Sunday, April 02, 2006

 

The Iraq Oil Bonanza: Estimating Future Profits - James A Paul

The Iraq Oil Bonanza: Estimating Future Profits

By James A. Paul

Global Policy Forum
January 28, 2004

Oil Companies in Iraq: A Century of Rivalry and War (November 2003)
Iraq: the Struggle for Oil (August, 2002)
Oil in Iraq: the Heart of the Crisis (December, 2002)

After the Iraq War of 2003, United States and United Kingdom oil giants are certain to gain privileged access to Iraq’s oil resources. Excluded from control over Iraqi oil since the nationalization of 1972, Exxon, BP, Shell and Chevron will now gain the lion’s share of the world’s most profitable oil fields. Few outside the industry understand the huge stakes in Iraq, which amount to tens of billions of dollars in total potential profits per year.

The following tables estimate the magnitude of potential profits in Iraq, using four key variables. They aim to show the possible long-term Iraq profits for all private oil companies, assuming that one or more companies will be involved in all the country’s producing fields. The exact legal status of Iraqi oil is not at issue here, since the same results could accrue for the companies whether the new government: (1) eventually privatizes the industry (which seems unlikely) or (2) maintains a national company which enters into production sharing agreements that offer the companies favorable terms.

The analysis uses four key variables, each of which is independent of the others. These variables are illustrated in Table 1 below, which shows four possible outcomes for each of the four variables. Note that there is no necessary relationship between the variables in each row, so that (for example) reserves might be 400 billion barrels but the recovery rate might be 65% and the oil rent average $30:

Table 1

The “oil reserves” estimates follow estimates given by industry experts and those published on the US Department of Energy website. The “oil rent average” refers to the very large spread between the cost of production (estimated at $1 per barrel) and the price of a barrel of oil on the international markets. The international price estimate is a fifty-year average, in real (inflation adjusted) terms, based on oil prices for 2004. Thus the lowest estimate assumes a very low average price of $21 per barrel, while the highest estimate assumes a high price of $41 per barrel under conditions of increasing future scarcity. The “recovery rate” is the percentage of reserves actually brought to the surface, a percentage that is generally believed to be high in Iraq compared to industry norms because of the very good quality of Iraq’s oil reservoirs. The “rent appropriated by private companies” estimates the share of the total rent (profit) taken by the companies after government taxes, fees, production-sharing agreements and other deductions. Though companies have taken much lower shares since the 1970s, the current trend is moving towards higher shares in the range of the estimates shown here.

Table 2 below uses the four variables to estimate potential profits for the oil companies in Iraq. In order to understand the magnitude of these profits, it is useful to know that the worldwide profits of the world’s five largest oil companies in 2002 were $35 billion. Our estimate of the “most probable” annual profits in Iraq are $95 billion, three times this sum! Total company profits in Iraq, over time, would be an enormously large sum – ranging from a low of about $600 billion to a high of about $9 trillion.

Table 2

Our “most probable” estimate of corporate profits assumes the following:

1. 350 billion barrels of oil reserves;

2. $30 oil rent average over 50 years;

3. Recovery rate of 75%; and

4. Percentage of rent appropriated by private companies at 60%.


 

Iraq: the Struggle for Oil - James Paul

Iraq: the Struggle for Oil

By James A. Paul

Executive Director, Global Policy Forum

August, 2002 (revised December, 2002)

Oil Companies in Iraq: A Century of Rivalry and War (November 2003)
Oil in Iraq: the Heart of the Crisis (December, 2002)
The Iraq Oil Bonanza: Estimating Future Profits (January 28, 2004)

Iraq possesses the world’s second largest proven oil reserves, currently estimated at 112.5 billion barrels, about 11% of the world total and its gas fields are immense as well. Many experts believe that Iraq has additional undiscovered oil reserves, which might raise the total well beyond 250 billion barrels when serious prospecting resumes, putting Iraq closer to Saudi Arabia and far above all other oil producing countries. Iraq’s oil is of high quality and it is very inexpensive to produce, making it one of the world’s most profitable oil sources. Oil companies hope to gain production rights over these rich fields of Iraqi oil, worth hundreds of billions of dollars. In the view of an industry source it is “a boom waiting to happen.”(1) As rising world demand depletes reserves in most world regions over the next 10-15 years, Iraq’s oil will gain increasing importance in global energy supplies. According to the industry expert: “There is not an oil company in the world that doesn’t have its eye on Iraq.”(2) Geopolitical rivalry among major nations throughout the past century has often turned on control of such key oil resources.(3)

Five companies dominate the world oil industry, two US-based, two primarily UK-based, and one primarily based in France.(4) US-based Exxon Mobil looms largest among the world’s oil companies and by some yardsticks measures as the world’s biggest company.(5) The United States consequently ranks first in the corporate oil sector, with the UK second and France trailing as a distant third. Considering that the US and the UK act almost alone as sanctions enforcers (and as advocates of war against Iraq), and that they are the headquarters of the world’s four largest oil companies, we cannot ignore the possible relationship of their policy with this powerful corporate interest.

US and UK companies long held a three-quarter share in Iraq’s oil production, but they lost their position with the 1972 nationalization of the Iraq Petroleum Company.(6) The nationalization, following ten years of increasingly rancorous relations between the companies and the government, rocked the international oil industry, as Iraq sought to gain greater control of its oil resources. After the nationalization, Iraq turned to French companies and the Russian (Soviet) government for funds and partnerships.(7) Today, the US and UK companies are very keen to regain their former position, which they see as critical to their future leading role in the world oil industry. The US and the UK governments also see control over Iraqi and Gulf oil as essential to their broader military, geo-strategic and economic interests. At the same time, though, other states and oil companies hope to gain a large or even dominant position in Iraq. As de-nationalization sweeps through the oil sector, international companies see Iraq as an extremely attractive potential field of expansion. France and Russia, the longstanding insiders, pose the biggest challenge to future Anglo-American domination, but serious competitors from China, Germany and Japan also play in the Iraq sweepstakes.(8)

During the 1990s, Russia’s Lukoil, China National Petroleum Corporation and France’s TotalFinaElf held contract talks with the government of Iraq over plans to develop Iraqi fields as soon as sanctions are lifted. Lukoil reached an agreement in 1997 to develop Iraq’s West Qurna field, while China National signed an agreement for the North Rumailah field in the same year (China’s oil import needs from the Persian Gulf will grow from 0.5 million barrels per day in 1997 to 5.5 million barrels per day in 2020, making China one of the region’s most important customers).(9) France’s Total at the same time held talks for future development of the fabulous Majnun field.

US and UK companies have been very concerned that their rivals might gain a major long-term advantage in the global oil business. “Iraq possesses huge reserves of oil and gas – reserves I’d love Chevron to have access to,” enthused Chevron CEO Kenneth T. Derr in a 1998 speech at the Commonwealth Club of San Francisco, in which he pronounced his strong support for sanctions.(10) Sanctions have kept the rivals at bay, a clear advantage. US-UK companies hope that the regime will eventually collapse, giving them a strong edge over their competitors with a post-Saddam government. As the embargo weakened and Saddam held onto power, however, stakes in the rivalry rose, for US-UK companies worried that they might eventually be shouldered aside. Direct military intervention by the US-UK, then, offers a tempting but dangerous gamble that might put Exxon, Shell, BP and Chevron in immediate control of the Iraqi oil boom, but at the risk of backlash from a regional political explosion.

In testimony to Congress in 1999, General Anthony C.Zinni, commander in chief of the US Central Command, testified that the Gulf Region, with its huge oil reserves, is a “vital interest” of “long standing” for the United States and that the US “must have free access to the region’s resources.”(11) “Free access,” it seems, means both military and economic control of these resources. This has been a major goal of US strategic doctrine ever since the end of World War II. Prior to 1971, Britain (the former colonial power) policed the region and its oil riches. Since then, the United States has deployed ever-larger military forces to assure “free access” through overwhelming armed might.(12)

A looming US war against Iraq is only comprehensible in this light. For all the talk about terrorism, weapons of mass destruction and human rights violations by Saddam Hussein, these are not the core issues driving US policy. Rather, it is “free access” to Iraqi oil and the ultimate control over that oil by US and UK companies that raises the stakes high enough to set US forces on the move and risk the stakes of global empire.

Oil Companies in Iraq: A Century of Rivalry and War (November 2003)
Oil in Iraq: the Heart of the Crisis (December, 2002)
The Iraq Oil Bonanza: Estimating Future Profits (January 28, 2004)


(1) Conversation with the author, June 5, 2002.
(2) Ibid.
(3) See, for example, Daniel Yergin, The Prize: the epic quest for oil, money and power (New York, 1991).
(4) In order of size these firms are: Exxon Mobil, Royal Dutch-Shell, British Petroleum-Amoco, Chevron-Texaco, and TotalFinaElf. Royal Dutch Shell is often described as a British-Dutch company, while TotalElfFina is sometimes described as a French-Italian company.
(5) ExxonMobil was ranked as the number one company worldwide in 2001 as measured by profits, which stood at over $15 billion. In that year, the company was ranked number two worldwide in terms of revenues, which totalled $192 billion, behind the far-less-profitable retail company Walmart, that had revenues of $220 billion.
(6) Major shareholders in IPC were: Shell, BP, Esso (later Exxon), Mobil, and CFP, the French national company.
(7) For an account of this period, see Joe Stork, Middle East Oil and the Energy Crisis (New York, 1975), 188-194. Since 1918, France had considered Iraq to be its main source of international oil reserves and its main means to gain parity with the Anglo-American companies (see Yergin, op. cit., 188-191).
(8) See Michael Tanzer, “Oil and Military Power in the Middle East and the Crimean Sea Region, The Black World Today (web site), two parts, February 28 and Mar 6, 2002.
(9)From US Department of Energy, International Energy Outlook, Table 13.
(10) Text as posted at www.chevrontexaco.com/news/archive/chevron_speech/1998/98-11-05.asp At the time, Condoleeza Rice, currently US National Security Advisor, was a board member of Chevron and one of the company’s supertankers was named after her. Though it is tempting to insist on the many oil and energy industry connections of the Bush administration, including the President and Vice President Cheney, oil issues have consistently had a heavy influence on US foreign policy, regardless of party or personalities.
(11) Testimony to the Senate Armed Services Committee, April 13, 1999.
(12) See Michael T. Klare, Resource Wars: the new landscape of global conflict (New York, 2001), esp. ch. 3, “Oil Conflict in the Persian Gulf.”

 

Oil Companies in Iraq: - James A Paul

Oil Companies in Iraq:
A Century of Rivalry and War

By James A. Paul

Global Policy Forum
November 2003


Conference in Berlin on Corporate Accountability – November 25-26, 2003

Iraq: the Struggle for Oil (August 2002)
Oil in Iraq: the Heart of the Crisis (December 2002)
The Iraq Oil Bonanza: Estimating Future Profits (January 28, 2004)

The United States and the United Kingdom did not wage war on Iraq for the officially stated reasons. That much is obvious. The world’s superpower and its key ally were not acting because they feared the Iraqi government’s weapons of mass destruction or its ties with the terrorist group al-Qaeda. Nor were they fighting to bring democracy to the Middle East, a region where the two governments had long supported reactionary monarchs and odious dictators, including Iraqi president Saddam Hussein himself.

It is time, then, to set aside the sterile discussions about “intelligence failures” and to consider a deeper reason for the conflict. This paper will argue that the war was primarily a “war for oil” in which large, multinational oil companies and their host governments acted in secret concert to gain control of Iraq's fabulous oil reserves and to gain leverage over other national oil producers. In arguing for the primacy of oil, we do not imply that other factors were not at play. The imperial dreams of the neo-con advisors in Washington contributed to the final outcome, as did the re-election strategies of the political operatives in the White House. But the Iraq war did not emerge solely from the Bush administration. As we shall see, it involved both London and Washington, through the course of many governments. And it emerged from a decades-long effort by the world's largest companies to appropriate the planet's most lucrative natural resource deposits.

Several elements contribute to make the case for an oil war: the enormous, long-term political influence of the oil companies, the close personal ties between the companies and their host governments, the long history of prior conflicts and wars over Iraqi oil, and the enormous potential profitability of the Iraqi fields. To consider the evidence, and answer the questions of skeptics, we must begin by reviewing the companies’ power and influence over a period of many decades. Later, we will turn to the immediate events leading up to the 2003 war itself.

Companies’ Great Size & Global Presence

By the early 20th Century, when most business firms were relatively small by modern standards and purely national in scope, Standard Oil and Royal Dutch Shell were already global companies that controlled a worldwide network of production and distribution. By 1911, they held rich production fields in the Dutch East Indies (today’s Indonesia), Romania, Russia, the United States, Venezuela and Mexico, as well as refineries, pipelines, rail cars, tankers, storage depots and other facilities in dozens of countries. Standard Oil alone had a fleet of nearly 100 ships.1

Large as they were a century ago, the oil companies have since grown mightily, due to worldwide collusion in production and pricing and to fierce backing by their host governments. For decades, the so-called “Seven Sisters,” all of them firms based in the US or the UK, dominated the industry and ruled the global oil market through a tightly-knit cartel. Though nationalizations by producer countries in the 1970s dealt a serious blow to these firms, they continued to dominate the oil industry through control over the"downstream" end of the business -- transport, refining, petrochemicals, and marketing -- while building new production facilities in more friendly locations.2

Today, a wave of mergers has given the successor companies a new and unprecedented scale, reducing the major firms to just five. In 2003, annual revenues of the leader, ExxonMobil, were an astonishing $247 billion.3 By way of comparison, Exxon’s revenue is vastly greater than such well-known international companies as Walt Disney ($25 billion) and Coca Cola ($19 billion) and it is larger than the revenues of 185 national governments, including Brazil, Canada, Spain, Sweden and the Netherlands. Only the world’s six richest countries – the US, Japan, Germany, France, Italy and the UK – had revenues above this level. 4

Among the world’s fifteen largest corporations listed in the 2002 “Fortune Global 500,” five were oil companies. After US-based Exxon came the UK giants Shell and British Petroleum (BP), the mammoth French firm Total, and the huge US-based Chevron. Compared to the large automakers, with their anemic profits, the oil companies stand out among the world’s biggest corporations for their high profitability. In 2001 (and again in 2003), Exxon earned the world’s highest profits. In 2003, its earnings reached a record $22 billion, more than General Motors, Ford, DaimlerChrysler and Toyota taken together.5

Oil, Economy & Warfare

To understand the special “national security” status enjoyed by the oil companies, we must first consider oil’s economic importance and then its central role in war. Oil provides nearly all the energy for transportation (cars, trucks, buses airplanes, and many railroad engines). Oil also has an important share of other energy inputs – it heats many buildings and fuels industrial and farm equipment, for example. Overall, oil has a 40% share in the US national energy budget. Beyond energy, oil provides lubrication and it is an essential feedstock for plastics, paint, fertilizers and pharmaceuticals. Sometime in the future, the world may switch to renewable energy and other non-oil inputs, but oil now reigns as the indispensable ingredient of the modern economy. For this reason, governments are nervous about their national oil supply.6

Modern warfare particularly depends on oil, because virtually all weapons systems rely on oil-based fuel – tanks, trucks, armored vehicles, self-propelled artillery pieces, airplanes, and naval ships. For this reason, the governments and general staffs of powerful nations seek to ensure a steady supply of oil during wartime, to fuel oil-hungry military forces in far-flung operational theaters. Such governments view their companies’ global interests as synonymous with the national interest and they readily support their companies’ efforts to control new production sources, to overwhelm foreign rivals, and to gain the most favorable pipeline routes and other transportation and distribution channels. “One of our greatest helpers has been the State Department,” mused John D. Rockefeller, founder of Standard Oil in his 1909 book, Random Reminiscences of Men and Events. “Our ambassadors and ministers and consuls have aided to push our way into new markets in the utmost corners of the world.”7

The oil industry gained its crucial role in military affairs during World War I. In the run-up to the war, the world’s navies converted from coal to oil-fired ships, because of significant advantages in speed and range of operation. The war also marked the first military uses of the automobile, truck, tank and airplane. Belligerents on both sides faced severe oil shortages, but the Allies eventually gained the upper hand with vastly greater supplies. Lord Curzon, a member of the British War Cabinet, concluded that “the Allied cause has floated to victory upon a wave of oil.”8

Government policy makers give the highest priority to oil matters during wartime, as many historical studies show. Japanese and German officials made desperate efforts to gain oil sources during World War II while US and British leaders did their utmost to deny them this resource. But even allies could be bitter oil rivals. In many wartime meetings and cables, President Franklin Roosevelt and Prime Minister Winston Churchill wrangled over their countries’ respective post-war shares of Middle East oil reserves.9 After the war, George Kennan, Director of the US State Department’s Policy Planning Division, reacted with unbridled enthusiasm at US oil companies’ primacy (to the exclusion of Britain) in the newly-discovered Saudi Arabia fields. The United States, he wrote, had just acquired “the greatest material prize in world history.”10

Oil Rents, Corruption & Conflict

Just as governments like the US and the UK need oil companies to secure fuel for their global war-making capacity, so the oil companies need their governments’ military power to secure control over global oilfields and transportation routes. It is no accident, then, that the world’s largest oil companies are located in the world’s most powerful countries.

Power has primacy in the oil business, because of the incomparable value of key fields. Production costs vary widely from one place to another, leading to intense competition for the lowest-cost locations. The difference between cost and sales price is so large that economists sometimes refer to the gap as a “rent” – an extraordinary profit advantage enjoyed by the low-cost producer.11

All producer companies want to gain control of such lucrative profits, by fair means or foul. Company rivalry typically leads beyond ordinary market-based competition. As many studies show, companies and their sponsor governments do not shrink from backing dictatorial governments, using bribery and corruption, promoting civil violence and even resorting to war, to meet their commercial goals and best their competitors.12 The modern history of the Middle East bears witness to this process. In one notorious example, US intelligence services recruited in 1959 a young Iraqi thug named Saddam Hussein to take part in the assassination of Iraqi Prime Minister Abd el-Karim Qasim. Washington feared that the nationalist Qasim might act independently and alter the favorable terms under which their oil companies operated.13 A few years earlier, in 1953, the CIA engineered a coup in Iran, overthrowing the democratic government of Mohammed Mossadegh and installing the autocratic Shah, in order to gain control over Iranian oil and redistribute British production shares to US companies.14

A recent court case in France, involving high officials of the national oil company Elf Aquitaine, provides a glimpse of more recent operations in this world of oil intrigue and covert competition between the giant companies. The case revealed bribes, espionage, sexual favors, arms smuggling, civil strife and plots to overthrow governments, all with the complicity of French military and intelligence services as well as politicians at the highest levels. These actions had a terrible effect on a number of oil-producing countries, mostly in Africa. They spread malfeasance, corruption and anti-democratic practices in France as well. 15

Special Government Favors and “National Security”

Those who deny oil company complicity in the Iraq War always insist that the companies have little political influence, that they are “out of the loop” in Washington, that they are just one industry group among many others. These arguments are utterly false. The oil companies have always enjoyed “insider” privileges with the US and UK governments, resulting in many unique favors in the name of “national security.”

The United States government offers the companies extremely favorable tax treatment, including the “oil depletion allowance” and “intangible drilling costs” – far more than the ordinary capital depreciation available to other companies. In 1960, at the behest of the National Security Council, the international companies obtained the lucrative “foreign tax credit,” enabling deductions for taxes or royalties paid to foreign governments. In 1974, while the US corporate tax rate was 48%, the nineteen largest oil companies paid a tax rate of only 7.6%.16

The companies have also enjoyed unofficial immunity from anti-trust or anti-monopoly laws. Though the US government knew for decades about the international oil cartel, federal authorities took no enforcement action until 1952, when President Harry Truman ordered a criminal anti-trust suit. The companies mobilized all their legal and political muscle to quash the case. General Omar Bradley, Chairman of the Joint Chiefs of Staff, reportedly approached the President and successfully urged that the “national security” required a softening of the government’s legal stance. Shortly afterwards, the National Security Council decided on various limitations to the suit that further weakened the government’s case. Though the judicial process lumbered on for fifteen years, the oil companies had nothing to fear and remained safely protected by the national security umbrella. Today, after a decade of mega-mergers, the companies still escape anti-trust scrutiny.17

US military/security policy has served the oil companies as comprehensively as have the tax and legal rulings. Virtually every US presidential security doctrine since World War II has aimed at protecting company interests in the oil-rich Persian Gulf. The Truman Doctrine, the Eisenhower Doctrine, and the Nixon, Carter, and Reagan Doctrines all asserted Washington’s special concerns in the Gulf and arrogated to the United States special rights to “protect” or “defend” the area. Recently-released secret papers show that during the oil crisis and Arab oil embargo of 1973, Washington seriously considered sending a military strike force to seize some of the region’s richest fields – in Saudi Arabia, Kuwait and Abu Dhabi.18

In 1979, President Jimmy Carter set up the US Central Command, a permanent military force designed to intervene in the Middle East on short notice. Presidents have expanded and strengthened this force several times since. Headquartered in Florida, but with a number of bases in the Middle East, the command maintains pre-positioned supplies and heavy weapons at Diego Garcia in the Indian Ocean and it can call on strike aircraft units, global satellite intelligence, cruise missiles, rapidly deployable ground troops and carrier-based naval fleets.19

In testimony to Congress in 1999, General Anthony C. Zinni, commanding officer of the Central Command, affirmed the importance of the Persian Gulf region, with its huge oil reserves. It is a “vital interest” of “long standing,” he said, and the United States “must have free access to the region’s resources.”20

Close Personal Ties between Companies and Governments

Given the close political relations between the oil companies and their governments, it should be no surprise to find close ties at the personal level binding companies and governments together. The career of Allen Dulles serves as a case in point. He began as a US diplomat in the Middle East and rose to be chief of the Near East section of the State Department. In the early 1920s, he led the campaign to win US oil firms’ participation in Iraq. Later he served as a corporate lawyer at Sullivan and Cromwell, New York’s leading counsel for the oil industry. After wartime intelligence service, he was named head of the CIA by President Eisenhower. As CIA chief, he arranged for the overthrow of Mossadegh, winning a place in Iran’s rich oil fields for US firms. In every assignment he consistently served company interests.21

Max Thornberg came to the US State Department as senior petroleum advisor in 1941, directly from Bahrein Petroleum, a joint venture of Standard Oil of California. Thornberg operated nearly independently of his government superiors. He continued to receive his company salary, informed company executives of private government meetings and actively promoted company proposals. He apparently could not conceive of a conflict of interest. Having worked in the industry his whole life, he thought of industry goals and those of the US government as being identical.22

The administration of President George W. Bush represents an especially close set of personal ties between the oil companies and the government – at the very highest level. The president and his father were both longtime industry insiders from Texas and chief executives of their own oil companies. Other oil figures at the top of the administration include Vice President Dick Cheney, former CEO of Halliburton, the nation’s largest oil-services company, and National Security Advisor Condolezza Rice, a former director of Chevron Texaco, after whom the company named one of its supertankers. These very visible figures give the administration its peculiarly strong oil flavor. In the earliest days of the administration, they promoted a number of striking industry-favorable policy decisions, such as the rejection of the Kyoto Treaty on global warming, the ouster of the head of the Intergovernmental Panel on Climate Change, and the elaboration of a strongly pro-oil national energy plan.

In the UK, close ties likewise bind companies and successive governments together, The government even held a majority stake in BP, with seats on the board, until 1987. By contrast to the United States, where the oil companies are first among such peers as General Motors, Walmart and Citigroup, in the UK, oil giants Shell and BP tower far above the next tier firms like British Telecom, Unilever and ICI.23 From such heights, UK oil executives speak almost as unofficial members of government. In recent years, a number of personal ties stand out, especially the close friendship between Prime Minister Tony Blair and BP CEO John Browne (Lord Browne of Maddingley). The Blair-Browne relationship was so close that wags in the press called the company “Blair Petroleum,” though it would have been more accurate to say that Blair was the BP Prime Minister. At least a dozen BP executives held government posts or sat on official advisory committees, including Browne’s immediate predecessor David Simon (Lord Simon of Highbury). Simon had stepped down as BP CEO to serve as Blair’s unelected Minister for European Trade and Competitiveness from May 1997 to July 1999.24 Later on, Tony Blair’s longtime friend and personal assistant Anjl Hunter, director of government relations and known as “the gatekeeper” in Downing Street, joined BP as head of public relations in the summer of 2002, just as the war was actively brewing.25

After a century of closely-combined action on the global stage, company chieftans and government leaders see their relationship as cooperative and thoroughly complementary. In April, 2003, shortly after the war in Iraq, Lord Browne responded tartly to critics by saying: “It is quite ethical and appropriate for a global company, based in the UK, to be supported by the British government.”26 He did not, of course, go into the details.

Seven Oil Wars to Control Iraq

Before coming to the Iraq war of 2003, we will review the modern history of conflicts over Iraq. There have been a total of seven wars in the past ninety years, all closely related to oil. What follows is a thumbnail sketch of those conflicts, to suggest the constant military struggle over this oil-rich territory.

1. Colonial Conquest (1914-18). The first conflict took place during World War I, when the British captured the area from the Ottoman Empire during a bloody four-year campaign. Lord Curzon, a member of the War cabinet who became Foreign Minister immediately after the war, famously stated that the influence of oil over British policy in Iraq was “nil.” “Oil,” said Curzon, “had not the remotest connection with my attitude over Mosul,” the major city in Iraq’s northern oil-bearing region.27 Studies by a number of historians have shown that Curzon was lying and that oil was indeed the major factor shaping British policy towards Iraq.28 Sir Maurice Hankey, Secretary of the War Cabinet, even insisted enthusiastically in a private cabinet letter that oil was a “first class war aim.”29 London had ordered its forces to continue fighting after the Mudros Armistice was signed, so as to gain control of Iraq’s main oil-producing region. Fifteen days later, the British army seized Mosul, capital of the oil region, blocking the aspirations of the French, to whom the area had been promised earlier in the secret Sykes-Picot agreement.30

2. War of Pacification (1918-1930). To defend its oil interests, Britain fought a long war of pacification in Iraq, lasting from 1918 throughout the next decade. The British crushed a country-wide insurrection in 1920 and continued to strike at insurgents with poison gas, airplanes, incendiary bombs, and mobile armored cars, using an occupation force drawn largely from the Indian Army. This carnage killed or wounded thousands of Iraqis, burning villages and extracting colonial taxes by brutal means. Winston Churchill, as Colonial Secretary, saw the defense of Iraq’s lucrative oil deposits as a test of modern weaponry and military-colonial use of force, enabling Britain to hold the oil fields at the lowest possible cost.31

3. Re-Occupation (1941). Though Britain granted nominal independence to Iraq in 1932, it maintained a sizeable military force and a large air base in the country and continued to rule “indirectly.” In 1941, fearful that Iraq might fall into the hands of the Axis, London again decided to seize direct control of the country through military force. Broad geo-strategic wartime goals drove this campaign, but not least was British concern to protect the Iraqi oil fields and keep them in British hands, free not only from German but also from US challenge.32

4. Iran-Iraq War (1980-88). In 1980, Iraq attacked its neighbor, Iran. A long war ensued through 1988, a savage conflict causing hundreds of thousands of casualties on both sides, costing tens of billions of dollars and destroying much of both countries’ oilfields and vital infrastructure. Foreign governments, interested in gaining geo-strategic advantage over both nations’ oil resources, promoted, encouraged and sustained the war, some arming both sides. The US and the UK supplied Iraq with arms, chemical and biological weapon precursors, military training, satellite targeting and naval support. Other powers participated as well, notably France, Germany and Russia.33 The big oil companies profited mightily, as war conditions kept Iraqi and Iranian oil off the market, driving worldwide prices substantially higher. By bankrupting the two governments and ruining their oil infrastructure, the war also potentially opened the way for the return of the companies through privatization in the not-too-distant future. But after the war, when Iraq and Iran turned to Japanese oil companies for new private investments, including a Japanese role in Iraq’s super-giant Majnoun field, the stage was set for yet another conflict.

5. Gulf War (1991). Following the Iraqi invasion of Kuwait in August 1990, the US decided to intervene militarily and Washington assembled a number of secondary military partners, including the UK and France. As US President George Bush summed up the oil-centered threat posed by Saddam Hussein at the time: “Our jobs, our way of life, our own freedom and the freedom of friendly countries around the world would all suffer if control of the world’s great oil reserves fell into the hands of Saddam Hussein.”34 US forces heavily bombed Iraqi cities and military installations and then launched a short and decisive ground war, ending the Iraqi occupation of its neighbor. The war badly battered Iraq, destroying much of its electricity and water purification systems and claiming 50-100,000 casualties.

6. Low Intensity Conflict During the Sanction Period (1991-2003). After the armistice, the UN’s pre-war embargo continued, because the US-UK used their Security Council vetoes to block its lifting. The sanctions imposed a choke-hold on Iraq’s economy, restricted oil sales and kept the country’s oil industry in a shambles. By blocking foreign investment and preventing reconstruction, the sanctions further ruined the country’s economic base. At the same time, with Iraqi supplies largely off the market, international oil prices were supported and company profits benefited. The US and the UK declared their goal to oust Saddam and their intelligence services made many efforts to assassinate him or to overthrow his government by military coup. The US-UK also established “no-fly” zones in much of Iraqi airspace, using air patrols to launch periodic attacks on Iraqi military targets. Four times, the US-UK launched major attacks, using scores of strike aircraft and cruise missiles – in January 1993, January 1996, June 1996 and December 1998. Though oil companies from a number of other countries negotiated with the Iraqi government for production deals, none dared to challenge the sanctions (and the Anglo-American companies) by beginning production under such risky circumstances.

7. Iraq War (2003). This war, launched by the US in spite of strong opposition at the UN, overthrew the government of Saddam Hussein and brought the US-UK coalition into direct rule over Iraq and in direct control of the oil fields. The war caused further deterioration of Iraq’s infrastructure, many casualties, and a chaotic and dysfunctional economy. Though the coalition rules Iraq, it has faced a tough armed resistance during many months following the main conflict. War number eight, the coalition’s war of pacification, has already begun.

The Exceptional Lure of Iraqi Oil

Constant wars hint at the exceptional lure of Iraq’s oil fields. Iraq’s oil is of good quality, it exists in great quantity, and it is very cheap to produce, offering the world’s most extraordinary and profitable oil rents.

Officially, Iraq’s reserves are stated as 112 billion barrels, the world’s second largest after Saudi Arabia. According to the US Department of Energy, Iraq’s real reserves may be far greater – as much as 3-400 billion barrels after further prospecting.35 Iraq’s Senior Deputy Oil Minister confirmed high estimates on May 22, 2002, in an interview with Platts, a leading industry information source. He said: “we will exceed 300 billion barrels when all Iraq’s regions are explored,” and he went on to affirm that “Iraq will [then] be the number one holder of oil reserves in the world.”36

Iraq’s oil is the world’s cheapest to produce, at a cost of only about $1 per barrel. The gigantic “rent” on Iraq’s oil, during decades of production, could yield company profits in the range of $4-5 trillion dollars – that is, $4-5 million, millions. Assuming fifty years of production and 40% royalties, Iraq could yield annual profits of $80-90 billion per year – more than the total annual profits of the top five companies, even in the banner year of 2003.37

As the world’s other oilfields seriously deplete during the next two decades, global production will increasingly depend on the enormous reserves of the Persian Gulf region. Iraq will then represent a large and increasing percentage of the world’s supplies – perhaps over thirty percent. An international company must hold a serious stake in Iraq if it is to retain its status as a major player in the world’s oil industry. The Anglo-American giants know they must gain the lion’s share in Iraq or decline irrevocably.

Shortly before the war, industry experts described Iraq as a future “gold rush,” where the companies would battle to gain control of key reserves.38 At that time, a well-informed diplomat at the UN commented bluntly: “Exxon wants Majnoun and they are determined to get it.”39 And a longtime industry observer said: “There is not an oil company in the world that doesn‘t have its eye on Iraq.”40

Control of Reserves

Oil companies’ future profits – and their current share prices and market capitalization – depend to a large degree on their control of reserves. The 1972 oil nationalizations in Iraq pushed the US and UK companies completely out of the country. Before that date, they held a three-quarter share of the Iraq Petroleum Company, including Iraq’s entire national reserves. After 1972, all that oil disappeared from their balance sheets.

In the 1980s and 90s, their rivals in France, Russia and even Japan and China began to make deals that led towards lucrative production sharing agreements, allowing those competitors to gain a large potential share of Iraq’s oil reserves. The sanctions regime, enforced under the United Nations and maintained at the insistence of the US and UK from 1990 to 2003, prevented these deals from coming to fruition, thus protecting the future stake of the US-UK companies.

In recent years, as older fields worldwide have dwindled, the companies have faced rising replacement costs for their reserves. According to a 2002 report by energy consultants John S. Herold, “finding costs” for new reserves rose 61% in 2001, pushing replacement costs to $5.31 a barrel.41 “Finding new sources of oil has become the industry’s main challenge, as old fields in North America and Europe are being tapped out,” commented the Wall Street Journal in early 2003.42 Imagine, then, the lure of the vast Iraqi fields, offering nearly free acquisition and a huge addition to total reserves. As Fadel Gheit of Fahnstock & Co. in New York concluded, Iraq “would be a logical place in the future for oil companies to replace their reserves.”43

New Iraq Contracts and Moves toward War

The big US-UK companies made no secret of their strong desire for Iraqi oil. BP and Shell conducted secret negotiations with Saddam Hussein, while Exxon and Chevron took a harder line and waited for Washington to eliminate Saddam covertly. In 1997, as the sanctions lost international support, Russia’s Lukoil, France’s Total, China National and other companies struck deals with the government of Iraq for production sharing in some of Iraq’s biggest and most lucrative fields. Lukoil reached an agreement for West Qurna, Total got Majnoun, while China National signed on for North Rumaila, near the Kuwaiti border.44 Paris, Moscow and Beijing, as Permanent Members in the UN Security Council pressed for an easing of the sanctions, with support from a growing number of other countries. Grassroots movements, concerned about Iraq’s humanitarian crisis, called on the UN Security Council to end the sanctions forthwith.

In 1997-98, the US companies saw the writing on the wall. With Iranian fields already slipping into the hands of competitors, such losses in Iraq threatened to reduce them to second rank and confront them with fierce international competition and downward profit pressure. The companies stepped up their lobbying in Washington and made their wishes for Iraq oil crystal clear. “Iraq possesses huge reserves of oil and gas – reserves I’d love Chevron to have access to,” enthused Chevron CEO Kenneth T. Derr in a speech at the Commonwealth Club of San Francisco.45

Almost as soon as Iraq signed the new oil agreements, Washington began to deploy military forces near the country’s borders in a very threatening forward posture. Operation Phoenix Scorpion and Operation Desert Thunder in various phases lasted almost continuously from November 1997 through December 1998. In Washington, the rhetoric grew increasingly hard-line and threatening. On January 26, 1998 members of the right-wing Project for a New American Century sent a letter to President Bill Clinton warning that the containment policy “has been steadily eroding over the past several month” and calling for “removing Saddam Hussein from power.”46 CIA sources told journalists and members of Congress that Saddam was hiding large stocks of deadly weapons. Congress held hearings and began drafting legislation. The President asked the Pentagon to plan a variety of military options, ranging from limited strikes (later designated Operation Desert Fox) to full-scale war (Operation Desert Lion).

On May 1, President Clinton signed a law that provided $5 million in funding for the Iraqi opposition and set up “Radio Free Iraq.” That was only the beginning. On May 29, the Project for a New American Century sent an open letter to Congress on Iraq, insisting that the US government was not sufficiently firm with Saddam, attacking what it called the President’s “capitulation” and warning of severe “consequence” to US interests. Among the signatories of this high-profile letter were Donald Rumsfeld, Paul Wolfowitz, Richard Perle, Elliot Abrams, John Bolton and others who would later take high posts in the Bush administration.47 The Clinton White House was ready to oblige. On August 14, the President signed another law (PL 105-235) that accused Iraq of building weapons of mass destruction and failing to cooperate with UN inspectors, declaring ominously: “Iraq is in material and unacceptable breach of its international obligations.” Finally, on October 31, the President signed the “Iraq Liberation Act of 1998” (PL 105-338), a text still more bellicose. “It should be the policy of the United States to support efforts to remove the regime headed by Saddam Hussein from power in Iraq,” read the key sentence. In London, government leaders made similar expressions of determination and a UK Strategic Defence Review of July 1998 affirmed readiness to use force. “Outside Europe,” the Review concluded, “the greatest risks to our national economic and political interests . . . will remain in the Gulf.”48

On December 16-19, 1998, the US-UK launched Operation Desert Fox. Hundreds of strike aircraft and cruise missiles hit Baghdad and other major Iraqi targets, including an oil refinery. The attacks ended the UN arms inspection program, pre-empting any declaration that Iraq was nearly free of mass destruction weapons. Following Desert Fox, US-UK air forces patrolled the “no-fly” zones with new, more aggressive rules of engagement and regular attacks on Iraqi targets.

This increasingly aggressive policy towards Iraq expressed a hardening conviction among leaders in the US and the UK that Saddam Hussein could not be ousted by covert means, and that invasion and direct control over Iraq’s oil would now be required.

The Bush Administration Heads for War

The new Bush administration came into office in January 2001 at this critical juncture. Revelations by former Secretary of the Treasury Paul O’Neill inform us that the new administration started planning for an invasion of Iraq almost immediately. According to O’Neill, Iraq was “Topic A” at the very first meeting of the Bush National Security Council, just ten days after the inauguration. “It was about finding a way to do it,” reports O’Neill, “That was the tone of the President, saying ‘Go find me a way to do this.’”49 Meanwhile, the President ordered stepped-up overflights and provocative attacks on Iraqi targets under a plan, evidently known as Operation Desert Badger. On February 16, US aircraft bombed Iraqi radar installations north of the no-fly zone and very close to southern limits of Baghdad. Readily audible from the Iraqi capital, this attack drew wide media comment.

Just a few weeks later, the hastily-organized National Energy Policy Development Group, chaired by Vice President Cheney, studied the challenge posed by French, Russian and other companies. One of the documents produced by the Cheney group, made public after a long court case, is a map of Iraq showing its major oil fields and a two-page list of “Foreign Suitors for Iraqi Oilfield Contracts.” The list showed more than 40 companies from 30 countries with projects agreed or under discussion, but not a single US or UK deal.50 The list included agreements or discussions with companies from Germany, India, Italy, Canada, Indonesia, Japan and other nations, along with the well-known French, Russian and Chinese deals. The Cheney Group’s report, released in May, warned ominously of US oil shortfalls that might “undermine our economy, our standard of living, our national security.”

The Bush administration seems to have reached a near-decision on war with Iraq in the late spring of 2001. The events of September 11, 2001 and the US war on Afghanistan, postponed the timetable of operations, but may have helped solidify the support of the UK ally. According to Sir Christoper Meyer, the British ambassador in Washington at the time, President Bush raised the issue of Iraq with UK Prime Minister Tony Blair at a private dinner at the White House just nine days after September 11. Bush asked for British support for removal of Saddam Hussein from power, a clear reference to a military operation. According to Meyer's account, Blair gave his silent assent to the proposal. 52 As the wheels of policy began to turn in the Pentagon and the While House, oil industry publications like Platts and Oil and Gas Journal reflected the growing sense of urgency within the industry that the time for action had arrived. Early in 2002, more than a year before the conflict, Bush and Blair affirmed their plans for war and (while keeping their decision secret) stepped up efforts to prepare their governments and their publics for the use of force.

As war talk increased in Washington and at the UN, oil issues came into the open. The influential Heritage Foundation published in September a report on “The Future of a Post-Saddam Iraq” which called for the privatization of Iraq’s national company and warned that competitor companies would lose their Saddam-era contracts. The companies, the Bush administration and the Iraqi opposition held many meetings over post-war oil. The Washington Post reported in September that the big companies were “maneuvering for a stake” in postwar Iraq and that the war could cause major “reshuffling” of world petroleum markets. Former CIA Director James Woolsey told the Post that the US would use access to post-war oil as a bargaining chip to win French and Russian support for the war.51 Also at this time, Iraqi exile leaders said publicly that a post-Saddam government would “review” all the foreign oil agreements. Ahmad Chalabi, leader of the Iraqi National Congress, US favorite as heir to the Iraqi leadership, was quoted as saying: “American companies will have a big shot at Iraqi oil.”53

Russian officials told the London-based Observer newspaper that they feared a post-war nullification of the large Russian contracts, with the most lucrative deals given over to US companies. The Observer quoted one official in Moscow as saying that the impending conflict could be called “an oil grab by Washington.” In France, it was reported that Total was actually in negotiations with the US government “about redistribution of the oil regions between the world’s major companies.”54

On October 21, Deutsche Bank added to the war-for-oil speculation by publishing a major investor-research study entitled: “Baghdad Bazaar: Big Oil in Iraq?” The report, which noted that “war drums are beating in Washington” and “Big Oil is positioning for post-sanctions Iraq,” analyzed the upward stock market potential of the oil industry in light of declining world reserves and Iraq’s post-war potential. On November 1, Youssef Ibrahim of the Council on Foreign Relations, warned in the International Herald Tribune that the coming war was “bound to backfire,” calling it a “a misguided temptation to get more oil out of the Middle East by turning a ‘friendly’ Iraq into a private American oil pumping station.”55

Meetings continued all fall and into the new year in Washington, London, Houston and elsewhere, between government officials, oil executives and Iraqi opposition leaders in various combinations. US envoys held private talks on oil in Moscow, Paris, Beijing and other capitals. In December, there was a meeting of oil company figures at a resort near Sandringham in Scotland, featuring a talk by the former head of Iraq’s Military Intelligence Agency. Topics on the agenda included Iraq’s future oil potential and whether post-Saddam Iraq might pull out of OPEC.56 In the Pentagon, war planners were considering how to seize Iraq’s oil fields in the first hours and days of the impending conflict.

The War and After

US-UK forces invaded Iraq on March 20, 2003, seizing the major oilfields and refineries almost immediately. When coalition forces later entered Baghdad, they set a protective cordon around the Oil Ministry, while leaving all other institutions unguarded, allowing looting and burning of other government ministries, hospitals and cultural institutions. Looters sacked the National Museum and burned a wing of the National Library, but the Oil Ministry stood relatively unscathed, with its thousands of valuable seismic maps safe for future oil exploration.

President Bush quickly appointed Phil Carroll, a former high-ranking US oil executive, to assume control of Iraq’s oil industry and on May 22, Bush issued Executive Order 13303 giving immunity to oil companies for all activities in Iraq and deals involving Iraqi oil. On the same day, under pressure from the US and the UK, the UN Security Council passed Resolution 1483 which lifted the former sanctions and allowed the occupation authorities to sell Iraqi oil and put the proceeds in an account they controlled. Every step in the early post-war period confirmed the centrality of oil, not as an Iraqi national resource to be protected, but as a spoil of war to be controlled. Now, many months after the war, the picture remains the same.

Company Bonanza or Greedy Overreach?

Was the war a bold and successful calculation or a major error, resulting from official hubris and company greed? The war’s authors hoped to affirm a New American Century and company pre-eminence, but the conflict instead could limit US global ambitions and set back oil company aspirations. It is too early to be certain of the outcome, but we can make a few preliminary conclusions.

The companies hoped that the Iraq war would allow them to take over Iraq’s oil reserves with only a minimum of difficulty. Self-confident assurances by pro-war ideologues in Washington reinforced the widely-held conviction that the sole superpower could easily mobilize international support and that the people of Iraq would welcome the invaders and applaud the “liberation” offered by a US occupation government. The hawks expected that they could rapidly set up a pliant government and privatize the Iraqi industry or distribute production agreements speedily to US firms. But these ideas proved illusory. Instead, Bush and Blair faced enormous worldwide opposition to the war. And in spite of US forces’ rapid seizure of the country, they now grapple with economic chaos and an intense and lethal resistance movement.

The companies, it should be said, are not in a great hurry. They plan and act on decades-long time horizons. They can wait out the insecurity of the present if the precious Iraqi oil fields fall dependably into their hands sometime in the next few years. But it is by no means certain that the Anglo-American giants will get their way as easily in Iraq as they did in Washington. As they wait, the violence of pacification and resistance engulfs the country. War number eight gets under way.

Iraq: the Struggle for Oil (August 2002)
Oil in Iraq: the Heart of the Crisis (December 2002)
The Iraq Oil Bonanza: Estimating Future Profits (January 28, 2004)


Notes

1See, for example, Daniel Yergin, The Prize (New York: Simon & Schuster, 1991).

2The Seven Sister companies arose after the federal anti-monopoly breakup of the Standard Oil Trust in 1911. They included three Standard Oil spinoffs, Standard Oil Company of New Jersey, Standard Oil Company of New York , and Standard Oil Company of California, as well as Texaco, Gulf, and the UK giants Royal Dutch Shell and British Petroleum. See Anthony Sampson, The Seven Sisters: the great oil companies and the world they made (London: Hodder & Staughton, 1988)

3Data from ExxonMobil web site, announcement of 2003 earnings, January 29, 2004, http://www.exxonmobil.com/corporate/files/corporate/earnings_4q03.pdf.

4Data from CIA World Factbook web site (www.cia.gov/cia/publications/factbook) and Fortune Global 500 (www.fortune.com/fortune/fortune500). Note that we are comparing company revenue with government revenue, not with national GNP. The seventh richest government, the Netherlands, had a revenue in 2001 of $134 billion, far below Exxon’s figure.

5See tables posted on the Global Policy Forum web site, based on information from Fortune and the CIA Factbook – www.globalpolicy.org/socecon/tncs/oiltable.htm - www.globalpolicy.org/socecon/tncs/oiltncs2002.htm - www.globalpolicy.org/socecon/tncs/tncstat2.htm

6Ordinary citizens worry about having a plentiful supply of gas for their automobiles, too. On this basis, the US government has often mobilized its people around aggressive Middle East military policies.

7John D. Rockefeller, Random Reminiscences of Men and Events (New York: Doubleday, 1909)

8Yergin,183.

9Michael B. Stoff, Oil, War and American Security: the search for a national policy on foreign oil 1941-1947 (New Haven: Yale University Press, 1980), 147-50.

10Wilson D. Muscamble, George F. Kennan and the Making of American Foreign Policy (Princeton: Princeton University Press, 1992)

11Rents sometimes result from technical advances, patents, copyrights, and the like, advantages that normally disappear after a period of time. Oil rents are long-lasting and can yield far higher spreads between the normal profit rate and the rate expressed by the rent.

12Virtually all historical studies of the industry provide evidence of this kind. See Yergin (1991) and Sampson (1988) See also: Joe Stork, Middle East Oil and the Energy Crisis (New York: Monthly Review, 1976) and Fiona Benn, Oil Diplomacy in the Twentieth Century (New York: St. Martin’s Press, 1986).

13Richard Sale, “Saddam Key in Early CIA Plot,” United Press International, April 10, 2003. Sale quotes a US operative who knew Saddam at that time saying: “He was a thug – a cutthroat.” Saddam was 22 years old at the time of the botched assassination.

14See Kermit Roosevelt, Countercoup, the struggle for the contol of Iran (New York: McGraw-Hill, 1979), a book written by the CIA’s coup-maker in Tehran, and Ervand Abrahamian, Iran Between Two Revolutions (Princeton: Princeton University Press, 1982).

15See, for example, Joseph Fitchett and David Ignatius, “Lengthy Elf Inquiry Nears Explosive Finish,” International Herald Tribune,” February 1, 2002 and Nicholas Shaxon, "The Elf Trial: political corruption and the oil industry," in Transparency International, Global Corruption Report 2004 (London: Pluto Press, 2004), pp. 67-71. Almost all the world’s oil-producing countries have suffered from abusive, corrupt and undemocratic governments and an absence of durable development. Indonesia, Saudi Arabia, Libya, Iraq, Iran, Angola, Colombia, Venezuela, Kuwait, Mexico, Algeria – these and many other oil producers have a sad record, which includes dictatorships installed from abroad, bloody coups engineered by foreign intelligence services, militarization of government and intolerant right-wing nationalism. On poverty and war in oil-producing countries see Christian Aid, Fueling Poverty: Oil, War and Corruption (London, 2003) and Michael Ross, Extractive Sectors and the Poor (Oxfam America, 2001).

16For a lengthy discussion of the special tax treatment of the companies see John M. Blair, The Control of Oil (New York: Random House, 1976), 187-203.

17Blair (1976), 71-76.

18New York Times, January 2, 2004.

19For a discussion of the Central Command as a force designed for oil-related intervention, see Michael T.Klare, Resource Wars: the new landscape of global conflict (New York: publisher, 2001)

20Testimony of the senate Armed Services Committee, April 13, 1999.

21See Peter Grose, Gentleman Spy: the life of Allen Dulles (Boston: Houghton Mifflin, 1994)

22Stoff (1980), 64-68.

23In 2003, for example, while BP had revenues of $233 billion, British Telecom had revenues of $29 billion, Barclays $26 billion, Lloyds $22 billion, Unilever $20 billion, BAT $18 billion and ICI only $10 billion.

24In recent decades in the UK, government ministers have nearly always been drawn from elected members of parliament, sitting in the House of Commons. Simon had just been named to the unelected House of Lords and had no parliamentary experience or popular constituency.

25On Hunter, see New York Times, August 30, 2003.

26As quoted in Guardian, April 6, 2003.

27Curzon was responding to fierce criticism in parliament and the press. T. Johnson, MP, had said, for example, that “The trail of oil was all over the question of Mosul and Iraq.” Curzon wrote three articles in The Times (London) on August 2, 9 and 16, 1924 in which he set forth his denials.

28See Helmut Mejcher, Imperial Quest for Oil: Iraq 1910-1928 (London: Ithaca Press, 1976) and Peter Sluglett, Britain in Iraq 1914-1932 (London: Ithaca Press, 1976)

29A note the Foreign Secretary Arthur Balfour, as quoted in Yergin, 188.

30On the seizure of Mosul, see Mechjer (1976), 42. Merchjer notes that the British also postponed the signing of the armistice to enable their forces to make more progress towards Mosul. See also Sluglett (1976).

31See, for example, David E. Omissi, British Air Power and Colonial Control in Iraq: 1920-1925 (Manchester: Manchester University Press, 1990), Sluglett, V.G. Kiernan, Colonial Empires and Armies: 1815-1960 (Stroud: Sutton, 1998).

32Raghid Solh, Britain’s 2 Wars with Iraq, 1941-1991 (Reading: Ithaca Press, 1996)

33Dilip Hiro, The Longest War: the Iran-Iraq military conflict (New York: Routledge, 1991)

34As quoted by the New York Times, August 16, 1990

35See US Department of Energy, Energy Information Administration website at http://www.eia.doe.gov/emeu/cabs/iraq.html

36Platts website.

37I have arrived at this figure based on assumptions about four variables. I assume 350 billion barrels of reserves, $30 oil rent average in real terms, 75% recovery rate and 60% company share of the rent (the remainder going to the government). Different assumptions would yield different final estimates. For example, assumptions based on worldwide oil scarcity would drive the number up, while assumptions based on rapid conversion to sustainable energy sources would drive the number down. World Energy Outlook of 2001, published by the International Energy Agency, estimated that the total value of foreign contracts signed by the Iraqi government of Saddam Hussein might reach $1.1 trillion, a. number consistent with mine, since the contracts covered only a fraction of Iraq’s total oil potential. See “Scramble to care up Iraqi oil reserves lies behind US diplomacy,” Observer, October 6, 2002.

38Author’s Interview with an expert, November, 2002.

39Author’s Interview with a UN diplomat, November, 2002.

40Interview with a US-based industry observer, November, 2002

41Platts website –www.platts.com/Oil/Resources/

42Susan Warren, “Exxon’s Profit Surged in 4th Quarter,” Wall Street Journal, February 12, 2004.

43Platt’s website, www.platts.com/Oil/Resources/f.. A recent example, not dealing with Iraq, shows the great importance of company reserves. On January 9, 2004, Shell announced that it had revaluated its worldwide reserves downward by 20%. The firm’s stock immediately declined by 7%. Shell had reduced its estimated reserves by 3.9 billion barrels, bringing the company’s total to 15.4 billion barrels (Exxon’s reserves were 22 billion barrels at that time). By contrast, Iraq’s single super-giant Majnoun field (promised pre-war to Total) has estimated reserves of 10- 30 billion barrels, while the super-giant West Qurna field (promised to Lukoil) has estimated reserves of 15-18 billion barrels. If Shell could get control of such a field in Iraq, it could more than double its total company reserves and enjoy an enormous lift in its share prices. This demonstrates clearly what is at stake in Iraq, since share valuation brings fifty years or more of future production immediately into the market capitalization of the firm.

44China had become a major player in the Middle East oil game because of its rapid economic growth and huge future oil needs, with Persian Gulf imports estimated to rise from 0.5 million barrels per day in 1997 to 5.5 million barrels per day in 2020.

45As posted on the company web site at www.cherontexaco.com/news/archive/chevron_speech/1998/98-11-05.asp

46Project for a New American Century web site – www.newamericancentury.org/iraqclintonletter.htm

47www.newamericancentury.org/iraqletter.htm

48UK Ministry of Defence website, White Paper, July 18, 2002 – www.mod.uk/issues/sdr/newchapter.htm

49Ron Suskind, The Price of Loyalty: George W. Bush, the White House and the Education of Paul O’Neill (New York, Simon & Schuster, 2004) 174-75

50The Cheney documents were curiously made public in response to a law suit by a conservative organization called Judicial Watch. The administration fought the Judicial Watch case in court, but eventually lost. The “Foreign Suitors” list includes Shell, but lists no contract results with the company. Exxon, Chevron and BP are not on the list at all. Two small UK firms, Branch Energy and Pacific Resources are also to be found on the list.

51Dan Morgan and David B. Ottaway, “In Iraqi War Scenario, Oil is Key Issue as U.S. Drillers Eye Huge Petroleum Pool,” Washington Post, September 15, 2002.

52David Rose, "Bush and Blair Made Secret Pact for Iraq War," The Observer, April 4, 2004

53Morgan and Ottaway (2002)

54Ed Vulliamy, Paul Webster and Nick Paton Walsh, “Scramble to Carve up Iraqi oil reserves lies behind US diplomacy,” The Observer, October 6, 2002.

55Youssef Ibrahim, “Bush’s Iraq adventure is bound to backfire,” International Herald Tribune, November 1, 2002.

56Peter Beaumont and Faisal Islam, “Carve-Up of Oil Riches Begins,” Observer, November 3, 2002.


 

Oil in Iraq: the heart of the Crisis - James A Paul

Oil in Iraq: the heart of the Crisis

James A. Paul

Global Policy Forum
December, 2002

Oil Companies in Iraq: A Century of Rivalry and War (November 2003)
Iraq: the Struggle for Oil (August, 2002)
The Iraq Oil Bonanza: Estimating Future Profits (January 28, 2004)

Oil is at the heart of the crisis that leads towards a US war against Iraq. For more than a hundred years, major powers have battled to control this enormous source of wealth and strategic power. The major international oil companies, headquartered in the United States and the United Kingdom, are keen to regain control over Iraq’s oil, lost with the nationalization in 1972. Few outside the industry understand just how high the stakes in Iraq really are and how much the history of the world oil industry is a history of power, national rivalry and military force.

Why Iraq’s Oil is so coveted by the big companies

Oil in Iraq is especially attractive to the big international oil companies because of three factors:

(1)high quality/high value product
Iraq’s oil is generally of high quality because it has attractive chemical properties, notably high carbon content, lightness and low sulfur content, that make it especially suitable for refining into the high-value products. For these reasons, Iraqi oil commands a premium on the world market.

(2)huge supplies
Iraq’s oil is very plentiful. The country’s proven reserves in 2002 were listed at 112.5 billion barrels, about 11% of the world total. With little exploration since the nationalization of the industry in 1972, many promising areas remain unexplored. Experts believe that Iraq has potential reserves substantially above 200 billion barrels. The Energy Information Administration of the US Department of Energy has estimated that Iraqi reserves could possibly total over 400 billion barrels. If new exploration fulfills such high-end predictions, Iraq’s reserves could prove close to those of Saudi Arabia, now listed at 260 billion barrels but likely also to go considerably higher as well. The Department of Energy assessment says that:

“Iraq contains 112 billion barrels of proven oil reserves, the second largest in the world (behind Saudi Arabia) along with roughly 220 billion barrels of probable and possible resources. Iraq’s true potential may be far greater than this, however, as the country is relatively unexplored due to years of war and sanctions. Deep oil-bearing formations located mainly in the vast Western Desert region, for instance, could yield large additional oil resources (possibly another 100 billion barrels), but have not been explored.” (http://www.eia.doe.gov/emeu/cabs/iraq.html)

On May 22, 2002, Iraqi Senior Deputy Oil Minister gave an interview to Platts, a leading industry information source. Discussing Iraq’s estimates of its potential reserves, he told Platts that "The figure we reached and which is widely known, is that we could discover 214 billion barrels of oil in addition to the present proven reserve [of 112 billion]. We are sure of this figure as all available indications and scientific standards say. This means that we will exceed the 300 billion barrels when all Iraq's regions are explored."

Hamud indicated that more reserves were probably to be found. "We have also said on many occasions that we have indications of oil structures--these are only primary indications--estimated to be more than 560 reservoirs that could be oil fields that need digging, appraisal and which we believe have a high potential oil presence. We believe that when we prove all this, Iraq will be the number one holder of oil reserves in the world. We are highly confident of this."

According to Iraq oil expert Mohammad Al-Gallani at British-based GeoDesign Ltd, Iraq has 526 prospective drilling sites, of which only 125 have been drilled. Of those, 90 have proven potential as oil fields, but only 30 have been partially developed and just 12 are on stream. “You can imagine the huge potential that lies there for the future,” Al-Gallani told Canadian Press in a story datelined December 14, 2002.

As world demand for oil increases and as oil reserves in other areas decline at a fast rate, oil in Iraq will represent a steadily-larger proportion of the world’s total. If Iraq’s fields meet high-end estimates in the 3-400 billon barrel range, Iraq’s reserves could reach over 30% of total global reserves by mid-century or even before.

(3)exceptionally low production costs, yielding a high per barrel profit
The US Department of Energy states that “Iraq’s oil production costs are amongst the lowest in the world, making it a highly attractive oil prospect.” This is because Iraq’s oil comes in enormous fields that can be tapped by relatively shallow wells, producing a high “flow rate.” Iraq’s oil rises rapidly to the surface, because of high pressure on the oil reservoir from water and from associated natural gas deposits.

More than a third of Iraq’s current reserves lie just 600 meters (1800 feet) below the earth’s surface and some of Iraq’s fields are among the world’s largest. The fabulous Majnoun Field, not yet in production, is said to hold at least 25 billion barrels. According to Oil and Gas Journal, Western oil companies estimate that they can produce a barrel of Iraqi oil for less than $1.50 and possibly as little as $1, including all exploration, oilfield development and production costs and including a 15% return. This is similar to production costs in Saudi Arabia and lower than virtually any other country.

By way of comparison, a barrel of oil costs $5 to produce in other relatively low-cost areas like Malaysia and Oman. Production costs in Mexico and Russia might potentially be as low as $6-8 per barrel (higher under current production arrangements by local companies).

Offshore production areas like the North Sea, with expensive platforms, can run to $12-16 a barrel. In Texas and other US and Canadian fields, where deep wells and small reservoirs make production especially expensive, costs can run above $20 a barrel. When world market prices dip below $20 a barrel, the North American fields yield no profit at all, and many are capped, while production in an area like Iraq proves extremely profitable in all market conditions.

Oil companies' future profits (and share prices) depend on their control of reserves. In recent years, as older fields have begun to run out, the companies have faced rising “replacement” costs. According to a 2002 report by energy consultants John S. Herold, finding costs for new reserves rose 60% in 2001, pushing replacement costs to $5.31 a barrel. ExxonMobil, BP and Shell are facing this difficulty. Imagine the lure of the vast Iraqi fields, with little prospecting required, offering nearly free acquisition. As Fadel Gheit of Fahnstock & Co. in New York commented in an article in Dawn, Iraq “would be a logical place in the future for oil companies to replace their reserves.” http://www.dawn.com/2002/12/15/ebr12.htm Another expert called Iraq an “El Dorado” for the oil industry.

Estimating Profits in Iraq

Oil prices fluctuate widely, so any discussion of financial yield must be based on a long term average price estimate. For this discussion, we will use an average prices of $25 a barrel in real (inflation-adjusted) terms. This average is higher than the average price in recent years, but as oil becomes scarcer, the price should rise steadily and might well reach a far high level than $25. (During 2002, by way of reference, the price of oil has fluctuated between $20 and $30).

We will assume the level of Iraqi reserves at 250 billion barrels (a very conservative estimate) and recovery rates at 50% (also a very conservative estimate). Under those conditions, recoverable Iraqi oil would be worth altogether about $3.125 trillion. Assuming production costs of $1.50 a barrel (a high-end figure), total costs would be $188 billion, leaving a balance of $2.937 trillion as the difference between costs and sales revenues. Assuming a 50/50 split with the government and further assuming a production period of 50 years, the company profits per year would run to $29 billion. That huge sum is two-thirds of the $44 billion total profits earned by the world’s five major oil companies combined in 2001. If higher assumptions are used, annual profits might soar to as much as $50 billion per year.

Though such numbers are highly speculative, the oil companies themselves engage in similar exercises, as they develop their global strategies and plan for a flow of profits many years into the future. For instance, two Russian companies, Zarubeshneft and Rosneft, told journalists in 2002 that that they were preparing to develop Iraq’s Nahr Umr field that they estimated was worth about $570 billion. This estimate appears too high, based on our assumptions, but they suggest the order of magnitude. Reliable estimates for the value of the fabulous Majnoun field go up to $400 billion and beyond.

If diminishing supplies drive future prices steadily higher or if Iraq’s oil reserves prove to be much larger than 250 billion barrels, the profit yield might be considerably greater. On the other hand, a nationalist government in Baghdad that would demand a higher percentage split would reduce the profit potential, as would the development of major alternative energy sources and taxes on carbon-based fuels in response to global warming. Whatever the exact results, and assuming a U.S.-friendly government, it is clear that Iraq is a goldmine that is literally “worth fighting for” in the view of the big companies.

Iraqi Gas Reserves and Pipeline Routes

The same multinational companies that rule the oil industry are also in the natural gas business. Gas is increasingly popular because it burns with less particulate and has a lower carbon content per unit of energy output. Large gas reserves have been discovered in fields in northern Iraq and other gas fields may be found elsewhere in the country. Though Iraq’s gas may not prove to be as lucrative as its oil, this resource is also coveted by the companies and could be a source of additional multi-billion dollar profits. In December, 1996, Gaz de France and ENI of Italy formed a consortium to build a pipeline from the Iraqi fields to Turkey, a project that could eventually link up with the European gas grid. But because of the UN sanctions against Iraq, this project could not proceed. In post-war Iraq, the big US-UK companies will seek gas production and transport deals along with oil deals, in hopes of snatching these lucrative prospects away from continental European competitors. Other pipeline projects, to bring gas from Qatar and other Gulf states through Iraq to the European market, are also under study and offer huge profits to whichever companies get permission to build them.

New Oil Company Strategy Aims to Regain Dominance in Production

After the nationalizations that swept the oil producing countries, beginning with Iraq’s nationalization in 1972, the oil multinationals lost much of their role in production, known in the oil business as “upstream.” Forced to abandon the cornucopia of profits in the Middle East (and to buy Middle East oil on the world market), they developed alternative production in such areas as the North Sea and the West Coast of Africa where production costs were higher and profits lower. They had to shift much of their profit-making to “downstream” activities such as transportation (tankers and pipelines), refining, petrochemicals and retailing. Major national oil companies (such as Kuwait and Venezuela) pursued downstream strategies as well, however, leading to overcapacity and falling rates of return.

By the mid-1990s, the companies began to revise their strategy towards a return to upstream, crude-oil production, pressing oil producing governments to offer production-related arrangements that could give the multinationals a direct share in crude reserves. Such ideas proved controversial and contrary to nationalist public sentiment in the producing countries.

By the end of the 1990s, however, oil-producing governments were mired in political crises, due to corruption, wars, and civil unrest. In Venezuela, Iraq, Algeria, Iran, and other producer countries, the US government appeared to be involved in destabilization measures, deepening existing social instability and what some scholars call “the crisis of the rentier state." Facing domestic unrest and oil production problems, the nationalized companies confront the need for large new investments to preserve production in older fields and to prospect for new reserves. But corrupt and instable governments want to take all the oil revenue stream, leaving little left over for investments. The multinationals argue that their enormous finances, greater technical competence and lower production costs could benefit producer governments, but behind these technocratic arguments lies the threat of further foreign destabilization and even direct military intervention. Clearly, the companies hope to roll the clock back to the “good old days” when they ruled the oil business and gave producer governments only a very small share.

Effects of US-Dominated Iraq on Other Oil Producer Governments

A U.S. client government in Baghdad – or a U.S. military occupation government – would doubtless hand out upstream production concessions to US-UK companies that would set an important precedent in the world oil industry, tipping the balance of power in favor of the companies and away from the producer states. In this way, the war against Iraq would have an effect on the oil industry that would go far beyond the borders of Iraq.

Oil analysts believe that a US-controlled Iraqi government would quickly make deals with the companies for privatized production. Such deals, though possibly agreed-to in advance of the war, would be justified by the new government on the basis that only the companies would be able to quickly resume post-war production, in order to resume exports and buy critical food, medicines, and other humanitarian goods. Further, Iraq’s huge needs to rebuild its post-war infrastructure would lead towards high production.

Even before Iraq had reached its full production potential of 8 million barrels or more per day, the companies would gain huge leverage over the international oil system. OPEC would be weakened by the withdrawal of one of its key producers from the OPEC quota system. Indeed, OPEC might face the paradox that a US military government of occupation in Iraq would be an OPEC member! Alternatively, such a government might pull out of the producers’ cartel.

This would put pressure on all major oil producers like Kuwait, Iran, Saudi Arabia and Venezuela to de-nationalize their oil companies and offer US-UK companies new concessions or production-sharing agreements that could lead to far higher company profits in these areas. Iran has already made some deals based on a 50/50 split and Saudi Arabia has returned to production sharing in its emerging gas business. US military presence in the Gulf and US clandestine operations to overthrow nationalist governments such as Chavez in Venzuela would increase the pressure. Privatization, even if incomplete, could yield additional tens of billions of profits to the oil companies and would weaken and even destabilize the major oil-producing states. Oil prices might be lowered temporarily to achieve this purpose, then raised later on when a new company-friendly order had been established.

Competition among the Multinational Oil Companies

Five companies dominate the international oil industry, four of them based in the US and the UK. The largest, US-based Exxon Mobil, was the world’s most profitable company in 2001 ($15 billion in profits) and the largest industrial company in terms of revenue. The three other companies in order of size are: BP Amoco (UK), Royal Dutch Shell (UK), and Chevron Texaco (US). France’s TotalElfFina ranks in fifth place. Predecessors of these firms controlled nearly all of the Iraq Petroleum Company from the discovery of oil in the late 1920s until nationalization in 1972. The British firms held half of the company, reflecting the dominant colonial position of the UK at that time in the region.

After nationalization, the Iraqis sought to gain greater control of their oil resources. They shunned the UK and US companies, while developing working relationships with French companies and the (Soviet) Russian government.. Just before the Gulf War (1990-91), Japanese companies negotiated for production-sharing contracts in Iraq and were said to have concluded a deal for the Majnoun field, but that deal collapsed due to the US-led war and the subsequent sanctions. During the 1990s, various firms negotiated with the Iraqis in hopes of gaining access to Iraqi oil once the sanctions were lifted. Shell, and possibly other US-UK companies held secret talks that did not succeed. In 1997 TotalFinaElf, China National Oil Company, and Lukoil of Russia signed agreements with the Iraqis for deals worth hundreds of billions of dollars. Lukoil’s deal concerned development of the West Qurna field, while TotalFinaElf obtained rights to Majnoun and China Nations to North Rumailah (the latter is the huge field that lies astride the border with Kuwait). A number of smaller companies, mostly Russian but also from Malaysia and other countries, got contracts at about this time.

The US-UK companies, keen to regain their former dominance in Iraq, fear that they would lose their leading role in the world oil industry if these contracts with their competitors come to fruition. France and Russia pose the biggest threat, but serious competitors from China, Germany, Italy and Japan also are players in this sweepstakes. China is especially keen to gain a stake in the region’s oil reserves because its rapid economic growth is pushing up its oil consumption. Chinese economists estimate that China may have to import as much as 5.5 million barrels a day from the Gulf by 2020.

The US-UK companies strongly favored the sanctions, as a means to hold their competitors at bay (and hold down excess production on the world market), but weakening sanctions in the late 1990s threatened their future prosperity. The companies are nervous but enthusiastic about Washington’s war option, for it seems to be the only means left to oust their rivals and establish a dominant presence in the fabulously profitable future of Iraq oil production.

It appears that the Washington has used its post-war control over Iraqi oil to win over opposition in the UN Security Council. Discussions over access to future oil production in Iraq have apparently been going on between Washington, London, Moscow, Paris and Beijing and also between the companies directly. Many news stories have suggested that these parleys have taken place and statements by government leaders have underscored the importance of the oil issue.

"We will review all these agreements, definitely," said Faisal Qaragholi to a Washington Post reporter in September. Quaragholi is a petroleum engineer who directs the London office of the Iraqi National Congress (INC), an umbrella organization of opposition groups that is backed by the United States. "Our oil policies should be decided by a government in Iraq elected by the people."

Ahmed Chalabi, the INC leader, went even further, saying he favored the creation of a U.S.-led consortium to develop Iraq's oil fields, which have deteriorated under more than a decade of sanctions. "American companies will have a big shot at Iraqi oil," Chalabi said. Such statements have deepened the fears of the non-US-UK companies and pressured them to go along with the US war plans in order to get a share of the post-war concessions.

Business news agency Reuters, in a story datelined December 15, 2002, put the matter bluntly when it wrote “Iraq's crude reserves, the world's second largest after Saudi Arabia, are at the center of a tug-of-war between countries hoping to grab a share of Baghdad's oil wealth once United Nations sanctions are lifted.”

Free Market Forces vs. Government Intervention and Military Might

The specially high rate of profit (or “rent” as it is sometimes called by economists who study the oil sector) results from the unusual monopolistic structure of the oil industry and its unusual pricing system. From the earliest days in the 1870s, when John D. Rockeller built the Standard Oil Trust, a relatively small number of major companies have controlled world production and prices. These companies have tried to keep prices and production at a controlled level – to maximize their profits. The industry has always relied on close ties to governments. Governments have helped to maintain favorable market conditions, to promote managed pricing and to help the companies gain new sources of supply in foreign lands.

In the early decades, the Standard Oil Trust completely dominated the international oil markets, and US production represented a very large share of the world’s total. During World War I, US oil supplied an estimated 80% of the Allies’ needs. But by the end of the war, the British had built alternative companies – the Anglo-Persian Oil Company (later BP) and Royal Dutch Shell, which together controlled more than half of the world’s oil reserves. US companies feared that the British, through exclusionary policies in their empire, were going to dominate the world’s oil industry. British government purchase of the Anglo-Persian Oil Company (now BP) in 1914 confirmed these fears. And British firms’ leading role in Venezuela brought the competition right into the backyard of the American companies.

Throughout the inter-war period and up to the present the US and the UK have dominated the international oil industry, always in rivalry but also in collusion. The companies in these two countries have towered above those of all other nations. Bids by Japan, Germany, Italy, Russia and France to gain a major stake in the industry have largely failed, though a single large French company remains the sole challenger today to Anglo-American domination.

The Anglo-American companies have always sought to manage global oil output, though collusive agreements. In 1928, they reached the famous “Red Line Agreement” on joint action in the Middle East and the “Achanarry Agreement” to divide up (and avoid competition in) international markets. These agreements have maintained the extraordinary “rent” of Middle East producers, while supporting continued high-cost production in the United States and Canada. If oil markets functioned “normally,” production would increase in the low-cost areas like Saudi Arabia, Kuwait, Iran and Iraq, driving out of business the low-cost producers in North America, but this has not been the case.

Because of the enormous value of oil concessions and the high “rent” that results from low-cost fields, oil concessions are rarely allocated on a purely “market” basis. The companies typically win the most lucrative concessions through their host governments’ political and military power.

Imperial Control and Local Opposition: Will the US Iraq Plan Succeed?

The long, bitter experience of oil producing countries with the US-UK companies has left behind an anger and militancy in local politics that hinders the companies’ efforts to re-organize the “upstream” system. Such feelings run deep in Iraqi politics, going back to British seizure of Iraq after World War I and the bloody repression (including the use of poison gas) that crushed the nationalist revolt of 1920. British leaders fulminated against "Turkish misrule" in Iraq, but their own rule proved equally odious to Iraqis seeking independence and democracy.

Iraqis also remember the way the companies treated the country after it gained its independence and how the companies held Iraqi production down, to manage international supply and price levels. Iraqi’s also remember the fierce company resistance to Iraqi proposals for new exploration contracts in the 1960s. Such sentiments would doubtless not change after the ouster of Saddam Hussein.

These feelings are magnified by US support for Israel and by the long, punishing US-UK-UN sanctions. The US-UK would thus find it very politically difficult to create an indigenous post-Saddam government that would agree to a sweetheart deal for the US-UK companies. For this reason, the US-UK have announced that they are planning a military government that will “purge” Iraqi politics of its Baathist and nationalist elements and remain in power more than a year or as long as necessary. Though the US-UK official announcements speak about “human rights” and “democracy,” it would appear that the main goal of the war and “regime change” is to carry out the oil deals and re-fashion Iraqi politics on a new and more conciliatory and pro-US basis. Scenarios circulating in Washington talk about rapid military seizure of the oil fields, rebuilding oil infrastructure and protecting the oil production system from the negative effects of local politics.

Oil Companies in Iraq: A Century of Rivalry and War (November 2003)
Iraq: the Struggle for Oil (August, 2002)
The Iraq Oil Bonanza: Estimating Future Profits (January 28, 2004)


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