- Sep 30, 2003
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Managing Iraq's Econoccupation
Al Gehad Analysis of proposed Law (Never Passed)
IRAQ: Forbidden fields: Oil groups circle the prize of Iraq's vast reserves
I see members here are of the belief Iraq has completed oil legislation wildly favorable to the US and detrimental to own interests. I also people compalining about a lack of reconstruction in Iraq and why aren't we putting Iraqis to work?. Then we have a thread about the purpose and success of Maliki's recent "surge" in Southern Iraq.
Might be that all these are somewhat inter-related.
First the Oil Legislation has NOT been passed. From what I can tell the "sharing part" is not the problem. The draft agreements so far allocate the oil revenues among the Kurdish, Sunnis and Shia based on polulation. Part of what brought down the coalition needed to pass the oil legislation was the Kurds independantly starting oil development contracts in their area. I.e., who has the power to negotiate the deal?
Another problem is whether to go with PSA's or service contracts with the outside/foreign oil companies. The PSA's appear to have been unfairly characterized as a blatant take-over of Iraq's oil industry by the US (actually there are many different countries in negotiations, not just US companies). The other option is Service Contracts. But depending upon the details, these are very close to PSA's yet may provide the veneer as casting the structure as an Iraqi nationized oil industry. The latter seems preferred by the population. But these agreements with foreign oi companies bring (arguably?) much needed investment funds and expertise.
The Iraqi's have only 27 of 80 discovered fields under production. And much more in oil reserves is expected to be discovered in Iraq, possible enough so that it could surpass Saudi Arabia as having the largest amount of oil reserves. But the oil companies can't come in for exploration etc until the security improves. And this means the security in the South. The Bahgdad area has no oil, security is OK in the Kurdish region.
As far as reconstruction efforts go, the USA has to-date invested about $28 Billion and put about 100,000 Iraqi's to work on reconstruction projects. The Iraqi gov has budgeted $18 billion, yet spent little. Moreover, they have huge cash reserves - $30 billion alone in US banks (according to Carl levin in today's meeting with Patraeus & Crocker). Why are they holding back?
So, I'm left wondering if Maliki's surge in Souther Iraq isn't perhaps just as much about moving oil production forward as showing political strength. Taking control of the Southern section will help encourage the participation of foreign companies/investment/exploration. And that will help him (enormously) politically in the upcoming elections. Looks to me like all the players excepting the parliment are very involved in the oil issue now and making progress. Will progress in the security area put pressure on the parliment to proceed? Until the Southern security issue is resolved, legislation can't really help. Put that piece (security) in place and the major holdup will be in their laps (legislation).
Are the Iraqi's being stingy with their own reconstruction efforts in an effort to horde funds for oil exploration and development/production? Generally the model has been for developing countries to rely on foreign investment to establish their oil industry. Seems sometime thereafter they nationalize the thing and kick-out the foreigners. Iraq is already in the driver's seat, merely because there are very new places for the foreign oil co's to go. Can Iraq get an even better deal if they come to the table with a chunk of money, thus not really needing that of the foreign companies? Would this help reach a concensus of all (Iraqi) parties and help get the legislation finally passed?
Things could be moving quicker than we're led to believe, and much of it might be under the radar screen. If Iraq were open the spigots on their own oil money things may change drastically in a very short period of time.
Fern
(Below are excerpts from the links above0
Al Gehad Analysis of proposed Law (Never Passed)
IRAQ: Forbidden fields: Oil groups circle the prize of Iraq's vast reserves
I see members here are of the belief Iraq has completed oil legislation wildly favorable to the US and detrimental to own interests. I also people compalining about a lack of reconstruction in Iraq and why aren't we putting Iraqis to work?. Then we have a thread about the purpose and success of Maliki's recent "surge" in Southern Iraq.
Might be that all these are somewhat inter-related.
First the Oil Legislation has NOT been passed. From what I can tell the "sharing part" is not the problem. The draft agreements so far allocate the oil revenues among the Kurdish, Sunnis and Shia based on polulation. Part of what brought down the coalition needed to pass the oil legislation was the Kurds independantly starting oil development contracts in their area. I.e., who has the power to negotiate the deal?
Another problem is whether to go with PSA's or service contracts with the outside/foreign oil companies. The PSA's appear to have been unfairly characterized as a blatant take-over of Iraq's oil industry by the US (actually there are many different countries in negotiations, not just US companies). The other option is Service Contracts. But depending upon the details, these are very close to PSA's yet may provide the veneer as casting the structure as an Iraqi nationized oil industry. The latter seems preferred by the population. But these agreements with foreign oi companies bring (arguably?) much needed investment funds and expertise.
The Iraqi's have only 27 of 80 discovered fields under production. And much more in oil reserves is expected to be discovered in Iraq, possible enough so that it could surpass Saudi Arabia as having the largest amount of oil reserves. But the oil companies can't come in for exploration etc until the security improves. And this means the security in the South. The Bahgdad area has no oil, security is OK in the Kurdish region.
As far as reconstruction efforts go, the USA has to-date invested about $28 Billion and put about 100,000 Iraqi's to work on reconstruction projects. The Iraqi gov has budgeted $18 billion, yet spent little. Moreover, they have huge cash reserves - $30 billion alone in US banks (according to Carl levin in today's meeting with Patraeus & Crocker). Why are they holding back?
So, I'm left wondering if Maliki's surge in Souther Iraq isn't perhaps just as much about moving oil production forward as showing political strength. Taking control of the Southern section will help encourage the participation of foreign companies/investment/exploration. And that will help him (enormously) politically in the upcoming elections. Looks to me like all the players excepting the parliment are very involved in the oil issue now and making progress. Will progress in the security area put pressure on the parliment to proceed? Until the Southern security issue is resolved, legislation can't really help. Put that piece (security) in place and the major holdup will be in their laps (legislation).
Are the Iraqi's being stingy with their own reconstruction efforts in an effort to horde funds for oil exploration and development/production? Generally the model has been for developing countries to rely on foreign investment to establish their oil industry. Seems sometime thereafter they nationalize the thing and kick-out the foreigners. Iraq is already in the driver's seat, merely because there are very new places for the foreign oil co's to go. Can Iraq get an even better deal if they come to the table with a chunk of money, thus not really needing that of the foreign companies? Would this help reach a concensus of all (Iraqi) parties and help get the legislation finally passed?
Things could be moving quicker than we're led to believe, and much of it might be under the radar screen. If Iraq were open the spigots on their own oil money things may change drastically in a very short period of time.
Fern
(Below are excerpts from the links above0
Friday 04 April 2008
As violence rises again in Iraq, negotiations to institutionalize US economic dominance continue unabated.
While the battle of Basra raged last week, a series of talks between the Bush administration and the US-backed Maliki government rolled forward. These negotiations may have at least as many implications for Iraq's future as the violence on the ground.
The discussions, ongoing since November, stem from a "Declaration of Principles" agreement signed by the two leaders, aimed at establishing a long-term "friendship" between their countries.
While the portion of the Declaration that suggests a permanent US military presence in Iraq has garnered much attention, the agreement also proposes another goal: to solidify "economic ties" between the two countries and grant the US preferential treatment in trading with Iraq.
As brought to light by last week's oil price surge during the assault on Basra, economic concerns are inextricably linked to the occupation. When it comes to oil, the coming months may be crucial in determining what kind of "friends" the US and Iraq are going to be over the long haul.
A Framework for Occupation
In a House Foreign Affairs Committee hearing last month, State Department Iraq Coordinator David Satterfield revealed the Declaration of Principles proposals have now been divided into a binding Status of Forces Agreement (on military involvement) and a nonbinding Strategic Framework Agreement (on economic and diplomatic relations). Neither would be submitted for the consent of Congress. Though Satterfield emphasized that, being nonbinding, the Strategic Framework would not "tie the hands" of future administrations, it could solidify changes the US has already made to Iraq's economic landscape - and pave the way for increased US control over Iraq's oil in years to come, according to Antonia Juhasz, a fellow at Oil Change International.
"A lot of frameworks for foreign investment were set up under [former Director of Iraq Reconstruction L. Paul] Bremer, and are already in place," Juhasz told Truthout. "A bilateral agreement would lock all that in and also place pressure on the government to pass the domestic oil law, to settle access for foreign companies to Iraq's oil underground."
The "all that" encompasses a host of sweeping reforms: Thanks to Bremer's alterations of Iraqi law during the first year of the US occupation, American companies are now allowed to buy out 100 percent of Iraqi businesses, instead of partnering with them. Bremer's orders also eliminated Iraq's high taxes on corporations, exchanging them for a 15 percent "flat tax." They abolished the practice of giving preference to Iraqi companies - in contracting out reconstruction work, for example - and erased a requirement to hire Iraqi workers.
Where the Oil Flows
The November version of the Bush-Maliki agreement suggested a commitment to "facilitating and encouraging the flow of foreign investments to Iraq, especially American investments, to contribute to the reconstruction and rebuilding of Iraq."
According to James A. Paul, executive director of the Global Policy Forum, the "flow of foreign investments to Iraq" wouldn't manifest as generously as it sounds: The deal would primarily translate into "US/UK oil company control."
Last week's assault on Basra was "part of an effort to defeat the 'nationalists' in Iraq and consolidate a pro-US political regime that will go ahead with the oil deals," Paul told Truthout.
Just before fighting erupted in Basra, the Iraqi presidential council approved the "provincial law," which clears the way for elections - potentially allowing nationalist leaders who oppose US oil interests to come to power. Maliki's Basra attack, says Paul, represents a failed attempt to quash that possibility.
It's not a question of pressure from oil companies, according to Reese Erlich, co-author of "Target Iraq: What the News Media Didn't Tell You." Buying up oil reserves is a strategic move to ensure US energy "security." The corporations become the vehicles for that security.
"It's not like oil companies were pounding on the state house door to invade Iraq," Erlich told Truthout. "Oil companies certainly benefit, but they're not the initiators."
Since the early days of the occupation, the US has never kept its oil execs far from Iraq's oil. The oil fields, as well as the Oil Ministry in Baghdad, were some of the only places American soldiers guarded throughout the initial invasion. Paul notes that US "advisers" presided over the drafting of the latest version of the oil law.
Skirting the Law
According to the pan-Arab newspaper Al-Hayat, simultaneous with the battle of Basra, negotiations were taking place between major oil companies and the Iraqi ministry of oil.
An Oil Ministry official told The Associated Press last week Chevron, Exxon and British Petroleum would soon submit proposals for contracts on specific oil fields - including the Rumaila field near Basra.
Since the oil law has not yet passed, private companies can't obtain long-term contracts on the fields. However, that hasn't stopped them from getting their feet in the door. All it takes is a few powerful, cooperative Iraqis, and, according to Erlich, some of the most prominent are Kurds, who control Iraq's historically highest-producing oil field, near Kirkuk. Disregarding the Parliament's objections, Kurdistan has signed numerous "production sharing agreements" with Western oil companies.
The Maliki administration has also done its share of dodging Parliament's prohibition on international oil investment. Long-term contracts may be off limits, but short-term contracts stop just short of illegal, and Iraq's executive branch is swooping in on that loophole.
"You have the oil minister trying to sign two-year contracts with the oil companies, to demonstrate that the Maliki government is working with oil companies, even if Parliament is not," Juhasz said.
Pushing Back
Parliament is holding its ground. For the past year, the body has systematically rejected drafts of the oil law, which, in any form, would divest the legislature of authority on oil. The 12 fields still controlled by the government would be in the hands of an advisory board, including members of the Maliki administration, representatives of the provinces - and even, probably, representatives of foreign oil companies, according to Juhasz.
Paul points to Parliament's seeming inaction as a genuine act of resistance to the occupation.
"The Parliament has remained steadfastly opposed and, in spite of periodic predictions that parliamentary agreement is 'near,' they have not acted," he said. "There have even been rumors that the companies have offered $5 million to each parliamentarian who votes 'yes,' a rumor that seems to me to be probably based in reality, yet even with such blandishments the Parliament has not acted."
By democratic standards, Parliament has some important backers on its side. A July poll commissioned by a group of human rights organizations showed 63 percent of the Iraqi people would prefer Iraqi companies maintain control of the country's oil.
Neither Democratic presidential hopeful has explicitly spoken out against opening Iraq up to foreign oil investments. Both Barack Obama and Hillary Clinton have emphasized the need to urge the Iraqi government to pass one prong of the oil law - a provision to distribute oil revenue evenly throughout the country, over which there is little controversy - but have largely bypassed the broader debate about the law.
According to the oil ministry, only 27 out of 80 discovered fields are producing in Iraq, the result of decades of under-investment. A report by Wood Mackenzie, the consultancy, meanwhile says the scale of Iraq's remaining oil resources surpasses allother countries in the Middle East, including Saudi Arabia, and its high-quality reservoirs ensure that production costs would be very low.
But Iraq is also a dangerous frontier. Companies invited to invest in its oil industry - and satisfy Baghdad's plans at least to double oil production from the current 2.5m barrels a day - will be walking into a political, security and legislative minefield. Their involvement threatens to exacerbate the sectarian tensions that have torn the country apart since the US-led invasion.
International oil companies acknowledge that security, although better over the past year, will still need to improve significantly before workers are dispatched to Iraq. The weakness of the central government and its patchy control over the southern part of the country, home to 80 per cent of proved oil reserves, will also be taken into account. Perhaps most important, however, is that they could be entering a country with deep political fissures and lingering anger at foreign intervention, without clear legislation allowing for foreign participation.
In Libya, another country whose oil industry has only just opened up to foreign participation after years of sanctions, the government has now increased its take from all oil projects to an average of 95 per cent, from 81 per cent in 2000. Even in Kurdistan, where the regional authority has signed production-sharing agreements, the government's take of future oil produced is estimated at 87 per cent, says Mr Fryklund.
Oil industry executives say their companies will not invest if they do not get a significant part of "the upside", industry jargon for expected increases in production. But Tariq Shafiq, a former director of Iraq's national oil company, says companies would be prepared to accept variations of service contracts that pay companies fixed returns rather than rewarding them with control over reserves.
In theory, the production sharing contracts (and similar ones) are the perfect system for oil relations. The State is in full control of the oil. Foreign companies produce oil according to specific contract terms. Practically speaking, the state?s work and supervision is so limited in this type of contracts.
In Abu Dhabi, September 10, 2006, Deputy Premier and Chairman of the oil law committee Barham Salih was quoted as saying, ?Personally, I am in favour of the production sharing agreements. We have to ensure a maximum increase in profits and revenues for the Iraqi people.? Thomas Wald of the University of Dundee describes these contracts as, ?an appropriate marriage, they tend to give governments political satisfaction and the foreign company business satisfaction. The government is portrayed as if it is running the show. The company could run the show too through the legal phrase that refers to the emphasis on maintaining national sovereignty. Caution must be heeded when it comes to the oil law. Explicit contracts must be confirmed in order to preserve our rights. The regional law proved successful in this regard.
According to this type, the foreign company provides the funds needed for the first step, the investigation processes, and for the next step, the drilling operations and completing the basic structure for a ready-to-produce-and-export oil field. The company?s money is refunded by allocating a share of the first oil production, known as Cost Oil.
Once the company has its money back, the remaining oil is called Profit Oil, which is divided between the state and the company. Typically, taxes are imposed on the company?s shares of profit oil. The company also pays a Royalty for the produced oil. They could also pay other bonuses set by the contract. Sometimes the state contributes to the company?s capital and becomes part of the consortium, which is contracting with the state.
All the contracts that were signed in the 1990s stipulate that the company receives 40-100 percent of cost oil for refund, whereas the state receives 60-92 percent of profit oil. Of course those percentages must always be altered in a way that could be for the good of the state, particularly after 2004, when oil prices skyrocketed so much that such percentages look too generous. For instance, the company takes 30 percent of profit oil, the state 70. When the revenues are worth $20 per barrel, the companies get 6 USD/barrel. When a barrel is worth $50 (production cost almost fixed) the companies receive 15 USD/barrel instead of the $6, i.e. double and a half more thanks to the increase in oil prices. Therefore, an article that stipulates reconsidering these contracts after a specific period of time (4-5 years for example) must be added. The current contracts do not include articles about profit oil sharing (profits). Rather they tend to speak of the Internal Rate of Return. According to past international contracts, the state contributed to 10-50 percent of the companies? capital.
In Iraq, it could be quite beneficial to sign production sharing agreements for the small uncovered fields or lands that have not been subjected to oil inspections, once the contract forms are carefully studied. We hope Barham Salih?s comments were meant to refer to such fields or some of those which are being operated on in Kurdistan. He is not referring to the large fields like Majnoon, Gurna or eastern Baghdad.
According to the information we have, the Regional Government of Kurdistan has signed four production sharing agreements. In April 2003, they signed off contracts with the Turkish company Petoil, in January 2004 with Turkish Genial Energy, June 2004 Norwegian DNO and June 2005 Canadian Western Oilslands.
Technical Service Contracts come in different shapes. They have been developed to meet the financial requirements or need pertaining to experience or certain political or economic conditions. They look almost like method C below (i.e., PSA's explained above).
First/ Risk Service Contracts
According to this type, the foreign company provides funds to invest in the development operation. When production is in full swing, the company is paid back for the money it provided earlier plus a fixed pay for every barrel that comes out of the production line. This way, the company could increase profits by increasing the production. Meanwhile, the company must bear the risks of failure, particularly when prior investigations are not conducted. This method was used in Algeria when it first started producing. It works fine on the uncovered fields.
Second/ Buyback Contracts
This contract type was developed by Iran in the 1990s to upgrade a number of oil fields. Such contracts are similar to the Risk Service type above but they have shorter durations, which could last from three to five production years after two to three years of development. By the end of the duration, the national oil company is handed over the field and keeps all the revenues. Foreign companies are paid in oil barrels not in cash, which could be calculated according to the investment percentage the company had offered. A percentage of the revenues must be ensured after agreeing on reaching specific production rates that are written in the contract. The company here too bears the risks in case the production does not reach the rates agreed upon.
Ambassador Ryan Crocker, the top U.S. diplomat in Iraq, in testimony (.pdf) this morning before the Senate Armed Services committee, heralded increased Iraqi investment in its own reconstruction, noting $18 billion in pending budget allocations by the government in Baghdad and assuring lawmakers that "the era of U.S. funded major infrastructure projects is over." This would surely be welcome news to committee chairman Carl Levin, Democrat of Michigan, if only he could bring himself to believe it.
American taxpayers are spending vast sums on reconstruction efforts. For example, the U.S. has spent at least $27.6 billion to date on major infrastructure projects, job training, education and training and equipping of the Iraqi Security Forces. On the other hand, according to the Special Inspector General for Iraq Reconstruction, the Iraqi Government budgeted $6.2 billion for its capital budget in 2006 but spent less than a quarter of it. As of August 31, 2007, the Iraqi Government had spent somewhere between 4.4 percent (according to the GAO) and 24 percent (according to the White House) of its $10.1 billion capital budget for 2007. As of last Thursday, the U.S. government is paying the salaries of almost 100,000 Iraqis who are working on reconstruction.