Wednesday, January 03, 2007

It Was Always About Oil: The crossing lines (Part 2)

This is Part 2 of a multi-part post. Part 1 is here. Part 3 will appear in a few days.

The Bush administration, having dumped a majority of the responsibility for the security of Afghanistan on an unsuspecting NATO, had certain imperatives. First was the situation by which Iraq, under Saddam’s rule, had entered into technical service agreements (TSCs) with companies and countries other than the US and UK “big four” which could not be executed as long as UN sanctions remained in place. However, Iraq, under considerable pressure, was starting to weaken in its resolve not to allow UN weapons inspectors do a complete survey of Iraq’s weapons facilities. Compliance with UN Security Council Resolution 1284 would have been the first move necessary to remove sanctions and allow Iraq to resume a more normal trade in oil. With sanctions removed, previously arranged TSCs could be put in place, shutting out US and UK oil interests.

Iraq had already demonstrated significant influence over oil markets when, in November 1999, Saddam had shut down oil production causing world petroleum prices to spike to a level not seen since the 1991 Gulf War. There was no guarantee that he would not do it again or that he would refuse to sell oil to all but a few selected customers. Exclusivity, which did not include the US and UK, would have a deleterious effect on world oil prices.

In October, 2000 Saddam took the radical decision to move the currency of petroleum sales under the Oil-For-Food program from US dollars to Euros. He went even further by having the UN Oil-For-Food reserve fund converted to Euros. While many analysts suggested this would cost Iraq hundreds of millions of dollars in lost revenue most did not forecast the steady gain of the Euro against the US dollar. By January, 2003, Iraq’s original UN reserve fund of 10 billion dollars US had expanded to 26 billion Euros (24.8 billion US dollars). The currency conversion advantage recognized by Iraq was not lost on OPEC. Nor was it lost on the Bush administration. If OPEC started to move, however slowly, to Euros the US dollar would lose its supremacy in the world and the US economy would suffer. Imported goods, relatively cheap as long as the US dollar remained the dominant oil-trading currency, would shoot up in price.

Britain shared in the concern. The UK trades oil for US dollars and one of the two major international oil exchanges is based in London, England. The slowness of Britain in converting to Euros as a national currency leaves them holding US dollar reserves. As a net importer of oil this works for them on the world market – unless major suppliers convert to Euros.

Iraq, however, had tipped over the can and Saddam’s decision to convert from petro-dollars to petro-euros, even if it was purely emotional, had two major effects: it caused a strengthening of the Euro against the US dollar, impacting the US economy and, it put him and Iraq in a somewhat better light with the Europeans whose multi-national currency he was now using.

The fact that a dollar to euro conversion had already taken place in Iraq gave the US and the UK nightmares. It is, in fact, so critically relevant to the US/UK invasion of Iraq that it will be covered, in depth, in the next installment.

To further complicate things the US was having a problem with Saudi Arabia. The House of Saud was faced with internal dissent over several issues but high on the list was the presence of US military bases. The US explained their presence by pointing out the need to defend the giant Saudi Ghawar oil fields against foreign incursions (Iraq, Syria, etc.). The truth was actually much simpler. The US presence in Saudi Arabia was an acknowledgement that the House of Saud might come under assault from within and the US needed to protect that same giant oil field from the results of a possible coup d’etat. The House of Saud was very well aware of the fact that a nearby US military presence, in strength, helped preserve their rule. However, US military presence in Saudi Arabia itself was a major irritant to a vast segment of the Saudi population. The Saudis had a solution to this Catch-22. If the US invaded Iraq and established major military bases that would put the coup-deterring force right next door. To the Bush administration this was perfect. The movement of forces from Saudi Arabia, ostensibly temporary, to Iraq, where they would become permanent was an economic multiplier. From Iraq, they could defend a massive supply of oil. It is this need for a permanent US military presence in the Persian Gulf to prop up the House of Saud that one thing starts to become clear – the Saudi government, not the Israelis, as many would like to believe, has a great influence on Bush administration Middle-East policy and has been calling many of the shots.

The power base in Washington DC had a limited lifespan. They had control of the White House with a non-thinking, incurious, easily-led man, (who would be the Commissioner of Baseball if he’d gotten his way); Congress was Republican controlled and compliant; and, a majority of the American public was in the mood to continue a foreign expedition against any country which could be portrayed as a danger to US security. But all of that could end once memories faded. Bush, lacking the ambition necessary for the seat he occupied, had barely squeaked into office and, if it had not been for the September 11th attacks, would likely not have survived more than one term.

And there was always the niggling problem that, at any time, somebody could get rid of Saddam before the US and UK could act. There was little time to waste. And not one of the reasons stated above could be used to make a case against Iraq. The Bush administration went into spin mode inventing much of what they needed to feed the American public and the world. They cherry-picked intelligence, redacted any summaries which portrayed Iraq as a weakened military power, and put on display an array of defectors and Iraqi exiles who were more than happy to feed the Bush administration line.

On September 17, 2002, Iraq opened the doors to UN weapons inspection teams led by Hans Blix. This was some of the worst possible news for the Bush administration and on October 7, 2002, George W. Bush, in a speech, laid out the US case for war against Iraq. Far from indicating that UN weapons inspections would be permitted to proceed, Bush filled his speech with fear-mongering rhetoric, absolute falsehoods, imaginary linkages between Saddam and al Qaeda, and references to Iraqi weapons programs that had long since been dismantled. It was intended to subvert Blix’s inspections. What worried the Bush administration most was the possibility that Blix would find no weapons of mass destruction or worse, would find conclusive evidence that any such weapons had long been destroyed or disabled. Bush worked to pre-empt Blix’s positioning of an advanced weapons inspection team in Iraq by October 15, 2002. In fact, the Bush administration already knew the status of Saddam’s weapons. They withheld information that had come from inside Iraq, by way of a CIA back channel, from Iraq’s foreign minister.

What was also known was the state of Iraq’s oil industry. In 1998 the UN had contracted a Dutch company, Saybolt, to complete a study of Iraq’s oil production. Saybolt reported that Iraq was only able to produce 1.8 million barrels per day of crude oil for export. That amounted to less than $20 billion in annual oil revenues. “Lamentable,” was the word the UN secretary-general used to describe the situation.

Yet the Bush administration, with full knowledge of the Saybolt study, suggested that Iraq’s oil production would finance that country’s reconstruction. Paul Wolfowitz stated that Iraq’s oil revenues could be brought “from $50 billion to $100 billion over the course of the next two or three years.” The only way that could happen is if Iraq’s oil production infrastructure was rebuilt. The only way that could happen is if major oil companies came in and did the job. The only way that would happen is if they had a major stake in Iraqi oil reserves. Attracting any of the “Big Four” US and UK companies would mean offering something more substantial than technical service contracts. Since any increase in Iraqi production would likely cause the price of oil to drop significantly, to achieve revenue of even $50 billion a year Iraq’s oil production would have to almost triple. The “Big Four” would show little interest if Iraq’s oil production remained nationalized and concessions would make outright plunder far too obvious. What would be an obvious fit would be production sharing agreements (PSAs). But even then, the numbers Wolfowitz was tossing around seemed more than wildly optimistic. Oil industry experts felt that the earliest Iraq could achieve Wolfowitz’s predictions would be 2011, if nothing went wrong. In truth, it didn’t matter to any of the neo-cons whether Iraq’s production increased at all. What mattered is that the US and UK, and their respective oil industries, would be sitting on Iraq’s reserves with PSAs which would lock down control of the resource. It would also give the US a de-facto seat at the OPEC table through an Iraqi surrogate.

Iraq, under pressure to pass an oil law, has been working behind closed doors. The new Iraqi Constitution not only allows foreign investment in oil production, it makes it mandatory. An additional provision allows foreign companies to take all their profits out of the country, something which L. Paul Bremmer, as administrator of the Coalition Provisional Authority, forced on the Iraqis and which was transferred, without alteration, to the Constitution. And, while there have been serious efforts to produce an oil law which would see Iraq’s reserves and production fully nationalized, US and British meddling in the constitutional process saw any chance of that eliminated.

Oil industry publications are slathering over the prospect of PSAs in Iraq and for a good reason. Production Sharing Agreements are the next best thing to a privatized oil industry without requiring oil companies to actually do anything for, perhaps, years.

As the London-based study group Platform states in a 2005 report, when it comes to PSAs the devil is in the details. The author of that report, Greg Muttit, said in 2006:

Such contracts are often used in countries with small or difficult oilfields, or where high-risk exploration is required. They are not generally used in countries like Iraq, where there are large fields which are already known and which are cheap to extract. For example, they are not used in Iran, Kuwait or Saudi Arabia, all of which maintain state control of oil. In fact, of the top seven countries with the largest oil reserves, only Russia – which has the World’s seventh largest – has any PSAs. Russia signed three PSAs in the early 1990s, during its own rapid political and economic transition, but has signed no more since then. Those PSAs have been so controversial, due to the poor deal they give the state, that it is unlikely any more will be signed. Now some of the very same people who pushed PSAs in Russia and the other former Soviet states of Kazakhstan and Azerbaijan are advocating their use in Iraq.

He further points out:

Part of the appeal of PSAs is that they give the appearance of sovereignty over natural resources: the state is described as “owner” of the resource, and the foreign company as its “contractor”. However, in practice, most oil industry analysts acknowledge that the terms of the contract can be written so as to have exactly the same effect as a more traditional privatisation, giving the company management control, and potentially huge profits. And with PSAs commonly lasting for 30 or 40 years, or even longer, decisions made now could sow the seeds of economic and political difficulties for decades to come.

In negotiations with the major oil companies Iraq can easily be held out as “high risk”. It is politically unstable and while traditional difficulties in exploration and extraction are non-existent in Iraq, the hazards to equipment and crews will give cause for the oil companies to demand a higher share of the resource. Even if the current insurgency was brought to an end, the mere potential of sectarian violence will give the oil companies a negotiating edge. And that could lead to much longer term PSAs.

As was pointed out in part one, oil companies with PSAs could spend years not extracting oil in Iraq and simply sit on their agreed reserves. The signed agreements themselves will increase the stock prices of the oil companies and slower production will keep the price of oil high. Additionally, PSAs, giving the appearance of state control, assure Iraq’s continued presence in OPEC and, despite the blustering of some neo-con think tanks demanding the privatization of Iraq oil fields as a means of breaking the back of OPEC, Bush, Cheney and the major oil companies want OPEC to survive as a means to keep oil prices up.

Whether great quantities of oil flow from the Iraq oil fields or not is of little consequence to the Bush administration. Control was the key. By having a permanent military presence in Iraq and with oil companies in control of reserves, the US controls Iraq’s oil.

And while it was always about oil, oil is money. Without US control of a major oil supply, and the potential to pump it, the US dollar is on shaky ground. In fact, the US dollar, without a guarantee of US dominance of Iraq, could crash.

To be continued.... (watch for part 3 in the days ahead)

Part 3

While this post is filed under Dave's name, Cheryl shares an equal credit in its production as a series having contributed an enormous amount of research.

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