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Originally Published: 1/17/2007

THE IRAQ WAR: IT’S ALL ABOUT THE OIL

By The Issue Wonk

 

In a survey, the Iraqi population was asked to choose three reasons why the United States invaded Iraq. 76% of those surveyed gave as their first choice “to control Iraqi oil.”1 The Iraqi oil reserves are the 3rd largest in the world, with an estimated 115 billion barrels waiting to be extracted.2 The Monthly Review reported that, in the U.S. “the ‘blood for oil’ explanation for the war is regularly scorned by the powers that be, including the corporate media. However, there is no way of getting around the fact that nearly all questions regarding Iraq return in one way or another to oil.”3 President Bush declared, “The oil belongs to the Iraqi people. It’s their asset.”3 However, “Iraq’s oil reserves were conspicuously excluded from the sweeping privatization of the economy introduced by the U.S. proconsul Paul Bremer . . . [T]he United States vowed to the entire world that all decisions on Iraq’s oil would be determined by a future democratically elected Iraqi government.”3

 

Colonial Oil Development

 

The issue of privatization is not “who owns the oil in the ground, but who gets the revenue from the oil once it is extracted and who controls its development and exploitation.”3 The Monthly Review3 provides us with a history of oil development:

 

Classical oil imperialism in the early decades of the twentieth century took the form of long-term concessions that the colonial countries and their giant oil companies imposed on the oil-producing countries in the periphery. The corporations of the colonial powers took charge of the development and exploitation of oil fields and got the revenue from the sale of the oil, paying royalties and taxes to the governments of the subject states. By the early 1970s, however, most large oil-producing states in the third world had managed to break away from this system, nationalizing their oil industries. In the nationalized model, which included all major oil producers in the Middle East, the development of the oil fields, the extraction of the oil, and the selling of it were all in the hands of the oil states themselves – although they often entered into various technical agreements with foreign oil companies.

 

With the old model no longer feasible, Western oil companies and their governments concocted a new model, call the Production Sharing Agreement (PSA).

 

Production Sharing Agreements

 

The Iraqi government is currently working on the issue of oil distribution. Since most of the oil is located in the northern (Kurdish) region and in the southern (Shia) region, the minority Sunnis are afraid of being left out of the spoils. But the Iraqi government is near making an agreement that would be a national oil law and would give the government the power to distribute oil revenues to the provinces or regions based on their population.4 Many hope that this agreement will help bring an end to the sectarian fighting. However, the provision for Production Sharing Agreements in the agreement may inflame the fighting.

 

Production Sharing Agreements (PSAs) are “contracts between a multinational oil corporation and a host government in which the corporation provides capital investment in exchange for control over an oilfield and access to a large share of the revenue from it.”5 They are agreements between an oil-rich country and oil developers, usually Western oil companies. They allow a country to retain legal ownership of its oil, but gives a share of profits to the international companies that invest in infrastructure and operation of the wells, pipelines and refineries.“Their introduction [in Iraq] would be a first for a major Middle Eastern oil producer. Saudi Arabia and Iran, the world’s number one and two oil exporters, both tightly control their industries through state-owned companies with no appreciable foreign collaboration, as do most members of the Organization of Petroleum Exporting Countries, OPEC.”2 PSAs are non-existent among major Middle East producers, and only cover about 12% of oil reserves worldwide.3 PSAs also

 

provide political camouflage while embodying the material equivalent of the old concessions regime. The oil states appear to retain control, but both the revenue stream and decisions on the development of oil fields are under the control of the giant oil corporations, which are in a position to reap enormous profits from the extraction and sale of the oil in accord with these agreements. The future actions of oil states are severely constrained under such agreements, since provisions in the PSAs make them immune to the passage of any subsequent legislation that might alter the basic rules. PSAs grant to corporations exclusive rights to exploit oil reserves for decades. Moreover, they allow them to “book” these reserves as assets, increasing the total asset value of their companies.3

 

The draft of the proposed agreement sets out the general terms for the PSA. While the costs are being recovered, companies will be able to recoup 60% to 70% of revenue.2 Another source states that the draft allows for up to 75% of the profits.40% is more usual.2 Once the companies have recouped their costs from developing the oil fields, they will be able to keep 20% of the profits.2 In more stable countries, 10% is the norm.2 (After the Persian Gulf War, the French company Total had a PSA with Saddam Hussein wherein it would take 40% of the profits while recouping its costs and 10% thereafter.2) In addition, there will be no restrictions on the oil companies taking their profits out of the country, and they will not be subject to any tax.2

 

The proposed PSA will give Western oil companies such as BP and Shell in Britain and Exxon and Chevron in the U.S. the right to exploit Iraq’s current weakness and to continue exploiting them for 30 years.2 PSAs of more than 30 years is unusual and more commonly used for “challenging regions.” Iraq is not considered a “challenging region” because it is “one of the cheapest and easiest places in the world to drill for and produce oil. Many fields have already been discovered, and are waiting to be developed.”2 The PSA also threatens Iraqi sovereignty as the draft states that “any disputes with a foreign company must ultimately be settled by international, rather than Iraqi, arbitration.”2

 

Who drafted this thing?

 

Greg Muttitt of Platform, a human rights and environmental group that monitors the oil industry . . . said [it] was drafted with the assistance of BearingPoint, an American consultancy firm hired by the U.S. government, which had a representative working in the American embassy in Baghdad for several months. “Three outside groups have had far more opportunity to scrutinise this legislation than most Iraqis,” said Mr. Muttitt. “The draft went to the U.S. government and major oil companies in July, and to the International Monetary Fund in September. [In December] I met a group of 20 Iraqi MPs in Jordan, and I asked them how many had seen the legislation. Only one had.”2

 

According to the Global Policy Forum:7

 

The use of PSAs in Iraq was proposed by the Future of Iraq project, the U.S. State Department’s planning mechanism, prior to the 2003 invasion. These proposals were subsequently developed by the Coalition Provisional Authority, by the Iraq Interim Government and by the current Transitional Government. The Iraqi Constitution also opens the door to foreign companies, albeit in legally vague terms.  [Emphasis added.]

 

Economic projections show that the oil development PSAs being proposed “will cost Iraq hundreds of billions of dollars in lost revenue, while providing foreign companies with enormous profits.”7

 

Rebuilding the Infrastructure

 

The basic premise of a PSA is that the company takes on the costs of building the infrastructure in exchange for future profits. If it is a speculative venture, this may make sense. But with an oil-rich country such as Iraq, where the extraction and refinement of oil has existed for decades, the venture isn’t speculative at all.

 

One source says that oil accounts for 70% of the Iraq economy2 but another source says it is 95%.6 If oil has been that much of the economy, the infrastructure for currently operating oil fields must be pretty much in place. Therefore, initial outlay for production would probably be limited to repairing the damage done by the war. Indeed, Iraq’s oil minister Hussein al-Shahrastani has said “that it will take about $20 billion to fix Iraq’s equipment well enough to more than double its current output of about 2 million barrels a day, to about 4.5 million barrels in five years’ time.”8 And, as stated above, exploration of yet undeveloped oil fields has already been done. Therefore, a PSA providing for 60%, 70%, or 75% of profits to recoup costs can only be viewed as exploitive.

 

And how much are American taxpayers paying for rebuilding the oil infrastructure? The more we pay for, the less the oil companies will have to pay. Information on reconstruction contracts is sketchy. The U.S. will release some information about who gets how much of a contract but usually doesn’t set forth which contracts are for reconstruction of oil infrastructure and which are for other reconstruction, a distinction I’m sure they don’t want us to know about. However, in 2004 the U.S. Army Corps of Engineers announced that it had awarded 2 contracts, one to Halliburton subsidiary Kellogg Brown & Root (KBR) and one to Parsons, for “restoring the Iraqi oil infrastructure to pre-war production levels.”9 KBR has received a $7 billion contract to rebuild Iraq’s oil infrastructure.2 I couldn’t find how much Parsons was awarded.

 

Perhaps this is why President Bush says that victory is near. It’s how you define “victory.” If “victory” is defined as a windfall for U.S. oil companies, then staying in Iraq and tamping down the fighting until the PSA is in place and the oil infrastructure has been reconstructed is a “victory.” The sooner the people are placated, the sooner the oil companies can get in there and start making a fortune, while the American people pay the tab.

 

Summary

 

So, what has the Iraq War been about? It’s the oil, of course. Prior to the U.S.-led invasion, even under U.N. sanctions, Iraq was producing about 2.5 million barrels of oil a day (mbd). But, as of March 2006, the oil production had only gotten back to 1.362 mbd.10 This reduction in Iraqi oil has led to the record profits for American oil companies.

 

Phase I of the “war profits plan” was based on simple supply and demand economics. Supply of Iraqi oil on the market was cut while demand continued to increase. Oil companies, who purchase oil on the futures market, had purchased OIL prior to the invasion at a low barrel price. When supply was cut they were able to sell at huge profits. ExxonMobil, Chevron, and ConocoPhillips, together, reported profits of $15.7 billion, ‘a nearly 17% increase from the first quarter 2005 profits.’”11 How are these profits to be sustained? If Iraqi oil production increases to its maximum capacity, the increased supply will decreases the prices. And, since the oil companies were forced to buy at the inflated mbd prices of the last 2 years, selling at the decreased prices will mean a loss. How do they keep the profits coming?

 

Phase 2 of the “war profits plan” is the answer. Iraqi oil production will not be at capacity until the infrastructure is rebuilt (by the American taxpayers) and PSAs are in place to allow the Western oil companies to exploit Iraq and its oil and make huge profits which will continue for the next 30 years. If you are still skeptical that this was planned from the beginning, let me remind you that in March, 2001, Vice President Dick Cheney convened an “energy task force.” The information was not available to the public, but a lawsuit by Judicial Watch, a conservative legal group, enabled them to obtain papers used by the task force that were produced by the Commerce Department. The papers included a map of Iraq’s oil fields, terminals, and pipelines as well as a list entitled, “Foreign Suitors of Iraqi Oilfield Contracts.”12

 

I rest my case.

 

__________

 

1  “Iraqi Attitudes:  Survey documents Big Changes.  University of Michigan News Service, June 14, 2006.

 

2  “Blood and Oil:  How the West Will Profit From Iraq’s Most Precious Commodity.  The Independent, January 7, 2007.

 

3  Notes From the Editors.  Monthly Review, Volume 58, No. 7.

 

4  Wong, Edward.  The Struggle for Iraq:  Iraqis Near Deal on Distribution of Oil Revenues.  The New York Times, December 9, 2006, page A1.

 

5  Jacobs, Ron.  Just Sign on the Dotted Line:  Iraqi Oil and Production Sharing Agreements.  Counterpunch, September 19, 2006.

 

6  Fortson, Danny, Murray-Watson, Andrew & Webb, Tim.  Future of Iraq:  The Spoils of War.  How the West Will Make a Killing on Iraqi Oil Riches.  The Independent, January 7, 2007.

 

7  Muttitt, Greg.  Crude Designs:  The Rip-Off of Iraq’s Oil.  Global Policy Forum, November, 2005.

 

8  Walt, Vivienne.  A New Oil Plan for Iraq.  Time, January 11, 2007.

 

9  Army Corps of Engineers.  News Release No. PA-04-03.  U.S. Army Corps of Engineers Awards Contracts for Repair of Iraq’s Oil Infrastructure, January 16, 2004.

 

10  The Saudi Connection.  The Issue Wonk, January 3, 2007.

 

11  The Price of Gas.  The Issue Wonk, May 3, 2006.

 

12 Iraq:  Making a Case for Invasion.  The Issue Wonk, Last updated September 6, 2006.

 

 

© The Issue Wonk, 2007

 

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