Monday, February 8, 2010

The Iraqi Oil Conundrum

The Iraqi Oil Conundrum

Energy and Power in the Middle East

By Michael Schwartz

February 2, 2010


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



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 His email

address is


Copyright 2010 Michael Schwartz


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