Oil, Neo-Liberalism, and Sectarianism

Some analysts estimate that two-thirds of Iraq’s oil would be prey to privatization, but one clause may allow almost every drop of Iraq’s oil to be controlled by transnationals. Article 8 of the draft demands the “speedy and efficient development of the fields discovered but partially or entirely not yet developed” and allows “collaboration with reputable oil companies.” 

Depending upon one’s agenda, any field can be considered “partially developed.” This was the view of exiled Iraqis organized under the U.S. State Department’s “Future of Iraq Project.” Designed to create the blueprint for a new Iraq, this body included participation from the CIA, National Security Council, Defense Department, Joint Chiefs of Staff, and Dick Cheney’s office. Its “Oil and Energy Working Group” issued a report in April 2003 that called for a new oil law upholding the tenets of privatization, such as Production Sharing Agreements, ending the state’s monopoly over production and welcoming international oil companies. The report also put forth “bold conjectures” on Iraq’s oil potential, arguing that it was woefully inadequate and could be increased ninefold up to 21.6 million barrels a day—twice the output of Saudi Arabia. This would lead to a conclusion that none of Iraq’s oilfields are fully developed, allowing oil companies into any area. 

Privatizing Iraq’s oil would meet another U.S. goal. It wants a source of non-OPEC oil to come to international markets, breaking the cartel’s power over pricing. But the Bush administration wants Iraq’s federal government to control the oil so the majors can get easy and undisputed access. A breakup of Iraq would lead to legal disputes, an intensified civil war, and possibly a regional war that could prevent access to oil for years. 

The Financial Times describes one nightmare scenario: “A separate Shia entity could encourage other Shia minorities to demand their own autonomy and firmly put southern Iraq under Iranian influence. A Kurdish entity, meanwhile, could provoke intervention from Turkey, afraid of the impact on its own Kurdish minority. A Sunni region may well be controlled by extremist Islamists, inviting intervention from Sunni Arab states.” 

Ironically then, the one thing holding Iraq together may be the White House’s greed for black gold. This hasn’t stopped the two main Kurdish parties from trying to form an autonomous region in the north and Shia parties doing the same in the south. Both these regions contain the vast majority of Iraq’s known reserves, which these “statelets” would need to survive. The two Kurdish parties—the Kurdistan Democratic Party (KDP) and the Patriotic Union of Kurdistan (PUK)—and the main Shia party, the Supreme Council for the Islamic Revolution in Iraq (SCIRI), are nominally allied with the United States, but they are pursuing their own agendas in pushing for autonomous regions. 

Combine all these factors and the result is an oil law that is a mess. Various provisions mandate the privatization of Iraq’s oil reserves and industry, which would benefit the majors, but which government entity controls the fields, revenues, production, and contracting is already in dispute. The draft tries to walk a line between maintaining federal control and granting enormous powers to the regions. 

U.S. and Iraqi officials have tried to put an upbeat spin on the draft. Prime Minister Nouri al-Maliki said it will provide a “solid base for unity of all Iraqis,” while the White House claimed it “will be a model for cooperation in the country.” It’s more likely that the exact opposite will happen.  

Fueling Sectarianism 

T he legislation is both a product of the sectarianism that the United States fomented in Iraq and an ongoing cause of it. The oil law is based on the constitution, which hardened the sectarian lines by allowing for provinces to form “autonomous regions.” The draft was delayed for months because the Kurdistan Regional Government (KRG) demanded the power to negotiate its own contracts. The KRG is trying to form its own state in three northern provinces and annex the nearby oil-rich city of Kirkuk to it. 

Kirkuk, which straddles 10 billion barrels of proven reserves, is where the insurgency, sectarian wars, and oil conflict all coincide. Production in the area has been crippled as insurgents have bombed pipelines, pumping stations, and refineries. Kirkuk residents are scheduled to vote in December 2007 on whether to join the Kurdish region. Over the last four years Kurdish militias have been evicting Arabs who moved there under Saddam Hussein’s forced Arabization policy while moving tens of thousands of displaced Kurds into the city. It’s believed that the city now has a Kurdish majority that will vote to join the KRG. An oil-rich Kirkuk would give the Kurdish parties an economic base to form their own state. But Sunni Arab resistance fighters are active in the region and the Shia-based Mahdi Army has also moved in. Along with a mix of Kurds, Arabs, and Turkmen in the city, Kirkuk is ripe for an explosion. 

A Kurdish state could also ignite a regional war. Turkey fears it would spark a renewed separatist movement among its own Kurds, which the military has repressed brutally for decades. The oil legislation has only added to the tensions. Days after the draft’s passage was announced, Turkish Prime Minister Recep Tayyip Erdoðan warned that claims by Kurds “to rights over the oil rich northern Iraqi city of Kirkuk…would pave the way for more conflict in Iraq.” 

David Phillips, author of Losing Iraq: Inside the Postwar Reconstruction Fiasco , observes that, “If the United States had to choose between Turkey and the Kurds, it would side with Turkey every time.” Short of a full-scale invasion, however, neither one is in a position to stop the Kurds’ methodical march to independence. The Kurds are not intending to proclaim an independent state any time soon. Their goal is to assume the powers and economic resources necessary to achieve complete autonomy. 

Kurdistan Rising 

W hen news broke of the draft’s approval, the Kurds made it clear that they would not cede one sliver of control over oil in the region. The KRG posted a long statement on its website on February 26, 2007 from “Dr. Ashti Hawrami, the KRG Minister for Natural Resources,” explaining the agreement. He said: “The Kurdistan Region will voluntarily share some of its Constitutional powers to manage petroleum exploration and development in Kurdistan with the Federal Government…. The Kurdistan Regional Government will permit an independent panel of experts to review the KRG’s petroleum contracts against certain agreed commercial criteria. The KRG will also voluntarily pool all of the petroleum revenues to which it is entitled with all the other regions and governorates.” 

The talk of “voluntarily” and “permit” shows that the KRG intends to exert complete control over exploration, development, contracting, and revenues. This is a legacy of the constitutional debacle in 2005, which allowed for the formation of regions and enshrined ambiguous wording over federal and regional powers in general and natural resources in specific. Under the constitution, “Oil and gas are owned by all the people of Iraq in all the regions and governorates.” According to a paper written by Tariq Shafiq, the Iraqi oil technocrat who helped write the draft, the KRG position is “based on a radical interpretation” of the constitution, “which categorizes oil and gas in Kurdistan as the property of the people of Kurdistan and not as an undivided asset of the whole Iraqi nation.” 

The KRG has already signed a handful of deals with small oil firms willing to enter the volatile region. These deals are the notorious Production Sharing Agreements (PSAs) that involve large profit margins for the companies involved and the KRG is even more generous. Here, then, is an example of how sectarianism and neo-liberalism coincide. The KRG is ostensibly trying to gain control of oil reserves to fund an independent state, but it’s giving away the store to oil companies. Oil deals are calculated using an “internal rate of return” with more than 12 percent considered to be a profitable venture. The KRG, according to Tariq Shafiq, signed contracts with “windfall profits well above the norm” that involve return rates of 60-100 percent. (These contracts have been declared invalid by Baghdad, but they will probably be reworked to be more in line with the still profitable industry standards.) Such exorbitant profits call into question whether the Kurds would ever see any money, but then again the KRG’s rule has been marked by rampant corruption, cronyism, and economic mismanagement. 

The situation is little better in the south, which contains 60 percent of Iraq’s known reserves. Last October Shia parties led by SCIRI forced through a bill that set the procedures for autonomous regions as early as 2008. Yet again, this added to the sectarian divisions. The Washington Post noted at the time, “Sunnis vehemently oppose such a division, which would leave them with an area in central Iraq that lacks the vast oil wealth of the north and south.” 

Resistance has been fierce, however. The overriding reason Western oil companies have not entered Iraq is because of the insurgency, both in terms of direct attacks on oil workers and infrastructure and the resulting power vacuum that has been filled by criminal networks engaged in plundering Iraq’s oil. Issam Al Chalabi, who served as Iraq’s oil minister from 1987 to 1990, told UPI that no exploration could take place because “Seismic crews simply cannot go outside. They will be under constant attack, not only by saboteurs, but by militias, by mafias, by gangsters, by thieves.” 

The resistance has also exacted a heavy toll on oil workers, with 289 of them dying in attacks last year. There were nearly 100 attacks on the oil infrastructure recorded last year. Since almost the beginning of the occupation, resistance groups have knocked more than 90 percent of production in northern fields offline through repeated bombings of pipelines and pumping stations. The number of attacks may be far higher. Iraq’s oil minister admitted in January that during one recent six-day period “oil pipelines were the target of thirty attacks and attempts at sabotage.” 

The oil workers are caught between a thuggish government, a brutal occupation, and a resistance that borders on nihilistic, but they are still mobilizing against the law. According to the Independent (UK), a statement released by oil workers meeting in Jordan vowed, “The Iraqi people refuse to allow the future of their oil to be decided behind closed doors. The occupier seeks and wishes to secure...energy resources at a time when the Iraqi people are seeking to determine their own future while still under conditions of occupation.” 

Hassan Jum’ah Awwad Al-Asadi, head of Iraq’s Federation of Oil Unions, told Time Magazine that his 23,000member union opposes the draft. “We want a new, different law, which will be in the interests of Iraqis. If there is no solution we can stop production, stop exports.” Asadi was also reported to have told union members, “We strongly warn all the foreign companies and foreign capital in the form of American companies against coming into our lands under the guise of production-sharing agreements.” 

Profit Boom 

I n January the Independent reported that it had “obtained a copy of an early draft, which was circulated to oil companies in July 2006.” The proposed law would be a bonanza for the majors. According to the draft, “While the costs are being recovered, companies will be able to recoup 60 to 70 percent of revenue; 40 percent is more usual.” The majors could thus receive nearly twice as much revenue during the cost-recovery phase as normal and in general they use all sorts of accounting chicanery to deny revenues to the host country. Iraq’s draft law also allows for a 20 percent profit rate once costs have been recouped, as opposed to a 10 percent norm for PSAs. 

Of Iraq’s 80 known oilfields, only 17, representing 40 billion barrels, are pumping oil. Whether the majors get access to these fields depends on how the Iraqi government determines whether they are “partially developed.” Nonetheless, the majors would be the big winners of the remaining 70 billion barrels in known reserves plus all the undiscovered fields. They would gain control through production sharing agreements, or PSAs. Many analysts are critical of PSAs, which grant generous terms to oil companies to develop new fields. One analyst with the International Energy Agency estimated only 12 percent of the world’s reserves are subject to such agreements. 

The Prize 

G etting access to Iraq’s oil would be the prize of the century for the majors—at least 10 percent of global reserves and perhaps one-quarter if predictions of undiscovered oil bear out. Before the U.S. invasion, some oil companies were licking their chops. In February 2003 the Financial Times reported that the “unusually blunt” chair of ConocoPhillips said about Iraq, “We know where the best reserves are [and] we covet the opportunity to get those some day.” 

The amount of profit depends on the specifics of Iraq’s oil law. Muttitt offered some guidance in Crude Designs . Using “conservative assumptions,” he estimated that Iraq could lose up to $194 billion over 30 years from just “12 of Iraq’s oilfields that have been listed as priorities for investment under production sharing agreements.” These numbers were based on oil at $40 a barrel. With a barrel of oil averaging more than $60 in the past year, this could mean more than $300 billion in profits for the majors from the 12 Iraqi oilfields alone. 

In mid-February a new version of the Iraq oil law was published by Iraqi bloggers. A complicated series of articles, it will open the door to massive privatization. In line with the Bush administration’s agenda, the draft appears to leave national control over oil while giving regional entities all sorts of powers over the central oil authorities. The new law would strip the federal government of power because much of the decision-making and oil revenue would devolve to regional and provincial entities. 

Regional and provincial entities are given all sorts of rights and control of “discovered but undeveloped fields,” which comprise the majority of Iraq’s proven reserves. Regions would also be able to negotiate their own contracts and then have votes on the body that can reject those contracts, thus giving them greater leeway to move away from central control. 

The law also severely limits the ability of the Iraqi National Oil Company (INOC)—the state-owned oil company—to engage in the development of anything other than already-producing fields. The draft law mandates that INOC set up subsidiaries that are given guaranteed revenue and profit streams as well as seats on its board. This appears to be a maneuver to have a national oil company in place, but then hollow it out. 

In a series of clauses, the draft opens the door to representatives of international oil companies taking part in the “negotiation and rights teams” as well as assessing the contracts once written. Many articles demand “competition.” One clause states that Iraq “shall aim at achieving variety among oil companies and operators” and consider “using consortia of selected companies, particularly in large fields.” These and other clauses make clear that there is no way to follow the new oil law other than by allowing in large oil companies. The oil companies are also allowed to “transfer any net profits from petroleum operations to outside Iraq.”  

The law is even written with language demanding haste in developing regional fields, as if there was a sense that the oil companies must be allowed to get access to oil before Iraq oil implodes. Another article mandates that in the case of disputes between Iraq and foreign oil companies, Iraq subject itself to arbitration. According to Platform, a nonprofit that is critical of privatizing Iraq’s oil, this would result in “a secretive and remote international arbitration tribunal—overriding domestic law.”  

Neither are there any guarantees for state participation. The Iraqi National Oil Company—a state-owned oil company—is only allowed to participate in development of “discovered but undeveloped fields,” and it must compete against other companies for the rights to exploration and production in “new fields.” 

Long-Time Plotting 

T he Bush administration’s thirst for Iraq’s oil goes back a long way. In 2004 former Treasury Secretary Paul O’Neill revealed to “60 Minutes” that barely ten days after Bush was inaugurated, invading and occupying Iraq was the top item in White House and National Security Council meetings. “From the very first instance, it was about Iraq. It was about what we can do to change this regime,” O’Neill claimed. 

Weeks later, in February 2001, Dick Cheney’s Energy Task Force began meeting with Exxon Mobil, BP, Conoco, Shell, and other majors. The task force was supposedly drawing up a national energy policy, but at the time, Cheney was poring over a map of “Iraqi oilfields, pipelines, refineries, and terminals” and charts detailing “foreign suitors” for Iraq’s abundant oil and gas reserves. It’s not known what was being discussed between the task force and the oil companies, but it probably wasn’t solar power. 

Little came of this until September 11. Then the Bush administration swung into action almost overnight. On September 13 Donald Rumsfeld ordered Army planners “to sketch a plan to seize and hold Iraq’s southern oilfields,” according to Michael Gordon and General Bernard E. Trainor, authors of Cobra II: The Inside Story of the Invasion and Occupation of Iraq . 

In April 2003 the Future of Iraq Project recommended privatizing Iraq’s national oil industry. It also suggested issuing “vouchers to all Iraqi citizens” and proposed PSAs as the catch-all solution to Iraq’s limited oil production, social ills, and revenue shortfalls. 

Gaining access to oil has been slowed by the lack of a legal framework. Once a permanent Iraqi government was seated in June 2006, a new oil law was the top priority for the White House. Bush visited Iraq days after the new government took power. According to a June 15 report from Platt’s Oilgram News , “Bush said energy in Iraq was a central topic of discussions during his meeting earlier this week with Iraqi Prime Minister Nuri Kamal al-Maliki.” Bush also announced that he was dispatching Secretary of Energy Samuel Bodman to Iraq. Bodman said “he would bring technical experts from the Department of Energy to help the Iraqis develop” a new hydrocarbon law. 

The following month Bodman delivered a message to Iraq’s oil minister, “from senior U.S. oil executives.” The newsletter Inside Energy reported the message was “We are interested…. There are a lot of reserves there, but we cannot think about investing.” Bodman added that the executives told him they wanted “a more secure environment and the establishment of a hydrocarbon law. Both are required. Both are necessary.” 

According to Muttitt, the Iraqi oil legislation has been made available to outside groups, but not to the Iraqi public. Muttitt told the Independent , “The draft went to the U.S. government and major oil companies in July and to the International Monetary Fund in September. Last month [December] I met a group of 20 Iraqi MPs in Jordan and I asked them how many had seen the legislation. Only one had.” 

The struggle over Iraq’s oil is about who it is for. For the Bush administration, the oil would serve as a profit stream for Western capital. It appears that many in the Iraqi government, who stay in power only with U.S. force behind them, agree as well. But like the grand plans to privatize Iraq’s economy four years ago, it may remain a pipedream. The armed resistance has shown that chaos is the only constant and it will probably be a long time before anyone gets their hands on Iraq’s oil.

A.K. Gupta is an editor at the Indypendent newspaper in New York.