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The privatization of Iraq's oil reserves

ASK THIS | July 02, 2007

One of the key 'benchmarks' the Iraqis are supposed to meet is agreement on a hydrocarbon law. Is it a coincidence that such an agreement is likely to benefit big multi-national oil companies?

By Cornelia Carrier

From time to time we read about the Iraqi oil law; but, with few exceptions, we hear only that the law will force the Kurds, Sunnis and Shia to share oil revenues. Who else will be sharing in those revenues?

On May 23, 2007, Congressman Dennis Kucinich (D-Ohio), on a point of personal privilege, got an hour to talk about the Iraqi “hydrocarbon” law, which he sees as a White House effort to privatize the oil of Iraq. “This administration has led Congress into thinking that this bill is about fair distribution of oil revenues. In fact… except for three scant lines, the entire 33-page hydrocarbon law creates a structure to facilitate the privatization of Iraq oil,”  Kucinich said.

In his hour, Kucinich referred to the few articles I have seen about the underlying aspects of this law. As far as I know his speech got little or no coverage, but it is well worth reading. 

Here are a few excerpts from the main stories I have found on the subject.

In the March 13, 2007, edition of the New York Times, Antonia Juhasz, an analyst with the watchdog group Oil Change International, wrote an article entitled “Whose Oil is it, Anyway?”  In it she said,

“The Iraqi hydrocarbon law would take the majority of Iraqi oil out of the exclusive hands of the Iraqi government and open it to international oil companies for a generation or more… The Administration has highlighted the law’s revenue sharing plan, but the benefits…are radically undercut by the law’s many other provisions – these allow much (if not most) of Iraq’s oil revenues to flow out of the country and into the pockets of international oil companies.. The Iraqi National Oil Company would have exclusive control of just 17 of Iraq’s 80 known oil fields, leaving two-thirds of known – and all of its as yet undiscovered – fields open to foreign control.”

She goes on to write about how the hydrocarbon law contains  the “most corporate-friendly contracts in the world, including what are know as production sharing agreements… which are used for only approximately 12 percent of the world’s oil.”

Michael Schwartz in TomDispatch.com on May 7, 2007, wrote a piece titled “The Struggle Over Iraqi Oil: Eyes Eternally on the Prize.” In it he discussed in detail about the nature of production sharing agreements.

“Production sharing agreements (PSA’s) are generally applied in circumstances where there is a strong possibility that oil exploration will be extremely costly or even fail, and/or where extraction is likely to prove prohibitively expensive. To offset the huge and often risky investments, the contracting company is guaranteed a proportion of the profits, if and when the oil is extracted and sold. In the most common of these agreements, the proportion remains very high until all development costs are amortized, allowing the investing company to recoup its investment expenditures (if oil is found), and then to be rewarded with a larger-than-normal profit margin for the remainder of the contract which, in the Iraqi case, could extend for up to 25 years.

 “This is perhaps a reasonably fair, or at least necessary, bargain for a country which cannot generate sufficient investment capital on its own, where exploration is difficult (perhaps underwater or deep underground), where the actual reserves may prove small, and/or where ongoing costs of extraction are very high.

“None of these conditions apply in Iraq: huge reservoirs of easily accessible oil are already proven to exist, with more equally accessible fields likely to be discovered with little expense. This is why none of Iraq's neighbors utilize PSAs. Saudi Arabia, Kuwait, Iran, and the United Arab Emirates all pay the multinationals a fixed rate to explore and develop their fields; and all of the profits become state revenues.

“The advocates of PSA’s in Iraq justify their use by arguing that $20 billion would be needed to develop the Iraqi fields fully and that favorable PSAs are the only way to attract such heavy doses of finance capital under the current highly dangerous circumstances. This assertion seems, however, to be little more than a smokescreen. No major oil companies are willing to invest in Iraq now, no matter how sweet the deal. If order is restored, on the other hand, Iraq would have no trouble attracting vast amounts of finance capital to develop reserves that could well be worth in excess of $10 trillion and hence would have no need whatsoever for PSAs.”

Lewis Seiler and Dan Hamburg wrote in the San Francisco Chronicle on April 30, 2007, “The new Iraqi oil law, largely written by the Coalition Provisional Authority… cedes control of Iraqi’s oil to western powers for 30 years. There is major opposition to the proposed law within Iraq, especially among the country’s five trade union federations that represent hundreds of thousands of oil workers. The United States is working hard to surmount this opposition by appealing directly to the al-Maliki government...” 

How many articles have we read about this oil law? Hundreds. Almost all concentrate on the “sharing” aspect. Only a handful talk about the potential benefits for big oil companies.  

For example, since it ran “Whose Oil Is it, Anyway?”  the New York Times, in article after article, refers exclusively to the oil revenue sharing aspect of the law. 

Why is this issue—which is obviously volatile, controversial and of great public interest—being almost totally ignored? 

Problems for the Iraqi Oil Industry
Walter Pincus writes in The Washington Post that two recent U.S. government reports show that the much-awaited approval of the law designed to manage distribution of future oil revenue in Iraq and govern the granting of exploration rights to foreign companies would be just the beginning of addressing the nation's oil problems.

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