How Bush and Cheney rushed to war to secure a sweetheart oil deal

The war in Iraq has been been beset by dozens of significant errors,

which most observers have pegged to some combination of hubris,

arrogance and stupidity. Yet there is a lot of evidence, mostly

circumstantial, that most of these "errors" were strategically

important, not to winning the war in Iraq, but to ensuring that the

Bush administration had a free hand in rewriting the rules for sharing

Iraq's oil revenue.

Ironically, securing sweetheart contracts for American-based oil

companies doesn't secure inexpensive oil for American consumers;

Americans end up paying the market price for oil no matter who

produces it. It simply provides increased profits for the oil

companies themselves, as will become clear below.

What errors am I talking about here? The decision to invade without

giving the UN arms inspectors more time to validate that Iraq had no

WMDs; pushing Ahmed Chalabi first as the head of the new Iraqi

government, and later, when we learned he had no popular support,

getting him the position as Iraq's oil minister; invading without

significant allied support and with too few troops; and refusing

assistance with the occupation from other nations in late 2003.

To understand our goals in the Middle East, you first have to

understand a little about how oil revenues are typically divided up.

Because oil in the Middle East is relatively inexpensive to extract,

as compared with off-shore drilling for example, the oil companies'

expertise in extracting oil from difficult locations has been

difficult to translate into significant equity oil holdings in that

area.

Most Middle Eastern countries, including all of Iraq's neighbors with

oil - Saudi Arabia, Iran and Kuwait, prohibit any foreign ownership or

equity interest in their oil reserves, either by law or in their

constitutions. Iraq's oil industry was also effectively nationalized

prior to the US invasion; oil production had been completely owned by

the Iraqi government since 1972, and since 1961 all but 0.5% of the

oil had been been owned and controlled by the Iraqi government.

Nearly all work done by foreign oil companies in the Middle East is

done essentially via cost-plus contracts, not by giving the companies

a fixed share of the extracted oil. It's a nice business, but its not

a *great* business.

Thus, the most important feature that oil companies would like to get

in their oil contracts is the right to sell some percentage of the oil

located in the fields at which they are producting oil. This would

enable them to "book" this fraction of the reserves, essentially

including them as assets, and thus boosting their stock price. They

would, of course, like to lock these terms in for as long as possible,

as insurance against changing popular opinion about the deals'

structure. These agreements are typically called Production Sharing

Agreements (PSAs). Of course, in the Middle East, much to the

frustration of large western oil companies, virtually no oil was

subject to such equity sharing PSAs.

In Iraq, however, by June of 2005, that was set to change. The Iraqi

oil ministry had drafted a new law concerning petroleum exploration,

to be proposed to the government elected in Decemeber of 2005 (which

at the time of this writing has not been formed). According to Global

Policy Forum, the draft states that while oil fields currently in

production should be developed by the Iraqi National Oil Company,

newly discovered fields should be developed by private corporations

under new production sharing agreements. Note that Iraq has about 80

known fields, of which only 17 are currently producing oil. These 17

fields represent about 1/3rd of the known oil reserves in Iraq,

leaving about 2/3rds of the oil to be subject to PSAs. And if more

oil is discovered, as is very likely, since Iraqi oil exploration has

been crippled over the past two decades by the Iraq/Iran war, the 1991

Gulf war and the current occupation, the fraction of Iraqi oil subject

to PSAs will increase further. This draft law was produced by the

Iraqi oil ministry under Ahmed Chalabi, the DoD's original choice to

lead the new Iraqi government, and the head of Iraq's interim

government's oil ministry.

Which oil companies were likely to obtain these new concessions? Back

in 1997, Iraq's government signed agreements with Russia's LUKoil,

France's Total, and China's national oil company, for exploration and

production of its oil fields, assuming the embargo would eventually be

lifted. It looked like American and British oil companies would be

locked out of the Iraqi oil fields for years, perhaps even decades.

As far back as March of 2001, Cheney's Energy Task Force was reviewing

the contracts Iraq's government had signed, or was in the process of

negotiating, with special concentration on foreign (to the US) suitors

( see the 'foreign suitors for Iraqi oil' links in this

link). At the time, it looked like American oil companies were

locked out of doing business in Iraq.

However, conveniently, the 2003 invasion has changed all that: In

December 2003, the Paul Wolfowitz at the DoD issued a directive

barring companies from France, Germany, and Russia from bidding on

prime contracts in Iraq (Even Fox covered it ), so, for now, oil companies from these countries are

locked out of competing for Iraqi oil development contracts. And even

before the invasion, in Fall of 2002, Ahmed Chalabi, now head of

Iraq's oil ministry, said "American companies will have a big shot at

Iraqi oil" (Washington

Post ). It looks like Chalabi promised sweetheart oil

deals for American oil companies in return for an invasion installing

him in a position of power.

The amount of money at stake here, under equity sharing PSAs, is by

any standards, enormous. Iraq's known reserves are about 115 billion

barrels, and at $60/barrel, that comes out to about 6.9 *trillion*

dollars. And Iraqi oil is some of the cheapest in the world to

extract, with extraction costs under $1 per barrel. So, were the new

Iraqi government the pawn the DoD expected, American oil companies

would have been looking at potential riches beyond any other

opportunities available in the world.

Things didn't go as planned, of course. As Naomi Klein explains in a

her wonderful article, 'Baghdad Year Zero' in Harper's Magazine ( Harper's ), the

original intention was for Bremer's CPA to privatize Iraq's oil

wealth. But by November of 2003, oil company lawyers had pointed out

that under the Geneva convention of 1949, any contracts signed by a

military occupation government might be invalidated by a later,

legitimate government. By the end of 2003, most companies were

waiting for a duly elected Iraqi government to take power before

proceeding with any forms privatization.

So, with this history as a prism, a lot of puzzling events in the war

become a lot clearer. In late 2002, American oil companies were

locked out of doing any business with Iraq, and other companies,

especially Russia, China and France, were poised to start work in Iraq

as soon as the embargo ended. Since weapons inspectors were roaming

freely throughout Iraq, it was quitely likely just a matter of months

before the world recognized that there were no Iraqi weapons of mass

destruction, and that Iraq was no longer a military threat of any form

to its neighbors. At that point, pressure for lifting the embargo

would have risen. If the Bush and Cheney were really determined to

lock out those foreign suitors, they had to act fast, and they had to

act without the assistance of France, Germany, Russia or China, who

might otherwise insist on participating in Iraq's rebuilding. This, I

suspect, is the real reason we rushed to war in early 2003 - it was

the only chance for American oil companies to get nearly exclusive

access to trillions of dollars of oil.

This history also helps explain why, in December 2003, at a time when

more allies would have helped gain international legitimacy for the

new Iraqi government, and at a time when the reconstruction was first

showing signs of trouble, we *turned down* offers of assistance from

Europeans, and actually banned them from working in Iraq. Even before

the war, we seemed to do everything we could to avoid unity with the

Western Europeans (remember Rumsfeld's Jan 2003 dismissal of French

and German concerns over the war as coming from "Old Europe"). Again,

the more the invasion was a purely American adventure, the easier it

would be to control the post-war Iraqi government, and its oil

ministry.

It also explains why Cheney is so determined to keep the contents of

his Energy Policy Task Force secret: it may well have discussed how to

divide Iraq's oil wealth, way back in March, 2001.

In short, there is a vast amount of circumstantial evidence that the

Bush administration was looking for any excuse to invade Iraq in order

to help their political base literally break into the Iraqi oil

business. This plan required attacking Iraq before Iraq's true

military weakness became public knowledge, and it required America to

fight with the fewest number of allies possible, to minimize

the chance of post-war competition between oil companies for Iraqi oil

development.

The results, of course, have been horrible. Upwards of 30,000 Iraqi

civilians, and thousands of American soldiers who believed they were

defending our nation, have died in a military operation apparently

primarily designed to enrich a few oil companies. The unity of the

Western alliance has been shattered, and the United States has lost

the credibility to lead the world in the battle against Al Qaeda and

other fundamentalist groups, or in helping direct a united plan to

limit nuclear proliferation. We can only count the minutes until

America hopefully comes to its senses.

References and further reading:

Here are some links to articles I found particularly interesting. The

Global Policy Forum site in particular has a large number of very

readable papers describing details about the oil industry.

Global Policy Forum: Crude Designs

GPF 2002 paper on pre-war Iraqi oil partnerships

GPF: History of oil companies in Iraq

Harper's Baghdad Year Zero article

Washington Post Chalabi quotes

Cheney's Energy Task Force Iraq Oil Maps