The British-based anti-poverty movement War on Want is one of the co-publishers of what looks like a well-done new study of the production sharing agreements that Iraq’s American occupiers are trying to develop for Iraq’s oil industry. The study is called Crude Designs – The rip-off of Iraq’s oil wealth.
A recent press release from War on Want says:
- Figures published in the report for the first time show:
* the estimated cost to Iraq over the life of the new oil contracts is $74 to $194 billion, compared with leaving oil development in public hands. These sums represent between two and seven times the current Iraqi state budget.
* the contracts would guarantee massive profits to foreign companies, with rates of return of 42% to 162%.
The kinds of contracts that will provide these returns are known as production sharing agreement(PSAs). PSAs have been heavily promoted by the US government and oil majors and have the backing of senior figures in the Iraqi Oil Ministry. Britain has also encouraged Iraq to open its oilfields to foreign investment.
The report’s Executive Summary lays out those same facts and further explains:
- an oil policy with origins in the US State Department is on course to be adopted in Iraq, soon after the December elections, with no public debate and at enormous potential cost. The policy allocates the majority of Iraq’s oilfields – accounting for at least 64% of the country’s oil reserves – for development by multinational oil companies.
Iraqi public opinion is strongly opposed to handing control over oil development to foreign companies. But with the active involvement of the US and British governments a group of powerful Iraqi politicians and technocrats is pushing for a system of long term contracts with foreign oil companies which will be beyond the reach of Iraqi courts, public scrutiny or democratic control.
… The development model being promoted in Iraq, and supported by key figures in the Oil Ministry, is based on contracts known as production sharing agreements (PSAs), which have existed in the oil industry since the late 1960s. Oil experts agree that their purpose is largely political: technically they keep legal ownership of oil reserves in state hands, while practically delivering oil companies the same results as the concession agreements they replaced.
Running to hundreds of pages of complex legal and financial language and generally subject to commercial confidentiality provisions, PSAs are effectively immune from public scrutiny and lock
governments into economic terms that cannot be altered for decades.
In Iraq’s case, these contracts could be signed while the government is new and weak, the security situation dire, and the country still under military occupation. As such the terms are likely to be highly unfavourable, but could persist for up to 40 years.
I don’t know much about the strength of the oil workers’ trade unions in Iraq right now. But Gilbert Achcar just sent me this text, which is an English-language version of the speech that Hassan Jumaa Awad, the President of the General Union of Oil Employees in Basra, made at the big anti-war gathering in London on Dec. 10.
Awad concluded his speech thus:
- America does not want to withdraw at this time, because it did not complete its operation; it has not yet accomplished the second phase of the occupation, the economic occupation of Iraq. That is why the U.S. administration is currently putting forward its economic plans which include privatization of the oil and manufacturing sectors, and the production sharing agreement [PSA] project.
From this platform, I would like to make clear to all the positions of our Union, which are known to the Iraqi people:
1. Occupation forces must leave the country immediately and unconditionally.
2. We will stand firmly and resolutely against all those who want to tamper with the security and power of the Iraqi people.
3. We condemn terrorist attacks against our people and stress the importance of respecting human rights.
4. We support the honorable resistance that targets and strikes at foreign military forces and seeks to drive the occupiers out.
5. We will not allow the intrusion of foreign companies [in the oil sector] and production sharing agreements, and we will stand with all our force against monopoly firms such as Halliburton, KBR, Shell, and others.
6. We ask the patriotic forces, the antiwar movement and peace-lovers to support our Union in its campaign against privatization and PSAs.
7. We demand the unconditional cancellation of Iraq’s [foreign] debts, as these debts never benefited the Iraqi people but served the buried regime.
In conclusion, I wish you good luck and success, and I look forward to meeting you in a free, democratic, and united Iraq that would be a workshop for all free citizens of the world. I offer again my thanks and appreciation to the organizers of this conference
So anyway, it looks as though the new Iraqi government– when and if it should ever get formed!– will have three extremely important items on its agenda:
(1) Completing the still-incomplete negotiations for the Constitution,
(2) Negotiating the withdrawal (or otherwise) of the US/UK forces, and
(3) Determining the country’s oil policy– an item that looks as if it is going to be forced onto their agenda very early on.
I will just conclude by noting that Iraq’s nationalization of its oil industry, which back in 1972 took control of the industry back from its British and other foreign “concessionaires”, was an extremely important step forward in the country’s history. But now– here come the same-old colonial powers, back once again.
It seems obviously wise for the Iraqis to be very careful about what Oil agreements it signs.
Oil is profitable to the extent that it is hard for competitors to get into the oil business and to the extent that there is some monopoly, as in OPEC. Oil would and should be as free as air except for the differences in production costs. The ethics of land ownership are shown by the old US sitcom “The Beverly Hillbillies”. In that show, a family of ignorant slobs in Appalachia strikes oil in their back yard and becomes amazingly rich, moving to the wealthy town of Beverly Hills. Where they are still ignorant slobs, but somewhat lovable for their idiocy, and fawned over by the local businessmen and bankers.
The rich Arabs of the Middle East are just variations on that theme. They are rural idiots made rich by the strike of oil. Neither the Arab princes nor the owners of Standard Oil have the “Right” to get rich off of the consuming public of the world. The scramble of the Iraqi “People” to get their “Fair Share” of this same unearned wealth sometimes is given the patina of “Justice” by the NGO’s of the mideast or by the oil ministers of the Middle Eastern countries. It is all a scramble over cash found in the street, having fallen off of a bank truck.
If competing organizations are given development rights to different parcels of oil land, and forbidden to collude and to drill horizontally, the force of competition in the market will drive down the price of crude to something like the cost of production. But the Oil giants and those on the Oil Dole would not like that one little bit. There is no ethnic advantage here. The fine citizens of the State of Alaska have been on the Oil Dole for decades and want to continue. The Iraqis would be wise to fight for the same larcenous deal.
There are, of course, those noble fools in history who have invented the automobile, discovered oil in the rocks of the wastelands, invented catalytic cracking of useless crude oil into gasoline, invented and perfected the internal combustion engine, paved the unpassable hinterlands, actually gotten dirty refining oil or repairing cars and so on. These creators and workers are allowed their pittance so that the leisure classes can continue uninterrupted in their repose.
Helena
The cynical and world weary might suspect that the apointment of Ahmed Challabi to the Oil Ministry (just as a temporary measure of course) is a little more than a coincidence.
I just wonder what oversight there is of any contracts he may sign, and how they are ratified.
I am not going to take a position whether PSA’s are good or bad for Iraq, but I speculate that the US and UK are pushing for it because they know the issue of oil will become, if not already, a hindrance to the ratification of the Iraqi Constitution. I refer the reader to a policy brief by Marina Ottaway of the Carnegie Endowment for International Peace.
There, Ms. Ottaway describes the difficulty of divvying up Iraqi oil fairly between the Kurds, Shias and Sunnis, albeit it’s supposed to be property of all Iraqi people. The article illustrates how the majority of Iraq’s oil fields are in the hands of the Kurds and Shias, leaving out the Sunnis. If the constitution is to be ratified by all three ethnic groups, the Sunnis must get involved.
I speculate the PSAs, while making the US and UK look bad in pilfering Iraqi oil, in my mind believes that the private sector (US and foreign oil companies) will do a better job in dividing the oil fairly among the Iraqi people. This doesn’t mean that I don’t believe that the US is not benefiting from this transaction, it does. Perhaps the US and UK believe that they are entitled to it for deposing Saddam’s regime.
Ms. Ottaway’s article’s URL: http://www.carnegieendowment.org/files/pb43.ottaway.FINAL.pdf
But now– here come the same-old colonial powers, back once again.
What, only just now? TotalFina (in Iraq from the beginning) never left!
http://www.brookings.edu/fp/cuse/analysis/marcel.htm
and what the hell was lukoil’s gargantuan stake in qurna if not “foreign intrusion” on a massive scale?
the idea that iraq’s oil industry could possibly operate free of “the intrusion of foreign companies ” is completely absurd and ahistorical.
http://www.lukoil-overseas.com/press_6_5div__id_21_5div__id_21_1id_2346_.html
The contract on development and production of West Qurna-2 in the Republic of Iraq was signed on March 21, 1997 between the Iraqi Oil Ministry, LUKOIL, Zarubezhneft and Mashinoimport. The contract validity under the PSA terms is 23 years[!!!] and can be extended for 5 years more. LUKOIL share of the project is 68,5%[!!!!], the Iraqi party – 25%, Zarubezhneft and Mashinoimport – 3,25% each.
Of course oil production and distribution is a global business. But the idea that only “western” companies have the expertise to run it is quite ludicrous, outdated, and paternalistic.
Certainly an independent Iraq would sign all kinds of concession agreements with foreign distributors– unless, like Kuwait, they felt confident of implementing a far-reaching campaign of vertical integration. But the question is, on what terms are these concessions signed? And is Iraq, as the national owner of these reserves– and a country with considerable expertise in oil extraction and many phases of distribution and refining, in its own right– able to negotiate on quite “free and equal” terms with potential concessionaires?
I have certainly heard the argument from some British and US citizens that “because we deposed Saddam Hussein, therefore we somehow ‘deserve’ to get all the lucrative post-Saddam contracts.” What total nonsense. Did the Iraqi people as a whole invite them to depose Saddam with the explicit promise that the lucrative PSAs– lucrative, I would note, not for the US citizenry as a whole but only for shareholders in the favored companies!– would go to Brit and US companies? No of course they didn’t. (A small coterie of Iraqi exiles may have made such promises. But such pro-western stooges as Chalabi and Allawi have now been twice rebuffed at the polls by Iraqis).
Right now, most Iraqis don’t feel “grateful” to the Americans for what they have done in Iraq for the past 33 months. Why should they?
And Vadim, just because Saddam signed a 23-year PSA with some foreign oil companies doesn’t make it the right thing to do. I can’t quite figure your reasoning here.
A couple of things that I found interesting in this report, and perhaps Vadim can comment on these more extensively.
First of all, if you recall we were led into this in the press release and Executive Summary with the idea that
the estimated cost to Iraq over the life of the new oil contracts is $74 to $194 billion, compared with leaving oil development in public hands. These sums represent between two and seven times the current Iraqi state budget.
However, from the same tables in the report, we see that the income to Iraq over the life of the new oil contraxts is betwen $777 and $897 billion! That’s a whopping 20 to 24 times the current Iraqi state budget.
The second point are the IRR calculations. It appears that this was pretty much based at the wellhead. But of course, there are significant costs all the way down the line for the oil companies. I would tend to take the claims of “excessive profits” with a grain of salt here until I saw some more information.
JES, I’ll take a closer look. I’m not involved in project finance so I can’t offer much professional insight, although I’d agree with you that the range of assumptions here must be ridiculously broad. Yet the ‘economic modeling’ section of the report amounts here to all of one page containing nine assumptions. They’re all murky but this one can’t possibly hold water:
We assume that economic factors (including production rates, costs etc.) are the same whether oil is extracted by the Iraq National Oil Company or by foreign companies through PSAs.
Would any sane person think that INOC, its physical and technical resources gutted by years of sanctions and war, might operate as efficiently as Mitsui or Lukoil or Shell? (btw lest I’m accused of ethnocentrism/paternalism etc there’s nothing “western” about any of these multinationals.)
Also, Sakhalin II is used as an analog PSA. But Sakhalin II has been widely criticised for its especially bad terms to the Russian government. Ian Rutledge [who ostensibly helped w/ this report] himself wrote an critique of sakhalin II where he states the following:
“the particular terms of the Sakhalin II PSA are
not typical of those incorporated in most PSAs
throughout the world. The Sakhalin II PSA is particularly disadvantageous to the Russian Party, and it is surprising that the Russian Party agreed to these terms.”
Rutledge also notes that
“PSAs are a common contractual mechanism, used
throughout the oil-producing world….It is noted though that for this particular highcost, high-risk project, it is unlikely that the SEIC
consortium would have proceeded with the project
without the fiscal stability that a PSA confers.”
http://www.pacificenvironment.org/downloads/SakhalinPSA-www1.pdf
helena the purpose of my noting Hussein’s PSAs with Russia (and France and China) was to counter the suggestion that PSAs and a nationalised oil sector were mutually exclusive, and that a nationalised oil supply as such lends itself to fair distribution of oil revenue or fair trade (Iraq’s “extremely important step forward.” ) Husseins PSA with lukoil was noteworthy because its terms were horrible for iraq– far worse than anything contemplated in this study – not because it was a PSA. What Iraq took from concessionaires it quickly re-offered to many of the same people at worse terms!
ultimately sunlight (via transparency) is the best disinfectant. A transparent bidding process serves everyones interest. the lesson is that transparency may be difficult to achieve under occupation, but it’s impossible under a military dictatorship.
2006-01-29 Catch-22 of energy speculation