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Iraq: Linchpin of a new oil
order
By Michael Renner
(Posted with permission from Foreign Policy in Focus)
Only in the most direct sense is the Bush
administration’s Iraq policy directed against Saddam
Hussein. In contrast to all the loud talk about
terrorism, weapons of mass destruction and human rights
violations, very little is being said about oil. The
administration has been tight-lipped about its plans for
a post-Saddam Iraq and has repeatedly disavowed any
interest in the country’s oil resources. But press
reports indicate that US officials are considering a
prolonged occupation of Iraq after their war to topple
Saddam Hussein. It is likely that a US-controlled Iraq
will be the linchpin of a new order in the world oil
industry. Indeed, a war against Iraq may well herald a
major realignment of the Middle East power balance.
Oil forever
The Bush administration’s
ties to the oil and gas industry are beyond extensive;
they are pervasive. They flow, so to speak, from the
top, with a chief executive who grew up steeped in the
culture of Texas oil exploration and tried his hand at
it himself; and a second-in-command who came to office
with a multi-million dollar retirement package in hand
from his post of CEO of Halliburton Oil. Once in office,
the vice president developed an energy policy under the
primary guidance of a cast of oil company executives
whose identities he has gone to great lengths to
withhold from public view. Since taking office, the
president and vice president have assembled a government
peopled heavily with representatives from the oil
culture from which they came. These include Secretary of
the Army Thomas White, a former vice president of Enron,
and Secretary of Commerce Don Evans, former president of
the oil exploration company Tom Brown Inc, whose major
stake in the company was worth US$13 million by the time
he took office.
The Bush administration’s energy
policy is predicated on ever-growing consumption of oil,
preferably cheap oil. US oil consumption is projected to
increase by one-third over the next two decades. The
White House is pushing hard for greater domestic
drilling and wants to open the Arctic National Wildlife
Refuge to the oil industry. Even so, the
administration’s National Energy Policy Development
Group, led by Vice President Cheney, acknowledged in a
May 2001 report that US oil production will fall 12
percent over the next 20 years. As a result, US
dependence on imported oil - which has risen from
one-third in 1985 to more than half today - is set to
climb to two-thirds by 2020.[1]
Since the 1970s,
the US has put considerable effort into diversifying its
sources of supply, going largely outside of OPEC and
outside the Middle East. The current administration is
advocating greater efforts to expand production in such
far-flung places as the Caspian area, Nigeria, Chad,
Angola and deep offshore areas in the Atlantic basin and
is looking to leading Western Hemispheric suppliers like
Canada, Mexico and Venezuela.[2] West Africa is expected
to account for as much as a quarter of US oil imports a
decade from now.[3]
But there is no escaping the
fact that the Middle East - and specifically the Persian
Gulf region - remains the world’s prime oil province,
for the US and for other importers. Indeed, the Cheney
report confirms that "by any estimation, Middle East oil
producers will remain central to world oil security".
The Middle East currently accounts for about 30 percent
of global oil production and more than 40 percent of oil
exports. With about 65 percent of the planet’s known
reserves, it is the only region able to satisfy the
substantial rise in world oil demand predicted by the
Bush administration.[4] The Cheney report projects that
Persian Gulf producers alone will supply 54-67 percent
of world oil exports in 2020.[5]
Saudi Arabia is
a pivotal player. With 262 billion barrels, it has a
quarter of the world’s total proven reserves and is the
single largest producer.[6] More importantly, the Saudis
have demonstrated repeatedly - after the Iranian
revolution, and following Iraq’s invasion of Kuwait -
that they are prepared to compensate for losses from
other suppliers, calming markets in times of turmoil.
Today, Riyadh could raise its production of 8 million
barrels per day (b/d) to 10.5 million b/d within three
months, making up for any loss of Iraqi oil during a US
military assault.[7]
Iraq: From pariah to
prize
The pariah state of Iraq, however, is a key
prize, with abundant, high-quality oil that can be
produced at very low cost (and thus at great profit). At
112 billion barrels, its proven reserves are currently
second only to Saudi Arabia’s. The Energy Information
Administration (EIA) of the US Department of Energy
estimates that additional "probable and possible"
resources could amount to 220 billion barrels. And
because political instability, war, and sanctions have
prevented thorough exploration of substantial portions
of Iraqi territory, there is a chance that another 100
billion barrels lie undiscovered in Iraq’s western
desert. All in all, Iraq’s oil wealth may well rival
that of Saudi Arabia.[8]
At present, of course,
this is mere potential - the Iraqi oil industry has
seriously deteriorated as a result of the 1980-88
Iran-Iraq War, the 1991 Gulf War and inadequate postwar
investment and maintenance. Since 1990, the sanctions
regime has effectively frozen plans for putting
additional fields into production. It has also caused a
severe shortage of oil field equipment and spare parts
(under the sanctions regime, the US has prevented
equipment imports worth some $4 billion). Meanwhile,
questionable methods used to raise output from existing
fields may have damaged some of the reservoirs and could
actually trigger a decline in output in the short
run.[9]
But once the facilities are
rehabilitated (a lucrative job for the oil service
industry, including Cheney’s former employer,
Halliburton) and new fields are brought into operation,
the spigots could be opened wide. To pay for the massive
task of rebuilding, a post-sanctions Iraq would
naturally seek to maximize its oil production. Some
analysts, such as Fadhil Chalabi, a former Iraqi oil
official, assert that Iraq could produce 8-10 million
b/d within a decade and eventually perhaps as much as 12
million.[10]
The impact on world markets is hard
to overstate. Saudi Arabia would no longer be the sole
dominant producer, able to influence oil markets
singlehandedly. Given that US-Saudi relations cooled
substantially in the wake of the September 11, 2001,
terrorist attacks - rifts that may widen further - a
Saudi competitor would not be unwelcome in Washington.
An unnamed US diplomat confided to Scotland’s Sunday
Herald that "a rehabilitated Iraq is the only sound
long-term strategic alternative to Saudi Arabia. It’s
not just a case of swapping horses in mid-stream, the
impending US regime change in Baghdad is a strategic
necessity."[11]
Washington would gain enormous
leverage over the world oil market. Opening the Iraqi
spigot would flood world markets and drive prices down
substantially. OPEC, already struggling with
overcapacity and a tendency among its members to produce
above allotted quotas (an estimated 3 million barrels
per day above the agreed total of 24.7 million b/d),
might unravel as individual exporters engage in
destructive price wars against each other.[12]
A
massive flow of Iraqi oil would also limit any influence
that other suppliers, such as Russia, Mexico and
Venezuela, have over the oil market. Lower prices could
render Russian oil - more expensive to produce -
uncompetitive, which would cloud the prospects for
attracting foreign investment to tap Siberian oil
deposits.[13] Russia’s weak economy is highly dependent
on oil export revenues. Its federal budget is predicated
on prices of $24-25 per barrel.[14] Aleksei Arbatov,
deputy chairman of the Russian parliament’s defense
committee, predicts that if a new Iraqi regime sells oil
without limits, "our budget will collapse."[15]
Leading oil companies
|
Oil
reserves
(billion
barrels) |
Oil
production
(million
b/d) |
Refining
capacity
(million
b/d) |
Product
sales
(million
b/d) |
| Saudi
Aramco |
261.8 |
8.6 |
2.1 |
3.0 |
| INOC
(Iraq) |
112.5 |
2.6 |
0.4 |
0.4 |
| KPC
(Kuwait) |
96.5 |
1.7 |
1.0 |
0.9 |
| NIOC
(Iran) |
89.7 |
3.8 |
1.5 |
1.3 |
| PDV
(Venezuela) |
77.7 |
3.3 |
3.1 |
3.2 |
| ADNOC
(UAE) |
53.8 |
1.4 |
0.2 |
0.2 |
| Pemex
(Mexico) |
28.3 |
3.5 |
1.5 |
2.1 |
| NOC
(Libya) |
23.6 |
1.3 |
0.3 |
0.3 |
| Lukoil
(Russia) |
14.3 |
1.6 |
0.5 |
0.9 |
| NNPC
(Nigeria) |
13.5 |
1.3 |
0.4 |
0.3 |
| ExxonMobil (US) |
12.2 |
2.6 |
6.2 |
8.0 |
| PetroChina |
11.0 |
2.1 |
1.9 |
1.1 |
Royal
Dutch/Shell
(UK/Netherlands) |
9.8 |
2.3 |
3.2 |
5.6 |
| British Petroleum |
7.6 |
1.9 |
3.2 |
5.5 |
| TotalFinaElf (France) |
7.0 |
1.4 |
2.6 |
3.1 |
| ChevronTexaco (US) |
8.5 |
2.0 |
2.1 |
4.0 |
| Petrobras (Brazil) |
8.4 |
1.3 |
1.9 |
2.2 |
| Sinopec (China) |
3.0 |
0.7 |
2.6 |
1.3 |
| Nippon
Mitsubishi (Japan) |
0.05 |
0.05 |
1.3 |
1.4 |
| World |
1,046.2 |
74.5 |
81.6 |
- | Source: Adapted from Energy Intelligence
Group
Oil company
interests
To repair and expand its oil industry,
Iraq will need substantial foreign investment. Thus, for
eager oil companies, Iraq represents a huge bonanza - a
"boom waiting to happen," according to an unnamed
industry source.[16]
Prior to the OPEC
revolution in the early 1970s, a small number of
companies (referred to as the "majors" or "Seven
Sisters") called the shots in the industry, controlling
activities from exploration and production to refining
and product sales. But they lost much of their reserve
base as nationalization spread through the Middle East
and OPEC nations. Today, state oil companies own the
vast majority of the world’s oil resources. Even though
private companies still do much of the exploring,
drilling and pumping, in many countries they have access
to the oil only under prices and conditions set by the
host government. Although oil companies have managed to
adjust to this situation, a directly owned concession
would offer them far greater flexibility and
profitability.
The dominant private companies
(ExxonMobil and Chevron-Texaco of the US, Royal
Dutch-Shell and BP of Britain and the Netherlands,
TotalFinaElf of France), which are largely the result of
recent megamergers, sell close to 29 million barrels per
day in gasoline and other oil products. But production
from fields owned by these "super-majors" came to 10.1
million barrels per day in 2001, or just 35 percent of
their sales volume.[17] Although these corporations have
poured many billions of dollars into discovering new
fields outside the Middle East, their proven reserves
stood at just 44 billion barrels in 2001, 4 percent of
the world’s total and sufficient to keep producing oil
for only another 12 years at current rates.[18] The
situation is similar for other oil companies. Thus, the
oil-rich Middle East, and particularly Iraq, remains key
to the future of the oil industry.
If a new
regime in Baghdad rolls out the red carpet for the oil
multinationals to return, it is possible that a broader
wave of denationalization could sweep through the oil
industry, reversing the historic changes of the early
1970s. Squeezed by a decade of sanctions, the current
regime has already signaled that it is prepared to
provide more favorable terms to foreign companies.[19]
Such an invitation by Baghdad would be in tune with
larger changes that are afoot, as a growing number of
oil producing countries are opening their industries to
foreign direct investment.[20]
Rivalries and
quid pro quos
Several European and Asian oil
companies have in recent years signed deals with Iraq
that, if consummated, would give them access to reserves
of at least 50 billion barrels and a potential output of
4-5 million barrels per day (another estimate says that
Russian companies alone have signed deals involving
about 70 billion barrels). In addition, a number of
contracts have been signed for exploration in the
western desert.[21]
Russian, Chinese and French
companies in particular have tried to position
themselves to develop new oil fields and to rehabilitate
existing ones once UN sanctions are lifted. Russia’s
LUKoil, for instance, signed an agreement in 1997 to
refurbish and develop the West Qurna field (with 15
billion barrels of oil reserves). China’s National
Petroleum Corporation signed a deal for the North
Rumailah reservoir. And France’s TotalFinaElf has set
its eyes on the giant Majnoon deposits (holding 20-30
billion barrels).[22]
Iraq has sought to use the
lure of oil concessions to build political support among
three permanent Security Council nations - France,
Russia and China - for a lifting of sanctions. Although
the international consensus in favor of sanctions has
badly eroded, this gamble has failed to pay off in the
face of determined US and British opposition. (In
December 2002, Iraq cancelled a contract with three
Russian companies out of frustration that the firms - in
deference to sanctions - had not commenced oil
exploration work.) As long as Saddam Hussein stays in
power, US and British companies will be kept out of
Iraq, but ongoing sanctions will also thwart existing
oil development plans.
"Regime change" in
Baghdad would reshuffle the cards and give US (and
British) companies a good shot at direct access to Iraqi
oil for the first time in 30 years - a windfall worth
hundreds of billions of dollars. US companies relish the
prospect: Chevron’s chief executive, for example, said
in 1998 that he’d "love Chevron to have access to"
Iraq’s oil reserves.[23]
In preface to the
passage of Security Council Resolution 1441 on November
8, there were thinly veiled threats that French, Russian
and Chinese firms would be excluded from any future oil
concessions in Iraq unless Paris, Moscow and Beijing
supported the Bush policy of regime change. Ahmed
Chalabi, leader of the Iraqi National Congress (INC), an
exile opposition group favored by the Bush
administration, said that the INC would not feel bound
by any contracts signed by Saddam Hussein’s government
and that "American companies will have a big shot at
Iraqi oil" under a new regime. US and British oil
company executives have been meeting with INC officials,
maneuvering to secure a future stake in Iraq’s oil.[24]
Meanwhile, the State Department has been coaxing Iraqi
opposition members to create an oil and gas working
group involving Iraqis and Americans.[25]
Nikolai Tokarev, general director of Russia’s
Zarubezhneft, a state-owned oil company, reflected in
late 2002: "Do Americans need us in Iraq? Of course not.
Russian companies will lose the oil forever if the
Americans come."[26] Fears of being excluded from Iraq’s
oil riches and losing influence in the region have fed
Russian, French and Chinese interest in constraining US
belligerence. These countries nonetheless are eager to
keep their options open in the event that a pro-US
regime is installed in Baghdad, avoiding the "risk of
ending up on the wrong side of Washington", as the New
York Times put it.[27]
Rival oil interests were
a crucial behind-the-scenes factor as the permanent
members of the UN Security Council jockeyed over the
wording of Resolution 1441, intended to set the
conditions for any action against Iraq. It is likely
that backroom understandings regarding the future of
Iraqi oil were part of the political minuet that finally
led to the resolution’s unanimous adoption. US promises
that the other powers would get a slice of the pie,
hinted at in broad terms, were apparently inducement
enough to win their nod. It is thus unlikely that
French, Russian and Chinese companies will be completely
locked out of a post-Saddam Iraq, though they could find
themselves in a junior position.
From
surrogates to direct control
Throughout the
history of oil, sorting out who gets access to this
highly prized resource and on what terms has often gone
hand in hand with violence. At first it was Britain, the
imperial power in much of the Middle East, that called
the shots. But for half a century, the US - seeking a
preponderant share of the earth’s resources - has made
steady progress in bringing the Persian Gulf region into
its geopolitical orbit. In Washington’s calculus,
securing oil supplies has consistently trumped the
pursuit of human rights and democracy.
US policy
toward the Middle East has long relied on building up
proxy forces in the region and generously supplying them
with arms. After the Shah of Iran, the West’s regional
policeman, was toppled in 1979, Iraq became a surrogate
of sorts when it invaded Iran. Washington aided Iraq in
a variety of ways, including commodity credits and loan
guarantees, indirect arms supplies, critical military
intelligence in Baghdad’s long battle against Iran, a
pro-Iraqi tilt in the "tanker war" and attacks on Iran’s
navy.
Beginning in the 1970s, but particularly
in the wake of the 1991 Gulf War, the US supplied Saudi
Arabia and allied Persian Gulf states with massive
amounts of highly sophisticated armaments. After the
Gulf War, US forces never left the region completely. By
prepositioning military equipment and acquiring access
to military bases in Saudi Arabia, Kuwait, Bahrain and
Qatar, Washington prepared the ground for future direct
intervention as needed.
In the Persian Gulf and
adjacent regions, access to oil is usually secured by a
pervasive US military presence. From Pakistan to Central
Asia to the Caucasus and from the eastern Mediterranean
to the Horn of Africa, a dense network of US military
facilities has emerged - with many bases established in
the name of the "war on terror".
Although the US
military presence is not solely about oil, oil is a key
reason. In 1999, General Anthony C Zinni, then the head
of the US Central Command, testified to the Senate Armed
Services Committee that the Persian Gulf region is of
"vital interest" to the US and that the country "must
have free access to the region’s resources."[28]
Bush administration officials have, however,
categorically denied that oil is one of the reasons they
are pushing for regime change in Iraq. "Nonsense,"
Defense Secretary Donald Rumsfeld told 60 Minutes’ Steve
Kroft in mid-December 2002. "It has nothing to do with
oil, literally nothing to do with oil."
But oil
industry officials interviewed by 60 Minutes on December
15 painted a different picture. Asked if oil is part of
the equation, Phillip Ellis, head of global oil and gas
operations for Boston Consulting replied, "Of course it
is. No doubt."
In fact, oil company executives
have been quietly meeting with US-backed Iraqi
opposition leaders. According to Ahmed Chalabi, head of
the Iraqi National Congress, "The future democratic
government in Iraq will be grateful to the United States
for helping the Iraqi people liberate themselves and
getting rid of Saddam." And he added that "American
companies, we expect, will play an important and leading
role in the future oil situation in Iraq."
Notes
[1] National
Energy Policy Development Group, Reliable, Affordable,
and Environmentally Sound Energy for America’s Future
(Washington: US Government Printing Office, May 2001),
pp. x and 1-13.
[2] Ibid., pp. 8-3 and 8-7.
[3. James Dao, "In Quietly Courting Africa,
White House Likes Dowry," New York Times, September 19,
2002.
[4] Production and reserves are from BP
Statistical Review of World Energy 2002; exports are
from OPEC Annual Statistical Bulletin 2001 (Vienna:
2002), Table 26.
[5] National Energy Policy
Development Group, Reliable, Affordable, and
Environmentally Sound Energy for America’s Future
(Washington: US Government Printing Office, May 2001),
p. 8-4.
[6] BP Statistical Review of World
Energy 2002. Ultimately recoverable estimate is from US
Department of Energy, Energy Information
Administration (EIA), Saudi Arabia Country Analysis
Brief, October 2002, <>.
[7] Past Saudi
production increases are from BP Statistical Review of
World Energy 2002; potential for current increase is
from Jeff Gerth, "U.S. Fails to Curb Its Saudi Oil
Habit, Experts Say," New York Times, November 26, 2002.
[8] US
Department of Energy, Energy Information
Administration (EIA), Iraq Country Analysis Brief,
October 2002. Iraqi oil officials agree, estimating
reserves at 270-300 billion barrels in "Iraq’s
Oil Industry: An Overview," Platts.
[9] US
Department of Energy, Energy Information
Administration (EIA), Iraq Country Analysis Brief,
October 2002.
[10] Fadhil J. Chalabi, "Iraq
and the Future of World Oil," Middle East Policy,
vol. vii, no. 4, October 2000, <>.
[11]
Trevor Royle, "The World’s Petrol Station: Iraq’s Past
Is Steeped in Oil … and Blood," Sunday
Herald, October 6, 2002.
[12] OPEC
overproduction data is from Neela Banerjee, "As Its
Members Flout Oil Quotas, OPEC Considers New Approach,"
New York Times, December 12, 2002.
[13] Dan
Morgan and David B Ottoway, "In Iraqi War Scenario, Oil
Is Key Issue," Washington Post, September 15, 2002.
[14] Stratfor, "War in Iraq: What’s at Stake for
Russia?" November 22, 2002 (distributed electronically).
[15] Arbatov quoted in Sabrina Tavernise, "Oil
Prize, Past and Present, Ties Russia to Iraq," New York
Times, October 17, 2002.
[16] Quote from James
A. Paul, "Iraq: The Struggle for Oil," August 2002, Global
Policy Forum website.
[17] Calculated from
OPEC Annual Statistical Bulletin 2001 (Vienna: 2002),
Table 77.
[18] Ibid.
[19] US
Department of Energy, Energy Information
Administration (EIA), Iraq Country Analysis Brief,
October 2002.
[20] "The Iraq Oil Industry After
Sanctions," Middle East Institute conference proceedings
summary, February 29, 2000, as reposted on the Global
Policy Forum website.
[21] Deutsche Bank
estimates, reported in US
Department of Energy, Energy Information
Administration (EIA), Iraq Country Analysis Brief,
October 2002. The higher estimate is from Zarubezhneft,
a Russian state-owned company. See Sabrina Tavernise,
"Oil Prize, Past and Present, Ties Russia to Iraq," New
York Times, October 17, 2002.
[22] US
Department of Energy, Energy Information
Administration (EIA), Iraq Country Analysis Brief,
October 2002.
[23] Speech by Kenneth T. Derr,
.
[23] Chalabi quote is from
Dan Morgan and David B. Ottoway, "In Iraqi War Scenario,
Oil Is Key Issue," Washington Post, September 15, 2002.
[24] Peter Beaumont and Faisal Islam, "Carve-Up
of Oil Riches Begins," The Observer (United Kingdom),
November 3, 2002.
[25] Stratfor, "War in Iraq:
What’s at Stake for Russia?" November 22, 2002
(distributed electronically).
[26] Sabrina
Tavernise, "Oil Prize, Past and Present, Ties Russia to
Iraq," New York Times, October 17, 2002.
[27]
Serge Schmemann, "Controlling Iraq’s Oil Wouldn’t Be
Simple," New York Times, November 3, 2002.
[28]
Zinni quote is from James A. Paul, "Iraq: The Struggle
for Oil," August 2002, Global Policy Forum website,
. Testimony of April 13, 1999.
Michael Renner
is a senior researcher at Worldwatch
Institute and a policy analyst for Foreign Policy in
Focus.
(Posted with permission from Foreign Policy in Focus)
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