[Corp. Watch] Back to the Future: Big Oil returns to position it held in colonial-era Iraq

[Corporation Watch]

Deals With Iraq Are Set to Bring Oil Giants Back

  By Andrew E. Kramer

BAGHDAD (NY Times, June 19) -- Four Western oil companies are in the  
final stages of negotiations this month on contracts that will return  
them to Iraq, 36 years after losing their oil concession to  
nationalization as Saddam Hussein rose to power.

	Exxon Mobil, Shell, Total, and BP -- the original partners in the  
Iraq Petroleum Company -- along with Chevron and a number of smaller  
oil companies, are in talks with Iraq's Oil Ministry for no-bid  
contracts to service Iraq's largest fields, according to ministry  
officials, oil company officials and an American diplomat.

	The deals, expected to be announced on June 30, will lay the  
foundation for the first commercial work for the major companies in  
Iraq since the American invasion, and open a new and potentially  
lucrative country for their operations.

	The no-bid contracts are unusual for the industry, and prevailed  
over offers by more than 40 other companies, including those from  
Russia, China, and India.

	The contracts, which would run for one to two years and are  
relatively small by industry standards, would nonetheless give the  
companies an advantage in bidding on future contracts in a country  
that many experts consider to be the best hope for a large-scale  
increase in oil production.

	There was suspicion among many in the Arab world and among parts of  
the American public that the United States had gone to war in Iraq  
precisely to secure the oil wealth these contracts seek to extract.

	The Bush administration has said that the war was necessary to  
combat terrorism. It is not clear what role the United States played  
in awarding the contracts; there are still American advisers to  
Iraq's Oil Ministry.

	Sensitive to the appearance that they were profiting from the war  
and already under pressure because of record high oil prices, senior  
officials of two of the companies, speaking only on the condition  
that they not be identified, said they were helping Iraq rebuild its  
decrepit oil industry.

	For an industry being frozen out of new ventures in the world's  
dominant oil-producing countries, from Russia to Venezuela, Iraq  
offers a rare and prized opportunity. While enriched by $140 per  
barrel oil, the oil majors are struggling to replace their reserves  
as ever more of the world's oil patch becomes off limits.

	Governments in countries such as Bolivia and Venezuela are  
nationalizing their oil industries, or seeking a larger share of the  
record profits for their national budgets. Russia and Kazakhstan have  
forced major oil companies to renegotiate contracts.

	The Iraqi government's stated goal in inviting back the companies is  
to increase oil production by half a million barrels per day by  
attracting modern technology and expertise to oil fields now  
desperately short of both.

	The revenue would be used for reconstruction, although the Iraqi  
government has had trouble spending the oil revenues it now has, in  
part because of bureaucratic inefficiency.

	For the American government, increasing output in Iraq, as  
elsewhere, serves the foreign policy goal of increasing oil  
production globally to alleviate the exceptionally tight supply that  
is a cause of soaring prices.

	The Iraqi Oil Ministry, through a spokesman, said the no-bid  
contracts were a stop-gap measure to bring modern skills into the  
fields while the oil law remained pending in parliament.

	It said the companies had been chosen because they had been advising  
the Ministry without charge for two years before being awarded the  
contracts, and because these companies had the needed technology.

	A Shell spokeswoman hinted at the kind of work the companies might  
be engaged in.

	"We can confirm that we have submitted a conceptual proposal to the  
Iraqi authorities to minimize current and future gas flaring in the  
south through gas gathering and utilization," said the spokeswoman,  
Marnie Funk. "The contents of the proposal are confidential."

	While small, the deals hold great promise for the companies. "The  
bigger prize everybody is waiting for is development of the giant new  
fields," Leila Benali, an authority on Middle East oil at Cambridge  
Energy Research Associates.

	The current contracts, she said, are a "foothold" in Iraq for  
companies striving for these longer-term deals.

	Any Western oil official who comes to Iraq would require heavy  
security, exposing the companies to all the same logistical  
nightmares that have hampered previous attempts, often undertaken at  
huge cost, to rebuild Iraq's oil infrastructure.

	And work in the deserts and swamps that contain much of Iraq's oil  
reserves would be virtually impossible unless carried out solely by  
Iraqi subcontractors, who would likely be threatened by insurgents  
for cooperating with Western companies.

	Yet at today's oil prices, there is no shortage of companies  
coveting a contract in Iraq. It is not only one of the few countries  
where oil reserves are up for grabs, but also one of the few that is  
viewed within the industry as having considerable potential to  
rapidly increase production.

	David Fyfe, an analyst at the International Energy Agency, a Paris- 
based group that monitors oil production for the developed countries,  
said he believed that Iraq's output could increase from its current  
2.5 million to about 3 million barrels a day, though it would  
probably take longer than the six months the Oil Ministry estimated.

	Fyfe's organization estimated that repair work on existing fields  
could bring Iraq's output up to roughly four million barrels per day  
within several years. After new fields are tapped, Iraq is expected  
to reach a plateau of about six million barrels per day, Fyfe said,  
which could suppress current world oil prices.

	The contracts, the two oil company officials said, are a  
continuation of work the companies had been conducting here to assist  
the Oil Ministry under two-year-old memorandums of understanding.

	The companies provided free advice and training to the Iraqis. This  
relationship with the Ministry, said company officials and an  
American diplomat, was a reason the contracts were not opened to  
competitive bidding.

	A total of 46 companies -- including the leading oil companies of  
China, India and Russia -- had memorandums of understanding with the  
Oil Ministry, yet were not awarded contracts.

	The no-bid deals are structured as service contracts. The companies  
will be paid for their work, rather than offered a license to the oil  
deposits. As such, they do not require the passage of an oil law  
setting out terms for competitive bidding.

	That legislation has been stalled by disputes among Shiite, Sunni,  
and Kurdish parties over revenue sharing and other conditions.

	The contracts are exceptional for the oil industry. They include a  
provision that could allow the companies to reap large profits at  
today's prices: the ministry and companies are negotiating payment in  
oil rather than cash.

	"These are not actually service contracts," Benali said. "They were  
designed to circumvent the legislative stalemate" and bring Western  
companies with experience managing large projects into Iraq before  
the passage of the oil law.

	A clause in the draft contracts would allow the companies to match  
bids from competing companies to retain the work once it is opened to  
bidding, according to the Iraq country manager for a major oil  
company who did not consent to be cited publicly discussing the terms.

	Assem Jihad, the Oil Ministry spokesman, said the ministry chose  
companies it was comfortable working with under the charitable  
memorandum of understanding agreements, and for their technical  
prowess. "Because of that, they got the priority," he said.

	In all cases but one, the same company that had provided free advice  
to the Ministry for work on a specific field was offered the  
technical support contract for that field, one of the companies'  
officials said.

	The exception is the West Qurna field in southern Iraq, outside  
Basra. There, the Russian company Lukoil, which claims a Hussein-era  
contract for the field, had been providing free training to Iraqi  
engineers, but a consortium of Chevron and Total, a French company,  
was offered the contract.

	A spokesman for Lukoil declined to comment.

	Charles Ries, the chief economic official in the American Embassy in  
Baghdad, described the no-bid contracts as a bridging mechanism to  
bring modern technology into the fields before the oil law was  
passed, and as an extension of the earlier work without charge.

	To be sure, these are not the first foreign oil contracts in Iraq,  
and all have proved contentious.

	The Kurdistan regional government, which in many respects functions  
as an independent entity in northern Iraq, has concluded a number of  
deals. Hunt Oil Company of Dallas, for example, signed a production- 
sharing agreement with Kurdish authorities last fall, though its  
legality is questioned by the central Iraqi government.

	The technical support agreements, however, are the first commercial  
work by the major oil companies in Iraq. The impact, experts say,  
could be remarkable increases in Iraqi oil output.

	While the current contracts are unrelated to the companies' previous  
work in Iraq, in a twist of corporate history for some of the world's  
largest companies, all four oil majors that had lost their  
concessions in Iraq are now back.

	A spokesman for Exxon said the company's approach to Iraq was no  
different from its work elsewhere.

	"Consistent with our long-standing, global business strategy,  
ExxonMobil would pursue business opportunities as they arise in Iraq,  
just as we would in other countries in which we are permitted to  
operate," the spokesman, Len D'Eramo, said in an e-mailed statement.

	But the company is clearly aware of the history. In an interview  
with Newsweek magazine last fall, the former chief executive of  
Exxon, Lee Raymond, praised Iraq's potential as an oil-producing  
country, and added that Exxon was in a position to know.

	"There is an enormous amount of oil in Iraq," Raymond said. "We were  
part of the consortium, the four companies that were there when  
Saddam Hussein threw us out, and we basically had the whole country."