_michael_schwartz%2C_will_iraq%27s_oil_ever_flow___/#more
How the mighty have fallen. Just a few years ago, an
overconfident Bush administration expected to oust Iraqi
dictator Saddam Hussein, pacify the country, install a
compliant client government, privatize the economy, and
establish Iraq as the political and military
headquarters for a dominating U.S. presence in the
Middle East. These successes were, in turn, expected to
pave the way for ambitious goals, enshrined in the 2001
report of Vice President Dick Cheney's secretive task
force on energy. That report focused on exploiting
Iraq's monstrous, largely untapped energy reserves --
more than any country other than Saudi Arabia and Iran
-- including the quadrupling of Iraq's capacity to pump
oil and the privatization of the production process.
The dream in those distant days was to strip OPEC -- the
cartel consisting of the planet's main petroleum
exporters -- of the power to control the oil supply and
its price on the world market. As a reward for vastly
expanding Iraqi production and freeing its distribution
from OPEC's control, key figures in the Bush
administration imagined that the U.S. could skim off a
small proportion of that increased oil production to
offset the projected $40 billion cost of the invasion
and occupation of the country.
All in a year or two.
Unremitting Ambition Tempered by Political and Military Failure
Almost seven years later, it will come as little
surprise that things turned out to cost a bit more than
expected in Iraq and didn't work out exactly as
imagined. Though the March 2003 invasion quickly ousted
Saddam Hussein, the rest of the Bush administration's
ambitious agenda remains largely unfulfilled.
Instead of quickly pacifying a grateful nation and then
withdrawing all but 30,000-40,000 American troops (which
were to be garrisoned on giant bases far from Iraq's
urban areas), the occupation triggered both Sunni and
Shia insurgencies, while U.S. counterinsurgency
operations led to massive carnage, a sectarian civil
war, the ethnic cleansing of Baghdad, and a humanitarian
crisis that featured hundreds of thousands of deaths,
four million internal and external refugees, and an
unemployment rate that stayed consistently above 50%
with all the attendant hunger, disease, and misery one
would expect.
In the meantime, the government of Shiite Prime Minister
Nouri al-Maliki, fervently supported by the Bush
administration and judged by Transparency International
to be the fifth most corrupt in the world, has morphed
into an ever less reliable client regime. Despite
American diktats and desires, it has managed to
establish cordial political and economic relationships
with Iran, slow the economic privatization process
launched by the neocon administrators sent to Baghdad in
2003, and restored itself as the country's primary
employer. It even seems periodically resistant to its
designated role as a possible long-term host for an
American military strike force in the Middle East.
This resistance was expressed most forcefully when
Maliki leveraged the Bush administration into signing a
status of forces agreement (SOFA) in 2008 that included
a full U.S. military withdrawal by the end of 2011.
Maliki even demanded -- and received -- a promise to
vacate the five massive "enduring" military bases the
Pentagon had constructed -- with their elaborate
facilities, populations that reach into the tens of
thousands, and virtually no Iraqi presence, even among
the thousands of unskilled workers who do the necessary
dirty work to keep these "American towns" running.
Despite such setbacks, the Bush administration did not
abandon the idea that Iraq might remain the future
headquarters for a U.S. presence in the region, nor in
the 2008 presidential election did candidate Barack
Obama. He, in fact, repeatedly insisted that the Iraqi
government should be a strong ally of the U.S. and the
most likely host for a 50,000-strong military force that
would "allow our troops to strike directly at al-Qaeda
wherever it may exist, and demonstrate to international
terrorist organizations that they have not driven us
from the region."
Since entering the Oval Office, Obama has not visibly
wavered in the commitment to establish Iraq as a key
Middle East ally, promising in his State of the Union
Address that the U.S. would "continue to partner with
the Iraqi people" into the indefinite future. In the
same address, however, the president promised that "all
of our troops are coming home," apparently signaling the
abandonment of the Bush administration's military plans.
Secretary of Defense Robert Gates, on the other hand,
has recently voiced a contrary vision, hinting at the
possibility that the Iraqis might be interested in
negotiating a way around the SOFA agreement to allow
U.S. forces to remain in the country after 2011.
Dynamic Paralysis Keeps Iraqi Oil Underground
Iraqi oil, too, has been a focus of Washington's
unremitting ambition tempered by failure. Long before
the cost of the war began to lurch toward the current
Congressional estimate of $700 billion, the idea of
using oil revenues to pay for the invasion had vanished,
as had the idea of quadrupling production capacity
within a few years. The hope of doing so someday,
however, remains alive. Speculation that Iraq's
production could -- in the not too distant future --
exceed that of Saudi Arabia may still represent
Washington's main strategy for postponing future severe
global energy shortages.
Even before the attacks of September 11, 2001, the
secretive energy task force Vice President Cheney headed
was tentatively allocating various oil fields in a
future pacified Iraq to key international oil companies.
Before the March 2003 invasion, the State Department
actually drafted prospective legislation for a post-
Hussein government, which would have transferred the
control of key oil fields to foreign oil giants. Those
companies were then expected to invest the necessary
billions in Iraq's rickety oil industry to boost
production to maximum rates.
Not so long after U.S. troops entered Baghdad, the
administration's proconsul, L. Paul Bremer III, enacted
the State Department legislation by fiat (and in clear
violation of international law, which prohibits
occupying powers from changing fundamental legislation
in the conquered country). Under the banner of de-
Baathification -- the dismantling of Saddam Hussein's
Sunni ruling party -- he also fired oil technicians,
engineers, and administrators, leaving behind a skeleton
crew of Iraqis to manage existing production (and await
the arrival of the oil giants with all their expertise).
Within a short time, many of these pariah professionals
had fled to other countries where their skills were
valued, creating a brain drain that, for a time, nearly
incapacitated the Iraqi oil industry. Bremer then
appointed a group of international oil consultants and
business executives to a newly created (and UN-
sanctioned) Development Fund of Iraq (DFI), which was to
oversee all of the country's oil revenues.
The remaining Iraqi administrators, technicians, and
workers soon mounted a remarkably determined and
effective multi-front resistance to Bremer's effort.
They were aided in this by a growing insurgency.
In one dramatic episode, Bremer announced the pending
transfer of the control of the southern port of Basra
(which then handled 80% of the country's oil exports)
from a state-run enterprise to KBR, then a subsidiary of
Halliburton, the company Vice President Cheney had once
headed. Anticipating that their own jobs would soon
disappear in a sea of imported labor, the oil workers
immediately struck. KBR quickly withdrew and Bremer
abandoned the effort.
In other Bremer initiatives, foreign energy and
construction firms did take charge of development,
repair, and operations in Iraq's main oil fields. The
results were rarely adequate and often destructive.
Contracts for infrastructure repair or renewal were
often botched or left incomplete, as international
companies ripped out usable or repairable facilities
that involved technology alien to them, only to install
ultimately incompatible equipment. In one instance, a
$5 million pipeline repair became an $80 million
"modernization" project that foundered on intractable
engineering issues and, three years later, was left
incomplete. In more than a few instances, local
communities sabotaged such projects, either because they
employed foreign workers and technicians instead of
Iraqis, or because they were designed to deprive the
locals of what they considered their "fair share" of oil
revenues.
In the first two years of the occupation, there were
more than 200 attacks on oil and gas pipelines. By
2007, 600 acts of sabotage against pipelines and
facilities had been recorded.
After an initial flurry of interest, international oil
companies sized up the dangers and politely refused
Bremer's invitation to risk billions of dollars on Iraqi
energy investments.
After this initial failure, the Bush administration
looked for a new strategy to forward its oil ambitions.
In late 2004, with Bremer out of the picture, Washington
brokered a deal between U.S.-sponsored Iraqi Prime
Minister Iyad Allawi and the International Monetary
Fund. European countries promised to forgive a quarter
of the debts accumulated by Saddam Hussein, and the
Iraqis promised to implement the U.S. oil plan. But
this worked no better than Bremer's effort. Continued
sabotage by insurgents, resistance by Iraqi technicians
and workers, and the corrupt ineptitude of the
contracting companies made progress impossible. The
international oil companies continued to stay away.
In 2007, under direct U.S. pressure, virtually the same
law was reluctantly endorsed by Prime Minister Maliki
and forwarded to the Iraqi parliament for legislative
consideration. Instead of passing it, the parliament
established itself as a new center of resistance to the
U.S. plan, raising myriad familiar complaints and
repeatedly refusing to bring it to a vote. It lies
dormant to this day.
This stalemate continued unabated through the Obama
administration's first year in office, as illustrated by
a continuing conflict around the pipeline that carries
oil from Iraq to Turkey, a source of about 20% of the
country's oil revenues. During the Bremer
administration, the U.S. had ended the Saddam-era
tradition of allowing local tribes to siphon off a
proportion of the oil passing through their territory.
The insurgents, viewing this as an act of American
theft, undertook systematic sabotage of the pipeline,
and -- despite ferocious U.S. military offensives -- it
remained closed for all but a few days throughout the
next five years.
The pipeline was re-opened in the fall of 2009, when the
Iraqi government restored the Saddam-era custom in
exchange for an end to sabotage. This has been only
partially successful. Shipments have been interrupted by
further pipeline attacks, evidently mounted by
insurgents who believe oil revenues are illegitimately
funding the continuing U.S. occupation. The fragility
of the pipeline's service, even today, is one small sign
of ongoing resistance that could be an obstacle to any
significant increase in oil production until the U.S.
military presence is ended.
The entire six-year saga of American energy dreams,
policies, and pressures in Iraq has so far yielded
little -- no significant increase in Iraq's oil
production, no increase in its future capacity to
produce, and no increase in its energy exports. The
grand ambition of transferring actual control of the oil
industry into the hands of the international oil
companies has proven no less stillborn.
Over the years since the U.S. began its energy campaign,
production has actually languished, sometimes falling as
much as 40% below the pre-invasion levels of an industry
already held together by duct tape and ingenuity. In
the Brookings Institution's latest figures for December
2009, production stood at 2.4 million barrels per day, a
full 100,000 barrels lower than the pre-war daily average.
To make matters worse, the price of oil, which had hit
historic peaks in early 2008, began to decline. By
2009, with the global economy in tatters, oil prices
sank radically and the Iraqi government lacked the
revenues to sustain its existing expenditures, let alone
find money to repair its devastated infrastructure.
As a result, in early 2009, Maliki's government began
actively, even desperately, seeking ways to hike oil
production, even without an oil law in place. That,
after all, was the only possible path for an otherwise
indigent country with failing agriculture in the midst
of a drought of extreme severity to increase the money
available for public projects -- or, of course, even
more private corruption.
The Oil Companies Make Their Move
In January 2009, the government opened a new chapter in
the history of oil production in Iraq when it announced
its intention to allow a roster of several dozen
international oil firms to bid on development contracts
for eight existing oil fields.
The proposed contracts did not, in fact, offer them the
kind of control over development and production that the
Cheney task force had envisioned back in 2001. Instead,
they would be hired to finance, plan, and implement a
vast expansion of the country's production capacity.
After repaying their initial investment, the government
would reward them at a rate of no more than two dollars
for every additional barrel of oil extracted from the
fields they worked on. With oil prices expected to
remain above $70 a barrel, this meant, once initial
costs were repaid, the Iraqi government could expect to
take in more than $60 per barrel, which promised a
resolution to the country's ongoing financial crisis.
The major international oil companies initially rejected
these terms out of hand, demanding instead complete
control over production and payments of approximately
$25 per barrel. This initial resistance began to erode,
however, when the Chinese National Petroleum Corporation
(CNPC), a government-owned operation, induced its
partner, BP, the huge British oil company, to accept
government terms for expanding the Rumaila field near
Basra in southern Iraq to one million barrels a day.
The Chinese company, experts believed, could afford to
accept such meager returns because of Beijing's desire
to establish a long-term energy relationship with Iraq.
This foot-in-the-door contract, China's leaders
evidently hoped, would lead to yet more contracts to
explore Iraq's vast, undeveloped (and possibly as yet
undiscovered) oil reserves.
Perhaps threatened by the possibility that Chinese
companies might accumulate the bulk of the contracts for
Iraq's richest oil fields, leaving other international
firms in the dust, by December a veritable stampede had
begun to bid for contracts. In the end, the major
winners were state-owned firms from Russia, Japan,
Norway, Turkey, South Korea, Angola, and -- of course --
China. The Malaysian national company, Petronas, set a
record by participating with six different partners in
four of the seven new contracts the Maliki government
gave out. Shell and Exxon were the only major oil
companies to participate in winning bids; the others
were outbid by consortia led by state-owned firms.
These results suggest that national oil companies,
unlike their profit-maximizing private competitors, were
more willing to forego immediate windfalls in exchange
for long-term access to Iraqi oil.
On paper, these contracts hold the potential to satisfy
one aspect of Washington's oil hunger, while frustrating
another. If fully implemented, they could collectively
boost Iraqi production from 2.5 million to 8 million
barrels per day in just a few years. They would not,
however, deliver control over production (or the bulk of
the revenues) to foreign companies, so that Iraq and
OPEC could continue, if they wished, to limit
production, keep prices high, and wield power on the world stage.
Nevertheless, the centers of resistance to the original
U.S. oil policies have voiced opposition to these new
contracts. Members of parliament immediately demanded
that all contracts be submitted for their approval,
which they declared would be withheld unless ironclad
protections of Iraqi workers, technicians, and
management were included. Iraq's own state-owned oil
companies demanded guarantees that their technicians,
engineers, and administrators be trained in the new
technologies the foreign companies brought with them,
and given escalating operational control over the fields
as their skills developed.
The powerful Iraqi oil union opposed the contracts
unless they included guarantees that all workers be
recruited from Iraq. Local tribal leaders voiced
opposition unless they guaranteed a full complement of
local workers, and subcontracts for locally based
businesses during the development phase. Then there
were the insurgents, who continued to oppose oil exports
until the U.S. fully withdraws from the country, and
expressed their opposition by the 26 bombing attacks
they've launched on pipelines and oil facilities since
September 2009.
Some of these same groups have successfully blocked
previous oil initiatives. Unless they are satisfied,
they may frustrate the government's latest bid to make
oil gush in Iraq. One warning sign can be seen in the
fate of a contract signed with the CNPC in early 2009
that called for the development of the relatively small
(one billion barrel) Ahdab oil field near the Iranian
border. The language of the original contract met
conditions demanded by local leaders and workers, but
the work, once begun, generated few local jobs and even
fewer local business opportunities. The Chinese instead
brought in foreign workers, following the pattern
established by U.S. companies involved in Iraqi
reconstruction. Eventually, equipment was sabotaged,
work undermined, and the project's viability remains threatened.
The end is not in sight and the outcome still unclear.
Will the vast Iraqi oil reserves be developed and sent
into the hungry world market any time soon? If they
are, who will determine the rate of flow, and so wield
the power this decision-making confers? And once this
ocean of oil is sold, who will receive the potentially
incredible revenues? As with so much else, when it
comes to Iraqi oil, the American war has generated so
many problems and catastrophes -- and so few answers.
A professor of sociology at Stony Brook State
University, Michael Schwartz is the author of War
Without End: The Iraq War in Context (Haymarket Press),
which explains how the militarized geopolitics of oil
led the U.S. to dismantle the Iraqi state and economy
while fueling a sectarian civil war. Schwartz's work on
Iraq has appeared in numerous academic and popular
outlets. He is a regular at TomDispatch.com. His email
address is ms42@optonline.net.
Copyright 2010 Michael Schwartz
