| 2008: Chasing Iraqi oil |
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July 11, 2008 Major oil companies are on the verge of initial deals which appear to seal their future influence in Iraqi oil development. The potential pitfalls are numerous. Major western oil companies are on the cusp of potentially determinative transitional agreements with the Iraqi oil ministry as the country seeks to bolster development and revenues. However, significant challenges loom. The ministry is reportedly working out the final details of short-term, no-bid deals for technical support and consulting services with oil companies Exxon Mobil, Shell, BP, Total, Chevron and a host of smaller companies that appear to provide each with delineated spheres of influence over pre-existing, under-producing fields. Reversing the nationalization of oil and gas production of 1972, the deals seem to constitute a foot in the door for potential production-sharing agreements (PSAs), which would constitute one of the most significant industry coups in recent decades. "These technical support contracts can bring up the production capacity by at least half a million barrels per day [bpd]. This is very important, especially considering the shortened [contract] period of 18 to 24 months," Dr Muhammad-Ali Zainy from the London-based Centre for Global Energy Studies told ISN Security Watch. "This is a kind of temporary or stop-guard measure until capacity is raised through the development of other oil fields," he said. Major players now appear to have been granted set areas of influence, with Shell active in northern fields near Kirkuk, BP in the southern Rumaila oil field, Exxon Mobil at Al-Zubair and Total and Chevron involved in a consortium at the West Qurna Phase I field. Referring to the technical service agreements, Chatham House's Daniel Litvin told ISN Security Watch, "I think one of the reasons they are embarked upon is to get on good terms with the government [and] to demonstrate the company's worth. The big prize in Iraq is the potential for production-sharing contracts." Staking claim A small team of US consultants, led by State Department officials, reportedly advised the Iraqi oil ministry on drawing up the contracts. The agreements reportedly contain clauses granting the contracted companies the ability to match any future bid on services in their areas, raising significant questions regarding the role of the US in securing the short-term agreements. The oil ministry confirmed that the companies awarded service contracts had been chosen due to their having provided free advice and analysis to the ministry over the course of the last two years. Litkin acknowledged that the situation is "ripe for conspiracy theories because of the public perception, or perception in many countries - including Iraq - that one of the motivations for the war was oil. "Therefore people will be looking out for any signals that the US State Department is trying to rig the game for US oil companies," he said, adding, "I think the evidence for that is questionable." Importantly, the companies' services were chosen over competing bids from more than 40 international oil companies, shutting out competing firms from companies including several from Russia, China and India. The service agreement for the West Qurna field appears to usurp Russian company Lukoil's claims to pre-existing rights under a Hussein era contract, the New York Times reports. Union crackdown While the alienation of carbon revenues through putative future PSAs with foreign companies is expected to elicit popular antipathy in Iraq, the contest for revenue sharing among the competing sectarian and ethnic political factions, embodied in the two-year draft national oil law dispute, appears to dilute the potential political impact of public sentiment. One clear rallying point for opposition has emerged in the form of unrecognized independent labor unions. "The contact [with western oil companies] in the past was not of great benefit to the Iraqi economy or Iraqi industry," Sabah Jawad, spokesperson for Naftana, a UK-based support group for the Iraqi Federation of Oil Unions (IFOU), said in an interview with ISN Security Watch. "Iraq suffered under them as much as it suffered under the regime of Saddam Hussein," he said. The draft oil law, which has been strongly criticized by industry unions, would provide the legal basis for PSAs with foreign companies, likely to snare post-cost revenue percentiles well above those offered to Chinese and Russian companies in the 1990s. The General Union of Oil Employees of Basra accuses Oil Minister Hussein Al-Shahristani of transferring a groups of union activists to an oil facility in a dangerous sector of Baghdad as part of his bid to break the workers' opposition to what it says are privatization moves. "In the past few years the unions have been subject to a lot of repression and pressure from the government," Jawad said. "For example, the oil ministry advised oil companies in the south of Iraq not to cooperate with the trade unions [and] not to facilitate their activities. "The union leadership has been subjected to harassment and false accusations and there is still an outstanding warrant for the arrest of three prominent trade unionists in Basra, including the president of the union Hassan Juma [Awad]," he said. Asked if these moves are in response to governmental interest in closer cooperation with foreign oil companies, Jawad said, "Yes, we believe so." Kurds go it alone The Kurdish Regional Government (KRG) is seeking to leverage the relative stability in its autonomous area and the failure of the Baghdad government to pass a draft national oil bill to attract foreign oil companies, signing a series of contracts with small oil companies that largely focus on the discovery and development of new fields. Those companies that have cast their dice on future KRG control of the region's carbon assets benefiting from the Irbil government's openness to full prospecting and PSA deals. Al-Shahristani has denounced the contracts as illegal usurping of governmental prerogatives. The KRG has responded by arguing that the agreements are in keeping with the Iraqi Constitution and draft national oil law, and commit the KRG to providing the central government with 83 percent of Iraqi revenues – with Kurds retaining the remainder as 17 percent of the national population. To Litvin, agreements signed with the KRG "are politically risky because they don't have the support of the government in Baghdad and it ultimately needs to call the shots on the development of the national oil industry. And [they are] ethically questionable because there is a risk that they will exacerbate ethnic tensions in Iraq." With the future of their investments in the KRG unclear, several of the oil companies involved in drilling in the north have reportedly seen their share prices drop in recent months as investors became skittish concerning the prospects of a fundamental break in relations with Baghdad, which still controls the Kirkuk fields and, crucially, a northern oil pipeline to the Turkish port of Ceyhan. KRG-contracted companies' efforts to hook up to the Baghdad-controlled pipeline are reportedly being stymied by the ministry's refusal to countenance KRG exports ahead of the passage of the national oil law, forcing some to truck oil from the wellhead for domestic consumption. If the KRG were able to assume control over long-exploited fields near Kirkuk, its bargaining position in relations with the central government, western states and oil companies would be greatly improved. However, a constitutionally-mandated popular vote on the fate of Kirkuk and nearby regions appears unlikely given Shia and Sunni opposition. Asked if these difficulties had put major industry players off KRG development, Zainy said, "I think so, yes. The reserves involved in the north are small compared with what is in the rest of Iraq and those companies are really after the lucrative [deals] in the rest of Iraq." Referring to the KRG and central government, he said, "But I do think there will be negotiations and some kind of settlement." Gambling on Baghdad The willingness of western capitals and major foreign oil companies to gamble on the central government's ability to rehabilitate its oil network appears at least partially motivated by concerns regarding the potential for the extension of Iranian influence over governing Iraqi Shia movements in the central government and southern oil regions. With Iraqi Prime Minister Nouri al-Maliki demanding a timetable for the withdrawal of US troops and presumptive US Democratic presidential nominee Barack Obama promising a full withdrawal within 16 months of taking office - a seemingly shaky pledge - major oil players recognize that their hand may be about to become significantly weaker. It appears to be in their interests to secure a future stake in the Iraqi oil industry in coming months and significant discussions appear likely at a major ministry-hosted oil conference at Baghdad's airport in October. Systemic corruption within the oil ministry and alleged links between government ministries and militias look set to go unaddressed in this process, significantly raising the potential for the squandering of oil revenues and channeling of the same into future factional struggles for control and influence. "Sound economic management of oil revenues is another potential constraint," Litvin said. In other countries, "even if they have avoided corruption in collecting the revenues, often those revenues have been spent on economically wasteful projects or […] the exchange rate inflates and makes it difficult to develop other sectors of the economy." The potential for ongoing instability and the dangers of work in Iraq - despite recent security improvements that have brought production up to an estimated 2.5 million bpd - are also likely to serve as a primary factor stymieing efforts to reconstitute Iraq's dilapidated oil infrastructure and bring new fields into production. "The most important factor that would inhibit [oil and gas] development is the political and security situation," Zainy said. According to Jawad, "Only after the withdrawal of foreign troops from Iraq and Iraq establishing itself as an independent sovereign state [will] the government be in a position to conclude such agreements on vitals issues such as oil." Dr Dominic Moran, based in Tel Aviv, is ISN Security Watch's senior correspondent in the Middle East and the Director of Operations of ISA Consulting. |