Sunday, December 31, 2006

It Was Always About Oil: The dots (Part 1)

This is Part 1 of a two multi-part post. Part 2 will appear in a few days.

Joshua Gallu, in Spiegel Online provides a look at the fallout that will likely occur from Iraq’s new hydrocarbons law.

The Iraqi government is working on a new hydrocarbons law that will set the course for the country's oil sector and determine where its vast revenues will flow. The consequences for such a law in such a state are huge. Not only could it determine the future shape of the Iraqi federation -- as regional governments battle with Baghdad's central authority over rights to the riches -- but it could put much of Iraqi oil into the hands of foreign oil companies.


Nevertheless, the draft law lays the ground work for private oil companies to take large stakes in Iraq's oil. The new law would allow the controversial partnerships known as 'production sharing agreements' (PSA). Oil companies favor PSAs, because they limit the risk of cost overruns while giving greater potential for profit. PSAs tend to be massive legal agreements, designed to replace a weak or missing legal framework -- which is helpful for a country like Iraq that lacks the laws needed to attract investment.
It's also dangerous. It means governments are legally committing themselves to oil deals that they've negotiated from a position of weakness. And, the contracts typically span decades. Companies argue they need long-term legal security to justify huge investments in risky countries; the current draft recommends 15 to 20 years.
Nevertheless, Iraq carries little exploratory risk -- OPEC estimates Iraq sits atop some 115 billion barrels of reserves and only a small fraction of its oil fields are in use. By signing oil deals with Iraq, oil companies could account for those reserves in their books without setting foot in the country -- that alone is enough to boost the company's stock. And, by negotiating deals while Iraq is unstable, companies could lock in a risk premium that may be much lower five or ten years from now.

The Bush/Blair administrations are always quick to respond to questions regarding Iraq’s oil stating that the invasion was not about the oil.

That, as most of us have come to believe, is an outright lie. It’s all about the oil, but more specifically, it’s about who controls it as a strategic resource, who profits from its production and how to outmaneuver a cartel which has enough influence to damage western economies with a less than herculian effort.

A better understanding of what is happening now comes from looking briefly at what Iraq was doing prior to the US invasion. Iraq had nationalized its oil industry in 1972 and allowed some foreign companies to participate by way of technical service contracts. (This has been the standard for most of the oil-rich nations of the Gulf region since the 1970s.) Essentially, TSCs were let to foreign oil companies for specific work for which they received payment. The foreign companies had no concessions in the oil fields and had no claim over the oil they produced. If they wanted it, they had to buy it. US and British oil companies were shut out of Iraq entirely.

After the 1991 Gulf War Iraq, faced with international sanctions, saw a marked production drop-off. The Food-For-Oil program allowed Iraq to export oil but severe, and necessary, limitations prevented them from expanding oil production to levels which allowed them to participate fully in the rewards gained by membership in OPEC.

Late in Saddam’s regime contracts were struck with several oil companies primarily from France, Russia and China. The problem for those companies was UN sanctions which prevented the execution of those contracts. The US and UK continued to apply pressure to maintain sanctions against Iraq if, for no other reason than to prevent France, Russia and China from gaining a foothold in the second largest proven oil reserves in the world and possibly, (if the western desert produces what is expected), the largest reserve of light-sweet-crude ever known. Worse, from the US and UK standpoint, four of the world’s dominant oil companies, Exxon-Mobil, Chevron, BP-Amoco and Royal Dutch Shell were excluded from Iraq totally.

While sanctions worked in preventing French, Russian and Chinese activity in Iraq, it also shifted more power into the hands of OPEC and prevented the US and UK “big four” from exploiting the super-giant fields of Iraq. Further, there was other pressure on the UN to ease sanctions, particularly if Saddam, individually, could be replaced.

That would have been an utter disaster for the US and UK. Eliminating Saddam and leaving the structure and form of his government in place, along with all previous laws, would have allowed the contracts with foreign oil companies to become operative; it would have done nothing to curtail OPEC power; and, it would have continued to exclude the US and UK based “big four” while giving preferred access to countries like China.

Pretend for a moment that September 11, 2001 went by without incident. The situation with regards Iraq was already a problem. If Saddam suddenly lost power in Iraq by whatever means, a possibility which increased with each passing month, the US and UK rationale for continued sanctions would vanish with him, to their detriment.

The only way to exercise any control over Iraq’s massive oil reserves would be to, not only get rid of Saddam, but eliminate all vestiges of his government and render null and void any and all agreements made under his regime. The only way into Iraq’s oil reserves was to completely retool Iraq as a state and do it such a way that the standard practice of the Gulf states, nationalized oil production and OPEC quotas, could be avoided. That meant invade, conquer and occupy. And, it had to be done relatively quickly, before Saddam’s ability to exert control over an increasingly dissatisfied population evaporated or someone took the $2.95 solution with a bullet.

Whether 9/11 had happened or not, Bush/Cheney had every intention of invading Iraq before their only reason not to, disappeared. The attacks on New York and Washington, a real reason to go to war, sent the US into a deep state of national grief which transmuted into a comprehensive national anger. While the Bush administration would exploit that grief and anger to their advantage, Afghanistan was hardly the preferred target. In fact, Afghanistan was the fly in the ointment. Any plans for Iraq would have to be delayed until Afghanistan was dealt with. If there was a bright side it is that the world was solidly on-side and would support a US military response in South Asia.

It’s worth looking at the conduct of operations in Afghanistan for a moment since there is more than a hint of how inconvenient that particular event was to the Bush administration plans. In fact, Afghanistan threw the Bush administration off its stride. If the neo-cons simply wanted a war, they now had one. But it wasn’t the war they wanted. And they were literally screwed. Osama bin Laden had robbed them of the timeline which would put the US firmly in control of Iraq.

The US escalated to an attack on Afghanistan at what could be considered to be a normal pace. The appropriate options, with sufficient deadlines, were offered to the Taliban government. The failure of the Taliban to respond appropriately, (hand over Osama bin Laden and company), forced an assault. The assault and initial campaign for Afghanistan went exceptionally well. The Taliban was forced out the seats of power and the ground campaign was well organized and coordinated. The problem, however, was that the basic strategy employed by General Tommy Franks (dictated by Rumsfeld) was fatally flawed. Rather than make a direct attack on al Qaeda with US forces and NATO attachments, it was decided to take out the Taliban, before going after al Qaeda, employing Afghan war-lords and their private armies. Al Qaeda was given the opportunity to escape to the complex at Tora Bora and enlist the paid assistance of local villagers and some of the war-lords themselves.

The sealing off and capture of Tora Bora was crucial if al Qaeda and Osama bin Laden were to be captured or killed. Except that Tora Bora was never sealed off. It was extensively bombed from one side and the US military made a mistake which would come back to haunt forces in the future. It relied on dubious war-lords, many of whom despised each other, to conduct a majority of the operation. Special Forces units which were in Tora Bora were ordered to hold back and allow an amalgam of Afghan private armies to catch up to them. The Khyber Pass, which was supposed to be closed down on the Pakistan side of the border by the Pakistani army, remained wide open. On the Afghan side of the border the Khyber Pass was ignored. It is not a leap of strategic thinking to understand that the one clear escape route needed to be closed, but the very air-mobile US military did nothing to block that avenue of escape.

It is a point where military analysts had to look at the employment of war-lords and fickle allies over prosecuting the attack on Afghanistan with well-trained, well-equipped, US and NATO forces (and other allied organized forces). Anyone with a minor amount of knowledge of the area would know that utilizing war-lords as a surrogate army would eventually lead to them exercising their power, and not in a good way, in a re-emergent Afghanistan. It could be argued that holding back massed mechanized ground forces reduced US and allied casualties, but that alone is not a sufficient reason. The truth appears to come from the rings of the Pentagon and the West Wing of the White House. That massed US military might was needed elsewhere to execute a plan of attack in a place other than Afghanistan: Iraq.

The need to attack and occupy Afghanistan was a surprise to the Bush administration. It interfered with existing plans for Iraq and the need to mobilize a hefty land force was expensive and inconvenient. Bells should have started ringing when Bush started calling for NATO to provide an extensive security and assistance force from the time Afghanistan was consolidated. There appeared to be an anxious desire to get right out of the place and hand the job of occupation over to others. Afghanistan was clearly an unwanted distraction from something much more important and much more urgent on the Bush administration’s agenda. It had to be. Bush had carte blanche from the American people, and indeed the world, to pulverize Afghanistan, occupy it and take as much time as necessary to rebuild it as a compliant state. Yet, he seemed to be in a rush. That rush would eventually leave the mission in Afghanistan unfinished with the Taliban intact and NATO struggling to achieve a level of security the US had left unattended.

Why then would the Bush administration leave such an overwhelming security concern such as Afghanistan in such disarray and shift its focus back to Iraq? And why would Britain suddenly take such a resolute position alongside the US on Iraq?

Simple, really.

The United States, the third largest producer of oil in the world at 8.7 million barrels a day (and declining), was consuming over 20 million barrels a day. Britain was forecasting that she would become a net importer of oil by 2004, her production peak having been reached in 1999 as the North Sea reserves declined.

To be continued.... (watch for part 2 in the days ahead)

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