PSAs and Ignorance

There is an article in yesterday’s Asia Times by a Pepe Escobar, which has been seized on by a number of left-wing blogs as evidence that the war in Iraq is all about securing reserves for US oil companies.  Mr Escobar vents his anger at the Iraq government’s decision to set up Product Sharing Agreements (PSAs) with foreign oil companies, and being a resident of Sakhalin Island – where it is nigh on impossible to hold a business conversation without reference to a PSA agreement, hence you quickly learn about them – I have come to the conclusion that Mr Escobar has no idea what he is talking about.

On Monday, Prime Minister Nuri al-Maliki’s cabinet in Baghdad approved the draft of the new Iraqi oil law. The government regards it as “a major national project”.  The key point of the law is that Iraq’s immense oil wealth (115 billion barrels of proven reserves, third in the world after Saudi Arabia and Iran) will be under the iron rule of a fuzzy “Federal Oil and Gas Council” boasting “a panel of oil experts from inside and outside Iraq”.

So far, this seems entirely sensible.  It is not unsual for a country rich in natural resources, as is the case with Iraq, to appoint a governmental body to oversee the management of those resources.  The United Arab Emirates has one, called the Supreme Petroleum Council, and Russia has one, called the Ministry of Natural Resources.  I don’t know why Mr Escobar calls Iraq’s version “fuzzy”, because its title and implied job description is crystal clear.  It is also not surprising that Iraq’s Oil and Gas Council should seek outside help in the first few years of managing their resources.

That is, nothing less than predominantly US Big Oil executives.

I have no idea where Mr Escobar has got his information from, but having searched Google for “Federal Oil and Gas Council” iraq members I have not been able to identify a single member of the council, let alone confirm that its advisory board is dominated by “US Big Oil executives”.

The law represents no less than institutionalized raping and pillaging of Iraq’s oil wealth. It represents the death knell of nationalized (from 1972 to 1975) Iraqi resources, now replaced by production sharing agreements (PSAs) – which translate into savage privatization and monster profit rates of up to 75% for (basically US) Big Oil.

Where to begin?

Firstly, PSAs do not represent institutionalised raping and pillaging of a country’s oil wealth, and this is evidenced by the fact that the agreement is between the government of the country in question and an oil company, i.e. it is an unforced contract from which both parties expect to gain benefits.  Unless raping and pillaging involves prior discussion and signed agreement on the part of the one being raped and pillaged, I rather think Mr Escobar has chosen his verbs poorly in this case.

Secondly, PSAs do not represent privatisation, savage or otherwise.  Under the terms of a PSA, all extracted products are the property of the state (as this rather useful document clearly explains).  I have no doubt that those oil companies party to such agreements with the Iraqi government are seeking profits, as that is generally what companies do; and whether these companies will be “basically” American remains to be seen, but unless the law prevents non-American companies from participating I suspect not.

As if this were not enough, the law reduces in practice the role of Baghdad to a minimum. Oil wealth, in theory, will be distributed directly to Kurds in the north, Shi’ites in the south and Sunnis in the center. For all practical purposes, Iraq will be partitioned into three statelets. Most of the country’s reserves are in the Shi’ite-dominated south, while the Kurdish north holds the best prospects for future drilling.

I have no idea why Mr Escobar considers distributing the oil wealth amongst the three main ethnic groups rather than centralising the whole lot in the Sunni-dominated capital to be a bad thing, as he doesn’t say.  But consider it a bad thing he does.  Personally, I think it is an inherently sensible idea.

Scandalously, Iraqi public opinion had absolute no knowledge of it – not to mention the overwhelming majority of Parliament members. Were this to be a truly representative Iraqi government, any change to the legislation concerning the highly sensitive question of oil wealth would have to be approved by a popular referendum.

Sorry?  In what other country is the management of the nation’s natural resources decided by popular referendum? Answer: none.  In a truly representative government, the elected representatives of the people are entrusted to form a government which then makes decisions on behalf of its population regarding such issues as monetary policy, defence, foreign policy, and resource management.  This is what is happening in Iraq.

In real life, Iraq’s vital national interests are in the hands of a small bunch of highly impressionable (or downright corrupt) technocrats. Ministries are no more than political party feuds; the national interest is never considered, only private, ethnic and sectarian interests. Corruption and theft are endemic.

This could adequately describe politics in any country; Iraq is no exception here.

Big Oil will profit handsomely – and long-term, 30 years minimum, with fabulous rates of return – from a former developing-world stalwart methodically devastated into failed-state status.

Pre-war Iraq was hardly a developing world stalwart.  Saddam Hussein bankrupted the country by fighting an 8-year war with Iran, and tried to balance the budget by annexing Kuwait.  A further 12 years of crippling sanctions rendered Iraq a failed-state long before the Americans had crossed the border.

But the crucial point remains: nobody will sign anything unless the “advisers” at the US-manipulated Federal Oil and Gas Council say so.

Again, Mr Escobar provides no evidence of the veto-wielding powers of these advisers, nor of the Federal Oil and Gas Council being US-manipulated.  As far as this article is concerned, it is pure speculation on his part.

Nobody wants to colonial-style PSAs forced down their throat anymore.

PSAs being an agreement by definition, it is hard to understand why he would think they were ever forced down anyone’s throat.

According to the International Energy Agency, PSAs apply to only 12% of global oil reserves, in cases where costs are very high and nobody knows what will be found (certainly not the Iraqi case).

Without trawling through all the IEA’s publications to check this, I will hazard a guess that they are saying PSAs apply in countries where the risks of investment are high, i.e. somewhere where costs are high and reserves are uncertain (I’m sure the IEA did not use the words “nobody knows what will be found”).  However, a PSA would equally apply in a country where the risks were high for other reasons, such as high levels of sectarian fighting and risk of civil war, i.e. Iraq.

No big Middle Eastern oil producer works with PSAs.

That is because PSAs are a vehicle to get foreign companies to invest in an undeveloped oil and gas market, namely by paying for the production and processing infrastructure in return for a share of the production.  No big Middle Eastern oil producer works with PSAs because they have the infrastructure in place already, the risks of investment are low, and they don’t need to attract enormous amounts of foreign investment to kick-start their oil industry.

Russia and Venezuela are renegotiating all of them.

Which isn’t true: the Sakhalin I project is not being renegotiated, probably because the Russian government – via its company Rosneft – already has a slice of the action.  But that’s beside point: Russia and Venezuela are “renegotiating” the PSA contracts because the foreign investments have already been made and they don’t see why a trivial matter like a prior agreement should prevent them from forcing a better deal for themselves halfway through.  It is a bit like borrowing some money from your younger brother to buy some sweets, then duffing him up when he later asks for repayment.

Bolivia nationalized its gas.

I think we’d better see how well the Bolivian economy performs over the next few years before we judge that to be a good thing.

Algeria and Indonesia have new rules for future contracts.

As does Iraq, remember?

Big Oil is obviously ecstatic – not only ExxonMobil, but also ConocoPhillips, Chevron, BP and Shell (which have collected invaluable info on two of Iraq’s biggest oilfields), TotalFinaElf, Lukoil from Russia and the Chinese majors.

Hang on!  What happened to the Federal Oil and Gas Council being dominated by US Big Oil executives?  Didn’t these have veto rights over all agreements a few paragraphs back?  So how did the bloody French, Russians, and Chinese get a slice of the action?  Didn’t they oppose the war?

Gargantuan profits under the PSA arrangement are in a class by themselves. Iraqi oil costs only US$1 a barrel to extract. With a barrel worth $60 and up, happy days are here again.

Iraqi oil only costs a dollar to extract once you have built a rather large and expensive facility with which to extract and process it.  Building this requires a huge up-front capital expenditure, which Iraq can ill-afford.  Therefore, the Iraqi government hopes to entice foreign companies to build this infrastructure for them in return for a share of the subsequent production for a limited period of time.  Sound sensible?  It should: it’s called a PSA.  As has already been noted, the oil company does not own the rights to the extracted product, but the state grants it product in return for building and operating the production facilities and infrastructure.  Whatever profit the oil companies can make by selling their share, the Iraq government can make a greater profit by selling its own share (which, under the PSA, it spent no money obtaining).

What revenue the regions do get will be distributed to all 18 provinces based on population size – an apparent concession to the Sunnis, whose central areas have relatively few proven reserves.

Again, it is left unexplained as to why Mr Escobar thinks this is a bad thing.  But there is one thing which requires no further explanation, and that is the suitability of Mr Escobar to comment on oil and gas affairs.

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9 Responses to PSAs and Ignorance

  1. Tatyana says:

    Logic seems to be a such a rare thing among our left friends…

  2. Dusty says:

    Thanks for the analysis and the explanation of PSAs (a new concept to me). You refute Escobar’s point that PSAs are being unfairly handed out to U.S. oil companies by stating that PSAs are consensual agreements, which are presumably arrived at on a competitive basis in keeping with free market economics. Perhaps the point he is making (or should be making) is that these agreements are not freely arrived at, but rather that the U.S. presence in Iraq is causing a form of rent seeking and favoritism for U.S. oil companies. Have you seen any evidence to support or refute this?

  3. Tim Newman says:

    Hi Dusty,

    I must confess I haven’t seen any evidence refuting that the US presence in Iraq is forcing such agreements on the government, but the onus must surely be on Mr Escobar to prove that this is happening rather than me to prove that it isn’t. Thus far, he hasn’t produced any evidence.

    From what I know of the oil industry, I very much doubt that the US is manipulating the Iraqis into favouring US oil companies. Unlike many industries, the degree to which the main players compete with each other is opaque at best, and more often than not they seem to cooperate on projects rather than compete. It is highly unlikely that the USis forcing through an agreement which favours Exxon-Mobil, Chevron-Texaco, and Occidental and keeps BP, Total, and Royal Dutch/Shell out of the market. In fact, I cannot think of a single location where this has occurred as a result of outside influence (of course, governments themselves often have their favourites).

    A far more likely scenario is that the US is leaning on the Iraqi government to open up its oilfields to foreign investment, which will serve to bring more oil to the market than if the Iraqis tried to build the new facilities and operate the oilfields themselves. Bringing their oil to the market as quickly as possible is in the US’ interests (and every other net importer), and also in Iraq’s interests, as they desperately need the oil revenues. Under the circumstances, the best way to go about this is through PSAs, and I’m sure the US wasted little time in convincing the Iraqis of this.

  4. W. Shedd says:

    Tim,

    I’ve no doubt that all you say about PSAs is correct. They are a carrot meant to entice development of oil resources in Iraq.

    However, there also seems to me very little doubt that the Iraq war is … ahem … HEAVILY INFLUENCED by oil. There is also little doubt that by forcibly changing the government in Iraq, oil companies in France and Russia (who were, small wonder, against the Iraq war) lost potential oil profits and oil companies in the US and UK (who initiated the war) will likely subsequently benefit. My understanding is that Total Fina Elf, for example, had negotiated billion dollar oil exploration contracts with the former Hussein government. Russian oil companies had done the same – the pre-war figures I read estimated the contracts values at about $7 billion lost for France and $4 billion lost for Russia (I will admit these figures are off the top of my head from news reports I read at that time).

    Further, I would say because of potential oil revenues, a stronger case could be made for removing Saddam from power. Regardless as to whether he did or did not fund terrorist activities against the West, had sanctions been lifted he most surely would have had the MEANS (via oil) and motive to provide future terrorism woes to the US and others. There are plenty of piss-ant dictators in the world. But none of the others were sitting on the world’s 2nd largest proven oil reserves as Saddam Hussein was.

    Lastly, if you refuse to believe that oil profits aren’t a strong side motivation for Dick Cheney, George W. Bush, and all their Halliburton pals, then I am afraid you are a bit naive and haven’t really been paying attention to the billions and billions of dollars of no-bid contracts our American leaders have handed to their cronies. There is very little doubt in my mind that in their own twisted way, the Republican leaders of the US believe they are making the world safer. However, they also don’t mind making a few billion here or there along the way either.

  5. Tim Newman says:

    Wally,

    However, there also seems to me very little doubt that the Iraq war is ahem HEAVILY INFLUENCED by oil.

    There are few events in Iraq or the Middle East which are not heavily influenced by oil in one way or another. However, the idea that the decision to invade Iraq was partly motivated by a desire for the US to gain access to Iraq’s oil does not stand up to reasoned argument. Had the US simply wanted to release more Iraqi oil to the market, they’d have made their peace with Saddam Hussein years ago.

    There is also little doubt that by forcibly changing the government in Iraq, oil companies in France and Russia (who were, small wonder, against the Iraq war) lost potential oil profits and oil companies in the US and UK (who initiated the war) will likely subsequently benefit.

    I would be intertested to see any evidence that US and UK oil companies will benefit from the Iraq war to a greater degree than Russian and French oil companies.

    Further, I would say because of potential oil revenues, a stronger case could be made for removing Saddam from power.

    Yes, because as Paul Wolfowitz admitted, the fact that Iraq sat on huge oil reserves made sanctions unworkable.

    But none of the others were sitting on the worlds 2nd largest proven oil reserves as Saddam Hussein was.

    Yes, hence sanctions are to some degree more effective tool against these regimes, which are a preferable course of action to an invasion.

    Lastly, if you refuse to believe that oil profits arent a strong side motivation for Dick Cheney, George W. Bush, and all their Halliburton pals, then I am afraid you are a bit naive and havent really been paying attention to the billions and billions of dollars of no-bid contracts our American leaders have handed to their cronies.

    Well, if you honestly believe that a strong motivation for Cheney and Bush to invade Iraq was to enrich their friends in Halliburton, you are not naive but delusional. Bush and Cheney were in a position to have enriched their cronies in Halliburton in a hundred ways which would not have carried the risk and political damage of an invasion of Iraq. I have been paying attention to the large no-bid contracts handed to the likes of Halliburton, and am really not surprised.

    Putting the task of rebuilding destroyed oil, gas and civil infrastructure for an entire country out to tender before the war would have been totally impossible, for the reasons being it would have taken at least 3 years to tender, the scope of work would have been completely unknown, and no company would have been able to submit a sensible bid. That Halliburton should be given a large chunk of the work is also no surprise, as they are probably the only company capable of carrying out such an enormous task. Obviously you think other companies should have been in the running for the task of rebuilding infrastructure across an entire country in the immediate aftermath of an invasion, and I invite you to share your thoughts as to who these companies might be.

  6. W. Shedd says:

    Regarding Halliburton and delusions: There is no way that Cheney and Bush could have awarded no-bid contracts of the value given to Halliburton without the Iraq War. Only by creating a case for war could the Bush administration sweep aside any and all objections to the executive branch deficit spending that has occurred over the last 6 years. A quick search shows that as of 2004, Halliburton’s contracts in Iraq had reached $21,000,000,000 (according to a report by Merrill Lynch). http://media.corporate-ir.net/media_files/irol/67/67605/pdf/ML_11-3-04.pdf (you have to wade through lots of other data before arriving at defense figures).

    I can envision no other scenario for Halliburton to reap such deep financial rewards so quickly without competition for services. Generally, the executive branch of our government can only award no-bid contracts in unusual situations. Further, in all situations except for war, the executive branch does not have a carte blanche budget – Congress must appropriate all funds. I further question the wisdom of privatization of so many necessary military support services (but that is another topic altogether).

    As to US and UK oil companies benefiting at the expense of French and Russian – only time will tell how that will play out. I have some links at home regarding the dollars lost by French and Russian interests. Another resource cited it as considerably more than the figures I tossed about yesterday.

    The one last point I’ll address is the idea that if the Bush administration simply wanted Iraqi oil on the market, they would have lifted sanctions. Undoubtedly true. However, I thought what was under discussion is the PROFITS from that oil being on the market, and who it will benefit. I think that is a very different point.

    Before the invasion, those profits would have benefited France, Russia, and select interests within Iraq (read Saddam Hussein and anything he wished to do). Now the equation is different. I believe few companies outside of the coalition nations will have any interest in investing in a war zone. US and UK companies at least can bend the ear of a Bush/Blair, etc. and expect to have their security concerns addressed. Certainly also, Iraqi security forces are somewhat more beholden and connected with the coalition nations as well. So those likely to benefit now are largely US and UK oil companies, and the current Iraqi government. It is difficult to imagine a foreign company from a nation outside the coalition taking the risk.

    In any case, your original point was that PSAs are not thievery, they are a business contract just like any other, and likely necessary to entice foreign development of Iraqi oil resources. I believe that is a very valid point.

    My points were simply that how we arrived at this juncture and which companies would likely benefit from the PSAs – was all a bit more than tainted by greed and politics.

  7. Tim Newman says:

    There is no way that Cheney and Bush could have awarded no-bid contracts of the value given to Halliburton without the Iraq War.

    Firstly, though this may be the case it is inadmissable as evidence that Cheney and Bush went to war partly to boost Halliburton’s revenues, as proof is required that Halliburton’s enrichment was a cause of the war, not a consequence. Secondly, as I have said, Cheney and Bush could have boosted Halliburton’s revenues considerably without going to war, albeit not to the same extent. I have a really hard time believing that of all the ways to throw pork at Halliburton, Bush and Cheney came up with an invasion of Iraq as the desired option.

    A quick search shows that as of 2004, Halliburtons contracts in Iraq had reached $21,000,000,000 (according to a report by Merrill Lynch).

    According to Halliburton’s annual report, their entire revenues for 2005 was $21bn, which is where I think your figure came from. This figure is not just their work in Iraq. Just looking at Halliburton’s revenues over the past decade should tell you that their revenues hardly needed boosting and they were getting billions from the US government already prior to 2003. The idea that Bush and Cheney went to war to increase these handouts yet further does not stand up to reason.

    However, I thought what was under discussion is the PROFITS from that oil being on the market, and who it will benefit. I think that is a very different point.

    So Bush and Cheney invaded Iraq in order to boost the profits of US oil companies, which stand at a record high? I hardly think Exxon-Mobil’s profits need much boosting at present (and they are not involved in Iraq). And wouldn’t it have been a bit easier to open up Alaska for more drilling, rather than invade a country half a world away?

    It is difficult to imagine a foreign company from a nation outside the coalition taking the risk.

    As far as I know, Lukoil are the oil company closest to going into Iraq, way ahead of the British and American companies.

  8. Enbi says:

    >PSAs being an agreement by definition, it is hard to >understand why he would think they were ever forced >down anyones throat.
    In case of Iraq, it seems pretty clear that US can influence any decision regarding oil. As for Sakhalin, you cannot expect a fair agreement between shrewd oil majors and corrupt Yeltsin government. In fact, the Sakhalin PSA was totally unfair to Russia. In that sense, what Putin did seems to be completely justifiable.

  9. Tim Newman says:

    In case of Iraq, it seems pretty clear that US can influence any decision regarding oil.

    But it is far from clear the extent to which this influence is or can be applied. Thus far, nobody has any evidence that the US wields a huge amount of influence regarding Iraq’s oil.

    fact, the Sakhalin PSA was totally unfair to Russia.

    Please can you be more specific and say exactly why you think the Sakhalin PSA was totally unfair?

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