[OPE-L:7801] Iraqi oil

From: Rakesh Bhandari (rakeshb@stanford.edu)
Date: Fri Oct 11 2002 - 13:29:52 EDT

We had some discussion about what we called the oilism and 
petrodollarism theses earlier. Any chance of revisiting the 
discussion?  I don't believe that Bush and Cheney are entertaining 
the possibility of toppling Saddam in order to free the world economy 
from the threat of his use of oil as a weapon and to break (putative) 
OPEC power.

- - - - - - - - - - - - - - - - - - - - - - - - AN ARTICLE FOR YOU, 


As the risk of war grows, so does Saddam Hussein's generosity--and the
willingness of some oil firms to profit from it

SADDAM HUSSEIN is on a charm offensive. Desperate to save his skin from the
coalition that President Bush is seeking to build, he is busily trying to boost
his own international support by doling out Iraqi oil to anybody he thinks will
rally to his cause. Needless to say, the firms left out of this bonanza seem to
be the American oil giants. If there were ever any truth in the talk outside
America that Mr Bush's secret motive for an invasion was black gold, Mr Hussein
is raising the stakes.

The deals now being done with Iraq may prove significant in shaping any
post-invasion politics, since its oil is among the industry's most coveted. The
country sits atop over 110 billion barrels of proven reserves (and possibly
more), the second-largest in the world after Saudi Arabia's. And if reports of
a flurry of deal-making by Mr Hussein turn out to be accurate, says Robert
Mabro, the head of the Oxford Institute for Energy Studies, "then there's not
much left in Iraq for the Americans!"

  Mr Hussein has been using oil as a political weapon for years. At unexpected
times, he has suddenly cut off exports to rattle the markets, to complicate
OPEC's market manipulations or to protest against America's support for Israel.
Now, with an invasion looming, he is doing the reverse: in the past few weeks,
he has more than doubled exports of oil.

  This is, admittedly, from depressed levels. The United Nations, which
supervises sales of Iraqi oil, had cracked down on illicit surcharges that Mr
Hussein had been tacking on to his exports. That measure, as well as the UN's
new policy of setting the price that purchasers must pay for Iraqi oil some
weeks after they have bought it, had driven away all but the shadiest of
customers. To win back the big boys, Mr Hussein has now dropped the surcharges.
Rumours suggest that he has secretly offered to compensate oil companies if
they lose because of the UN's new pricing policy. AXIS OF EVIL?

Such manoeuvres seem to have paid off. In the past few weeks, leading firms
such as TotalFinaElf (of France), Eni (Italy) and Repsol YPF (Spain) have
signed bilateral deals to bring Iraq's oil to market. These European countries
now have a greater incentive (should they need it) to think twice before
supporting any invasion. Boosting exports also adds to the impact that
disrupting the supply of Iraqi oil would have on global prices--a factor that
might influence politicians even in America, given the fragility of the world's

Mr Hussein is also dangling drilling and service contracts. A few months ago, a
Turkish firm cut a deal to drill in the north of Iraq. More recently, a team
from Tatneft, an oil contractor from the Russian republic of Tatarstan, arrived
to drill the first of what may be over 70 wells. That deal, believed to be the
biggest for several years, is part of a much broader relationship that Mr
Hussein has cultivated with Russian firms. Some industry insiders reckon that
Zarubezhneft, the Russian firm for which Tatneft is working, may have secured
oil concessions worth up to $90 billion.

The big prize is control of the country's oil reserves. UN sanctions forbid
foreigners from investing in the oilfields. But that has not stopped firms
rushing to sign contracts in the hope of exploiting fields when sanctions are
lifted. Mr Hussein has long been handing out concessions to big firms from
politically important countries. France's Total, for example, holds rights to
potentially huge reserves in the country. The national oil companies of China
and India (not hitherto regarded as oil powerhouses) have also been given
slices of the pie. Even Royal Dutch/Shell has signed a deal with Mr Hussein.

As well as Zarubezhneft, a number of smaller Russian firms are doing a brisk
trade with Iraq, in everything from oil supplies to drilling to spare parts.
Lukoil, a Russian giant, has a majority stake in West Qurna, an enormous field
holding over 11 billion barrels of oil; the firm plans to invest $4 billion
over the lifetime of the field to develop it. To the annoyance of the Bush
administration, Russia and Iraq even reached a deal a few weeks ago on
"economic co-operation" in energy and related sectors, rumoured to be worth as
much as $40 billion.

There are now over 30 deals signed and ready to be implemented the moment that
sanctions are lifted

There are now over 30 deals signed and ready to be implemented the moment that
sanctions are lifted. Compared with most international norms, Iraq's
beleaguered leader has offered terms that seem pretty generous. For example,
say analysts at Deutsche Bank, plausible rates of return are "of the order of
20%". Some of these contracts are for exploring the vast western desert of
Iraq, which some experts suspect could hold huge new reserves.

All this must be bad news for those excluded from the party: the Americans. Yet
they do not seem too worried. That is because there is one teeny doubt about
all these deals. Will they be worth the paper they are written on when Mr
Hussein one day becomes a former dictator?

American oilmen insist that any new regime would tear up existing contracts.
After all, they were signed by a ruthless tyrant with companies eager to keep
him in office. Why would any democratic Iraqi government, especially one
brought to power by America's efforts, honour them? The head of the Iraqi
National Congress, an umbrella opposition group, has openly declared that
"American companies will have a big shot at Iraqi oil"--if he gets to run the
show. Assorted other opposition leaders have been touring Texas making similar
promises to the oil giants.

Things could get messy, even so. The fractured and incoherent Iraqi opposition
may be prepared to say anything to win friends and credibility. But Deutsche
Bank's oil experts argue that, although a change of Iraqi regime would mean
that "some kind of legal clear-out is inevitable, the history of political
overthrows shows that root-and-branch bureaucracies survive intact, and there
is a clear hope that the contracts will remain valid."

  That is why Russia's oil barons are pursuing a dual strategy to preserve their
contracts. They are lobbying President Vladimir Putin to extract from America,
in return for Russian support for an invasion, a promise to honour their
contracts. Vagit Alekperov, boss of Lukoil, claimed recently that he had
received "guarantees" from Mr Putin of such a deal. The Russians are busy
schmoozing junior Iraqi bureaucrats in the hope that some will still be there
if Mr Hussein goes.

Luis Giusti, a former boss of PDVSA, Venezuela's state oil company, points to
his own country's recent experience. When Hugo Chavez ran for office he vowed
to tear up contracts signed by the old government with foreign investors,
arguing that they were exploitative. Once in office, the famously wacky leader
did not dare to revoke the contracts.

It is hard to imagine that the American giants would not find some way to get a
piece of the action in Iraq--or "Klondike on the Shatt Al Arab," as some call
it--post-Saddam. Still, his last-minute manoeuvring means they will probably
have plenty of legal wrangles ahead of them. Things could get especially
complicated if any regime change were the result of an internal coup rather
than a more clear-cut invasion. The dictator could yet make trouble even from
his grave.

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