Pulling an oil coup


Tuesday, January 16
It's been mostly unnoticed in the uproar over President Bush's decision to send more U.S. troops into Iraq, but the Iraq government is about to hand over a large chunk of its oil profits to Western oil companies in exchange for investment in new oil infrastructure.

The London newspaper The Independent reported last week that the Iraqi government is set to push through a law that would give BP and Shell in Britain and ExxonMobil and ChevronTexaco in the United States the right to sign contracts of up to 30 years to extract Iraq's oil.

This is known as a "production-sharing agreement." The host country retains legal ownership of the oil, but gives a big share of the profits to the international companies which invest in the operation of the oil fields.

This arrangement is the norm in most developing nations, but would be a first in the Middle East. By contrast, Saudi Arabia, Iran and most of the members of the Organization of Petroleum Exporting Countries (OPEC) tightly control their oil industries through state-owned companies.

An American consulting company, BearingPoint (formerly KMPG Consulting) was hired by the U.S. government to help the Iraqi Oil Ministry draw up this plan.

BearingPoint received a $240 million contract for its work in Iraq. Not surprisingly, the company was also the biggest contributor of any Iraq contractor to the 2000 and 2004 presidential campaigns of George W. Bush, giving a combined amount of $117,000. It also spent $1 million for lobbying activities in 2005 and distributed $120,000 to congressional candidates and campaign groups in the 2006 mid-term election.

So why are the Iraqis doing this? Why are they throwing open the doors to the third-largest oil reserve in the world?

In the run up to the March 2003 invasion, we were told that the reconstruction of Iraq would be paid for by that country's oil revenues. Since the U.S. invasion, oil production has dropped off dramatically, from 3.5 million barrels a day before 2003 to about 2 million today.

The combination of years of economic sanctions, two major wars and continued sabotage by insurgents has left the Iraqi oil industry unable to provide for its own needs, let alone export oil to the rest of the world.

Considering that 70 percent of Iraq's economy depends on oil revenues, the Kurds, Shiites and Sunnis are all fighting for the right to control the oil. Only the United States and Britain apparently have the leverage to pull off such a deal.

One could say the terms being offered to the oil companies are generous, given the chaos in Iraq. It's estimated that up to $150 billion will be needed over the next six years to increase Iraq's oil production to 6 million barrels a day. While that initial investment is being recovered, the oil companies will be getting 60-70 percent of the profits. After the initial costs are recouped, the companies would get 20 percent of the profit. This is roughly double the payout compared to similar production-sharing agreements.

If this agreement is signed, Iraq would be locked into a production deal for the next 30 years. Access to the vast state-owned oil reserves would be given to the big oil companies, with little benefit in return for the average Iraqi.

Although the Bush administration has vehemently denied it, a big reason why Iraq was invaded was to gain control of its oil reserves. If Iraqis see their wealth being carved up to benefit foreigners, it will further inflame the insurgency and defeat the supposed rationale for President Bush to send more troops there.

Back in 1999, Vice President Dick Cheney -- then president of Halliburton, the oil production giant -- gave a speech to the American Petroleum Institute warning that oil would become increasingly scarce in the coming years. Production was decreasing by 3 percent a year, while demand was increasing by 2 percent a year.

Cheney said that the world needed to produce another 50 million barrels a day. "So where is this oil going to come from?" he asked. The Middle East was "where the prize ultimately lies" but he said that "governments and national oil companies" controlled most of the "assets."

Cheney's predictions for demand and production proved to be conservative, but his solution to the problem was unmistakably clear. The United States needed to gain control over as much Middle Eastern oil as possible, in order to maintain its access to cheap petroleum. That's why Iraq was such a foreign policy priority for the Bush administration from its first day in power. And if the Iraqis sign this production agreement into law, the ultimate goal of our nation's invasion of Iraq will be achieved.


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