Let the Oil Deals Flow
Reports that a number of international oil companies are on the brink of signing contracts with Iraq have prompted a furious reaction in certain parts of the media and on Capitol Hill. The deals have been widely characterized as no-bid contracts, implying that Big Oil has somehow used its political clout to muscle in on Iraq and renewing suspicion that the whole U.S. intervention in Iraq was primarily a grab for natural resources. In the Senate, senior Democrats have argued that the contracts would heighten Iraq's sectarian tensions, and those lawmakers are threatening to cut financing for some nonmilitary programs in Iraq if the deals go ahead without prior passage of new hydrocarbons legislation.
These are gross mischaracterizations of the Iraqi contracts.
If the Iraq invasion was about oil, let the record show that that mission has been botched even worse than the war's toughest critics claim the military expedition has been. Iraqi oil production steeply declined after the conflict began, and only this year has it returned to the levels of the Saddam Hussein era. This recovery can partly be put down to better security, especially along the northern export pipeline. But international oil companies also deserve some credit.
More than 40 foreign oil firms -- ranging from the largest Western giants to minnows -- have signed memorandums of understanding with the Iraqi Oil Ministry over the past four years. The companies have provided millions of dollars worth of advice, field studies, training programs and, in some cases, guidance on procurement and reservoir management to an increasingly beleaguered ministry, all free of charge. None of the companies kept secret its hope that this help would position it well for the future, but the assistance has been vital to restoring Iraq's oil production, especially at the country's biggest-producing fields.
Last year the Iraqi Oil Ministry found itself in a bind. It realized that this one-way relationship could not go on forever, but with political disputes hampering passage of a hydrocarbons law and foreign investment, it needed to extend the remote assistance program. So last autumn, ministry officials reached out directly to nine companies -- not all super-majors by any means -- in a bid to formalize the relationships through a two-year bridging mechanism known as a technical support agreement. The goal was to contract with the companies to support the ministry's procurement, project management and field management tasks to increase production sustainably. None of the nine companies will operate on the ground, and all have one thing in common: They have in the past provided valuable help in managing the oil fields that Iraq counts on most.
Although the companies were sought out by the Iraqis, the past 10 months of talks have not been a cakewalk for the firms. Iraqi oil officials have proved to be tough and unyielding negotiators, seeking the best bargains for their country. Terms have not been made public, but the returns for the companies are thought to be low and the production targets challenging. Perhaps most significant, the companies have been told that the support agreements will not guarantee them preferential access to these or any other fields when Iraq eventually goes ahead with open bidding, which the Oil Ministry hopes will take place early next year.
To block the support agreements at this stage would be a major disservice to Iraq. Such action would deny Iraq's oil industry much-needed help from the companies with which Baghdad most wants to work. It would also rob the country of revenue that could improve its financial strength and ease the burden on U.S. taxpayers.
Senate critics are also doing a disservice to U.S. interests: Obstructing the deals simultaneously conveys to Iraqis the image of direct U.S. interference in their sovereign affairs and the impression that America is somehow seeking to impede their country's recovery. Given the record oil prices of late and concerns over the availability of crude supplies, delaying -- or possibly quashing -- a move by a member of the Organization of the Petroleum Exporting Countries to increase its output by as much as 500,000 barrels per day is folly. The senators no doubt mean well, but it is difficult to see how their actions serve the long-term interests of Iraq or the United States.
The writer is a senior director at PFC Energy in Washington, where he heads the Iraqi Advisory Service, which advises oil and gas companies -- including some of the nine mentioned in this column -- on investment risk in Iraq. PFC Energy does not have a direct commercial stake in the Iraqi market.