Royal Dutch Shell Plc  .com Rotating Header Image What Does Iraq’s New Oil Law Say About an Invasion?

Critics charge Iraq’s new hydrocarbon law is unfair to Iraqi people
By Cody Lyon (shelby): Published 2007-04-08 13:00 (KST)   
Amman, Jordan, is set to play host to a three-day economic trade show, a corporate meet and greet between powerful, well-moneyed investors and those who the guard the gates of vital decision-making government ministries in perilous but oil-rich Iraq.

On its Web site, loosely defined organizer Iraq Development Program (IDP) calls the Jordan gathering a “historic landmark event” Officially titled the Iraq Oil, Gas, Petrochemical and Electricity Summit, the three days of face to face meetings that begins on May 28 could impact Iraq’s economic future for years to come. 
Efforts to contact IDP directly and understand the origin of their funding and purpose were not successful. But the group’s stated mission is to “aid Iraq as an economic force.”

“Following declaration of new foreign investment laws for the extractive industries,” the IDP’s Web page says, “the [Iraqi] government is now finalizing its new hydrocarbon laws” — to which promoters of the summit say the timing “could not be better.”

Iraq’s new oil-hydrocarbon law, and the push to see it quickly passed, has begun to raise serious questions among observers and critics.

The Iraqi cabinet approved the hydrocarbon law on Feb. 26 and sent it on to parliament where it now sits. If fully approved, Iraq’s oil reserves would be opened to investment from foreign multinational oil companies. The current legislation would also provide oil companies the option for long-term contracts of up to 30 years. The laws would set up Profit Sharing Agreements, or PSAs, where revenue is based on the profit after oil companies’ deduct their production costs. Reportedly, the remaining profits would then be divided among the Iraqi provinces.

Critics charge that the law offers excessive and unfair profits to the oil companies. Others worry that since Iraq is now a country experiencing horrific turmoil, the time is not right to debate such important economic legislation.

Supporters of the oil law disagree. They say the regulatory, legal and tax structure the oil law sets up, will invite the necessary outside investment the country needs to jumpstart its economy. They see the law as an enabler of market-based economic infrastructure that will produce streams of revenue, helping restore stability and prosperity for the Iraqi people.

In the background, outspoken opponents of the war say the push for such a law is evidence that the war had more to do with gaining access to oil than what the public was told.

“This story raises so many more questions than it answers,” said Dr. Louay Bahry, adjunct scholar of public policy at the nonpartisan Middle East Institute in Washington D.C.

“As I read it, these foreign companies are fighting to get to Iraqi oil,” said Bahry noting that such practices would be new.

Oil company representatives were clear about hopes to enter Iraq but stressed that security, democracy and an oil law that included investment incentives were necessary.

PSAs are a primary incentive of the oil laws. According to the International Energy Agency, 12 percent of the world’s oil reserves are subject to PSAs.

“This would completely break from normal practice in the region where all the major oil producing industries are in the public sector,” said Greg Muttit, co-director of the British research and watchdog organization, Platform London. Muttit said Iraq would be the only major Middle Eastern oil-producing nation where production is controlled by foreign companies.

Platform London’s Unraveling the Carbon Web project states that it seeks to reduce the environmental and social impact of oil corporations and help citizens gain a say in decisions that affect them.

According to Muttit, oil companies have been lobbying hard to get what they want in Iraq by working with both the U.S. and U.K. governments, and through the International Tax and Investment Center (ITIC).

Muttit, who authored a chapter in a new book called A Game as Old as Empire says that Exxon Mobil Corp., Chevron Corp., Total S.A. and Eni S.p.A. funded ITIC’s effort at influencing the oil legislation in Iraq.

Founded in 1993, after the fall of the former Soviet Union, ITIC is a Washington, D.C., nonprofit research and education foundation with some of the world’s largest corporations as sponsors. Co-chair’s of the organization are former U.S. Under Secretary of State Thomas Pickering and former U.K. Secretary of Trade and Industry Lord Walker.

“Our purpose is to improve tax and investment regimes,” said Daniel Witt, president of the ITIC. The organization works with economies in transition and according to Witt, Iraq fits that profile perfectly.

Witt says the challenge in Iraq was how to attract investment where no stable economic infrastructure existed. ITIC commissioned a number of experts and looked at Iraq’s contract and fiscal options in the petroleum sector.

“Make no mistake, donor money is important in transition periods,” said Witt.

But, he says both the oil companies and the people of Iraq stand to benefit from ITIC’s recommendations.

In 2004, ITIC published a report titled “Petroleum and Iraq’s Future: Fiscal Options and Challenges,” which said every $1 increase in oil sales may translate into an extra $2 for the country’s gross domestic product. The report said the Iraqi government should write legislation that would create a framework where resources, rent and risk are shared with the investor, consistent with underlying economic potential and drawing on current industry norms and best practice.

The study said that profit-based systems tend to align parties toward common objectives.

Beyond rebuilding the country, oil company representatives say Iraqi oil plays another necessary role: meeting the world’s energy demands.

“Given the scale of Iraq’s resources and ambitions, we find it hard to see a future in which production of these resources will not play a significant role in meeting the global energy challenge,” said a representative from Shell International in London last month.

But a number of critics worry the Iraqi people will be short changed. Some Iraqis see the oil companies as trying to gain partial ownership of the country’s primary source of revenue.

“These laws give these foreign oil companies the right to actually have shared ownership of the oil,” said Raed Jarrar, Iraq project director for Global Exchange.

Jarrar says that since the laws do not set any limits on the percentage shared, over the next 30 years or so, the PSAs could cost Iraq billions of dollars.

Privatization proponents disagree, arguing that Iraqis will maintain ultimate control over their reserves of oil while benefiting from world market trends.

According to Daniel Witt at ITIC, “As oil prices go up or down, you have these dynamics in the contracts but Iraq is not surrendering sovereign rights [over the oil].”

In 1972, Iraq nationalized all assets of the country’s private oil consortium, the Iraq Petroleum Company, or IPC, after years of disagreements over revenue. In the past, Iraq relied on oil for up to 90 percent of its foreign exchange earnings.

According to a Central Intelligence Agency memo that same year, Iraq’s move to nationalize was the result of 11 years of tensions that resulted from the IPC’s refusal to satisfy Iraq’s demands for back payments it claimed the consortium owed.

The IPC included French, Dutch, British and United States oil firms, including British Petroleum, Royal Dutch Shell, Mobil, Standard Oil and Compagnie Francaise des Petroles.

Nationalization meant that one hundred percent of oil revenues went directly to the central government, a move that many in the Middle East saw as a move toward greater economic self-determination, a step that stood to benefit the Iraqi people directly through social programs, healthcare and education.

Nationalization set’s up a system whereby foreign oil companies buy oil from the state, under the state’s terms. The move set the stage whereby Western oil companies, and the powerful economies they supplied, found themselves in even more vulnerable positions, subject to the whims of oil-rich countries.

The CIA memo expressed its displeasure calling the move “sudden and dramatic.”

Some say that multinational oil interests have been anxious to get back to Iraq ever since.

Public debate over the law, in both Iraq and the United States, has remained hidden beneath front pages filled with daily death and destruction.

According to Greg Muttit at Platform London, the majority of Iraq’s citizens have no idea that this important law is being discussed.

“Most Iraqis would be extremely angry about this if anyone had bothered to tell them this was being done,” he said.

He says that those who do know — MPs, trade unionists and oil experts — are actively organizing against it.

“The oil companies and governments are planning to take advantage of the occupation and the general weak position of Iraqi state institutions to push through deals on highly profitable terms, at the expense of the Iraqi people,” said Muttit.

A few Iraqi political leaders have raised opposition.

A March 13 Voices of Iraq report Sunni lawmaker Hussein al-Falluji was arguing that it was not the right time to be dealing with the issue.

“Socio-political and security circumstances do not allow such a step now, as the draft would allow investment companies to re-wield power over Iraqi oil,” Falluji told parliament according to the report.

ITIC’S Daniel Witt disagrees, saying the time is right to invite new investment that will restart the stalled economy “given the lack of infrastructure needed to jumpstart the economy, and get investment in now, verses waiting 10 or 15 years so they [the Iraqis] can debate these laws ’til kingdom come.”

But some have questioned whether the law takes into account the reality on the ground in Iraq. They worry about tensions that might arise between the various deeply divided provinces once the market system is in place.

Louay Bahry of the Middle East Institute says there is a great deal of opposition from both the Sunnis and Shiites regarding the law. He says the Kurds, who apparently offer the most support, would prefer total freedom, and to see revenue from their region go directly to them.

“When it comes to revenue sharing, the law is not clear how exactly that is going to happen,” he said.

Bahry says that 80 percent of the country’s oil specialists have fled the country: “We have so many oil specialists from Iraq, but they are no longer there.”

Raed Jarrar of Global Exchange goes further, saying the law will exacerbate those divisions. He calls the law a marriage of convenience between the Bush administration and Iraqi separatists who are monopolizing power within the Iraqi government.

“The oil law threatens the concept of a unified Iraq” because the law “decentralizes” most of the important authority of signing oil contracts, said Jarrar.

The recent surge by American troops has raised eyebrows as some ask whether the increase is an attempt to buy time so outside oil interests can have a chance to gain a greater foothold over the direction of the fragile economy.

An April 5, an analysis report by United Press International’s Pamela Hess said U.S. officials are planning “a range of options to maintain the troop increase, from late summer through early spring 2008” whereby the hope is to quell the violence long enough for the nascent government to address some of the “underlying causes of the conflict, including the oil wealth sharing law.”

Supporters of Iraq’s hydrocarbon law cross both sides of the American political spectrum. They see the law not only as business friendly, but also as a chance to bring Iraq into the world marketplace, which they believe will foster democracy.

“The only way to fuel economic growth is through an engine of private sector investment” and “the sad part is, advocating state run equals slower economic growth which also equals slower improvement in quality of life,” said ITIC’s Witt.

Recommendations 62 and 63 of the Iraq Study Group recommends that the United States assist the Iraqis in drafting an oil law that helps privatize the industry and encourages investment.

One of the Iraq Study Group’s members, former Clinton White House Chief of Staff Leon Panetta plugged the law in an April 4 New York Times op-ed. In the article, Panetta listed the eventual approval of Iraq’s oil law as one of a number of steps the Iraqis could take to encourage democracy and achieve national reconciliation.

In his April 3 Rose Garden press conference, President Bush told reporters he had spoken to Iraq’s prime minister about the oil law earlier.

In a March 27 speech to the Washington Institute for Near East Policy’s Public Policy Forum, David Satterfield, a senior advisor to U.S. Secretary of State Condoleezza Rice, called the national hydrocarbon law part of the Bush administration’s “New Way Forward” in Iraq.

On March 3, U.S. Ambassador to Iraq Zalmay Khalilzad wrote in the Washington Post that the national hydrocarbon law “is a significant achievement for Iraqi’s national reconciliation.”

The Bush administration appears to have been interested in an oil law friendly to foreign investment since the invasion began in 2003. But some have pointed to clues that a push to gain easy access to Iraq’s oil has been underway for years.

In 1999, Vice President Dick Cheney, while still CEO of Halliburton, said in a speech to the London Institute of Petroleum (now the Energy Institute) that the “Middle East, with two thirds of the world’s oil and the lowest cost, is still where the prize ultimately lies.”

In 2003, four months after the March invasion had begun, the U.S. Agency for International Development (USAID) awarded McLean, Virginia, consulting firm BearingPoint, a $9 million contract to support activities and policies undertaken by the Coalition Provisional Authority, which was designed to create a competitive private sector.

Platform London’s Unraveling the Carbon Web wrote in July 2006 that the U.S. government had hired advisers from BearingPoint to help in drafting the oil law.

BearingPoint spokesperson Steve Lunceford said the firm was doing what it has done in the past in places like Kosovo and Poland — providing assistance in the review of a number of economic policy efforts.

“This included providing a single expert that consulted to the government on its oil industry,” said Lunceford this past week.

“Note, this does not equal ‘drafting’ the proposed hydrocarbon law,” he wrote in an e-mail message.

Some invasion opponents see BearingPoint’s role in helping draft the law as part of a bridge of suggestive evidence that crosses over to the controversial period before the war, when talk of how to gain control over Iraq’s oil was quietly bubbling in pockets around the world, primarily the United States and Britain.

In his 2002 American Prospect profile of Ahmed Chalabi, who was the United States’ original choice for a high leadership position in a new Iraq, Robert Dreyfus offers a snapshot of alleged oil ambition playing a role in an eventual invasion.

Dreyfus’ story quotes former U.S. Ambassador to Saudi Arabia James E. Akins as saying conservative think tanks and multinationals have denationalization in mind, and the parceling of “Iraqi oil out to American oil companies.”

Chalabi, a member of the Iraqi National Congress, had allegedly met with U.S. oil company officials and guaranteed lucrative contracts if the U.S. overthrew Saddam Hussein.

According to the American Prospect story, when asked about such meetings one U.S. oil executive said, “I can’t discuss that, even on background.”

Later, in a July 2003 interview with PBS television program “Frontline,” Chalabi admitted being “close” to Bush administration members Paul Wolfowitz and Douglas Feith, confirming he’d had easy access to Vice President Cheney’s office.

When confronted by “Frontline” with a direct quote from the London Observer where he assured U.S. oil companies lucrative contracts for removing Saddam, Chalabi said, “No, that’s not true,” arguing he’d said Iraq’s oil needed investment to increase production.

Leading back to the present day, where a number of observers and invasion opponents allege that the hydrocarbon law and the contracts it encourages lend evidence to the “blood for oil” charge, as Green Party chairman Jim Coplen did in a March 5 press release.

The hydrocarbon law’s supporters caution against making such allegations.

Of those who attempt to draw correlations between the new hydrocarbon law and the motive for the invasion, Daniel Witt at ITIC says, “They are trying to connect dots that aren’t there,” arguing such controversial theory provides a platform to advance their long-stated objectives.

“They have a fundamentally different view of the world than me” but “history has proven that people are better off with economic growth,” said Witt. 

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