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.