The most visible dogfight over Iraq’s future is playing out in diplomatic circles, as the U.S. tries to convince its skeptical allies that a “regime change” is imperative and military action inevitable. But another high-stakes, much less visible struggle is also quietly taking shape. Once U.N. economic sanctions on Iraq are lifted, who will develop — and control — Iraq’s vast oil reserves?
Since U.S. sanctions choked off the flow of Iraqi oil a decade ago, Baghdad’s role in world energy markets has been severely curtailed. Iraq’s oil output is so low that many analysts believe that even a complete shut-off of Iraqi supplies would easily be made up by other oil producing countries. In fact, they may already have. Led by Saudi Arabia, the Organization of Petroleum Exporting Countries quietly boosted production in September, raising output some 10 percent above official quotas, according to the latest figures from the International Energy Agency.
But Iraq’s vast oil reserves remain a powerful prize for global oil companies. Iraq is sitting on an estimated 112 billion barrels of crude, a pool of oil second in size only to Saudi Arabia’s 264 billion barrels. (By way of comparison, proven U.S. reserves total about 22 billion barrels; the U.S. Strategic Petroleum Reserve holds about 600 million barrels.)
Development of those Iraqi reserves will be no small project. After years of decay, Iraq’s oil infrastructure will require years of work and billions of dollars in investment, according to Nathaniel Kern, a Middle East analyst at Foreign Reports, Inc. in Washington.
“It’s in terrible shape,” he said. “The pipelines are leaking lakes (of oil), refineries are dumping toxic waste. It is a broken down industry.”
Such a massive rebuilding effort represents a huge opportunity for the companies chosen to tackle it. As the Bush administration has been working to rally support among its allies for a military strike, Saddam Hussein has been using the promise of lucrative oil contracts to weaken that U.S. effort and boost opposition to tougher U.N. resolutions.
Some major deals are already in place. In 1997, Russia’s LUKOIL signed contracts to develop Iraq’s West Qurna oil field. The same year, the China National Petroleum Corporation bought a 50 percent stake in the al-Ahdab oil field. (Both have been barred from developing those reserves by U.N. sanctions.) More recently, France’s TotalFinaElf has reportedly negotiated agreements to develop the much larger Majnoon field, but has not yet signed firm contracts to do so.
Over the years, those deals complicated U.S. efforts to win support for tough action against Baghdad in the U.N. Security Council, where France, Russia and China are permanent members.
Waiting their chance
So far, U.S. oil companies have been stuck on the sidelines of the Iraqi oil rush. Even if Saddam wanted to enlist U.S. firms in the rebuilding of Iraq’s oil infrastructure, U.N. sanctions — as well as U.S. laws — have barred American oil companies from dealing with Baghdad.
But some analysts say it’s unlikely that American firms will be left empty-handed if the U.S. follows through on threats of military action.
“If you turn up and it’s your tanks that dislodged the regime and you have 50,000 troops in the country and they’re in your tanks, then you’re going to get the best deals,” said Credit Suisse First Boston oil analyst Mark Flannery. “That’s the way it works. The French will have three men and a 1950s tank. That’s just not going to work.”
American oil companies are also hoping to benefit from the industry’s unusually strong ties to the White House. President Bush, himself the former head of a Texas oil company, has pursued an national energy policy that relies on aggressively expanding new sources of oil. Vice President Dick Cheney is the former CEO of oil services giant Halliburton. National security adviser Condoleezza Rice is a former director of Chevron.
So far, U.S. oil companies have been mum on the subject of the potential spoils of war. A spokesman for ChevronTexaco would say only that “we don’t speculate and we don’t comment on speculation.” Officials at ExxonMobil did not respond to calls for comment.
Not so fast
It’s anyone’s guess just who will decide how Iraq’s oil resources are developed. But some analysts say it’s likely those decisions will be made by Iraqis.
“Iraqis are pretty nationalistic,” said James Placke, a Middle East analyst at Cambridge Energy Research. “The assumption that the U.S. will just walk in and call the shots — I think that’s simplistic. Unless we behave like a colonialist occupier, we’re not going to call the shots.”
Some analysts note that a large-scale, occupying army would further inflame anti-American sentiment in the region and destabilize Iraq’s oil-rich neighbors, notably Saudi Arabia.
So a lot depends on just what kind of government is in power when U.N. sanctions are lifted. Even if the U.S. ousts Saddam, say analysts, any new government would face the daunting task of unifying rival ethnic groups and keeping a lid on political infighting.
“Ruling Iraq will be an absolute nightmare,” said Bill O’Grady, a commodities analyst at A.G. Edwards in St Louis.
A regime change could also dramatically reshuffle the deck for global oil giants trying to make the most of the cards they’ve been dealt. The Iraqi National Congress, an exiled opposition group that might have a role in any new government, has said it would review all oil contracts negotiated by Saddam Hussein. New contracts might offer less attractive terms, according to Placke.
”(Existing contracts) were done on a production sharing basis, which some Iraqis regard as too generous,” he said. “They would prefer to go back to a straight service contract. That’s not of much interest to most larger oil companies.”
Fear inside OPEC
No matter who ends up developing Iraq’s reserves, a revitalized Iraqi oil industry poses new problems for the Organization of Petroleum Exporting Countries, whose 10 members carved up Iraq’s production quotas when U.N. sanction took hold in 1991. By some estimates, a rebuilt Iraqi oil industry could produce as much as six million barrels a day, second only to Saudi Arabia as top OPEC producer. As Iraqi production rises, say analysts, oil prices would likely fall unless OPEC cuts back elsewhere. But it’s not at all clear how closely Iraq will cooperate with OPEC once sanctions are lifted.
Russia’s role in developing Iraqi oil production also strengthens it’s threat to OPEC’s grip on oil prices. Now second to Saudi Arabia in output, Russian oil companies would benefit from increasing output and boosting market share — even if oil prices fall. And Iraqi oil is cheaper to produce than Russian reserves buried deep below the Western Siberian permafrost.
The Russian government, though, may be less enthusiastic about boosting Iraqi production if it sends oil prices falling too far. Moscow is heavily dependent on oil as a critical source of foreign exchange, and the loss of all those petrodollars could send the fragile Russian economy back into a deep recession.
Russian oil companies have been pressing for guarantees that their deals won’t be jeopardized by any U.S.-led move to oust Saddam — so far, those pleas have fallen on deaf ears. Russia’s relationship with Iraq is further complicated by an estimated $7-$9 billion in loans owed by Baghdad to Moscow. Russia is also a major supplier of manufactured goods to Iraq.