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Like the sun and the moon, the politics and the economics of the Iraq situation stand in an inverse but reflective relation. The geo-political face of the conflict is simple and fairly constant. Saddam Hussein is a brutal, belligerent dictator who must be got rid of or at least disarmed and “neutralized”. The geo-economic face of the conflict is complex and extremely fluid. The general premise here is that Saddam can be negotiated with and that the stability he affords is better than the chaos. The political face is characterized by periodic and much publicized “crises” followed by long intervals of quiescence in what is supposedly a steady effort to get rid of Saddam. The economic face is ever silent covering steady attempts to trade with Saddam while surfacing from time to time in order to deny doing any such thing. An example of these dual constellations is that, in 1996, while director of Central Intelligence, John M. Deutch headed up American efforts to overthrow Iraqi President Saddam Hussein; but as of February 2000, Deutch sat on the board of Schlumberger Ltd., a multinational “shell” for US companies that was helping Baghdad service its oil rigs.
A brief and somewhat superficial summary of the past six years will give an idea of the curious dynamics surrounding Iraqi oil.
In 1996, the United Nations initiated the so-called oil-for-food program, which allowed limited and monitored sales of Iraqi oil in exchange for non-military and non dual-use goods. As of 1997, the Security Council removed any ceiling on the amount of oil Iraq could sell. However, it maintained a limit on the amount of spare parts Iraq could buy. As of June 1998 Iraq was allowed to buy only $300 million in spare parts every six months.
Complicating the situation, the United State government imposed sanctions on Iraq, which meant, in effect, that it prohibited American companies from doing business with the outlaw regime. But whereas Iraq could sell oil to anyone, it could only get the spare parts in needed from American sources which had built the original infrastructure. And if it could not get spare parts, it’s ability to pump and sell would be reduced. And so it stood; at least officially. According to U.S. government figures, American firms accounted for only a tiny share (about $400 million) of the nearly $10 billion in trade that has been conducted under the oil-for-food exemption. In reality, diplomats, industry officials and UN documents indicate that, between the summer of 1998 and Spring of 2000, American companies, operating through subsidiaries and affiliates, were buying oil and selling parts furiously, although they denied it in order to “comply” with the law.
One such company was Halliburton, the Dallas-based maker of oil equipment of which Dick Cheney was chairman and CEO until his election as vice-president. While the United States and Britain waged almost daily air strikes against military installations in northern and southern Iraq, Halliburton and other U.S. companies, were doing business with Saddam Hussein's government and helping to rebuild Iraq’s battered oil industry. Two such other companies were Dresser-Rand and Ingersoll-Dresser Pump Co., in which Cheney had major stock interests.
Prior to his election Dick Cheney was a long time critic of United States’ sanctions against Iraq which, he said, “penalized” American companies. They did not, however, greatly penalize Halliburton & Co. Although Cheney denied that Halliburton had business dealings “with” Baghdad, UN records showed that Halliburton held stakes in two “affiliates” that signed contracts to sell more than $73 million in oil production equipment and spare parts to Iraq.
Much the same obtains on the oil-buying side of the equation. In a speech to San Francisco’s Commonwealth Club, in November 1998 ,Chairman of the Board and Chief Executive Officer of Chevron Corporation , Kenneth T. Derr, criticized US imposed unilateral sanctions against various countries. Derr went on at length belaboring the obvious fact that (unless there is only one source) unilateral sanctions “don’t work”. On the other hand, Derr said “It might surprise you to learn that even though Iraq possesses huge reserves of oil and gas -- reserves I'd love Chevron to have access to -- I fully agree with the sanctions we have imposed on Iraq. Why? Because .Iraq’s conduct has been so egregious that ... other countries have been willing to join the United States by adding sanctions of their own.” What he did not say was that at the very time, without “access to” the reserves themselves Chevron was purchasing oil from the reserves” via middlemen.
A month later, the United States initiated Operation Desert Fox and bombed Iraq. Baghdad retaliated by prohibiting U.S. oil companies from directly purchasing Iraqi crude. " Any company found supplying Iraqi crude to a country in a state of war with Iraq will be put on the blacklist and there will be a partial or full ban in dealing with it," said Iraqi Trade Minister Mohammed Mehdi Saleh.
Yet despite multi-lateral sanctions imposed against Iraq and despite unilateral sanctions imposed by Iraq, Chevron and Exxon managed to increase their purchases of Iraqi crude in 1999. According to Larry Goldstein, president of the Petroleum Industry Research Foundation, Iraqi crude was the fastest growing source of imported crude amount to about 700,000 of the 2 million barrels of oil exported daily by Iraq or nine per cent of total U.S. oil imports. "The Chevrons and the Exxons of this world have to buy from the Russians, the French and the Chinese traders," said Goldstein. But, he added, "the U.S. spare parts industry is too dominant to ignore."
“Where does Iraq think its oil is going to go if it doesn't go to the U.S.?” asked one trader with a U.S. major oil company. Saudi Arabia, vowed to fill any disruption from Iraq, Iraq’s sanctions failed and Baghdad's penetration of the U.S. oil market soon surpassed pre-Gulf War levels.
In September 1999, more than 50 foreign companies attended an oil and natural gas technology exhibition in Baghdad, the first such gathering in 10 years. Most of the firms were from Canada, France, Italy, and the United Kingdom. No U.S. firms attended, although a high-level Iraqi oil official stated that Iraq was ready to deal with U.S. oil companies.
How Iraq was prepared to deal with foreign companies was another matter. A U.N. “Expert Report,” issued in March 2000, obliquely indicated that someone had floated the idea of foreign companies entering into “production sharing agreements” and/or “participating” in Iraq’s oil production. The Report states that the expert group “was advised, at Ministerial level, that in the current political environment...there would be no discussion on the matter of options for involving foreign oil companies in Iraq’s oil sector.”
The Report went on: “To sustain and increase oil production and export capacity it is the view of the experts that involvement of foreign companies would be helpful and, in principle, the Ministry of Oil welcomes this. .... However,... the Ministry of Oil declined to take part in discussions on this matter and was only willing to discuss the involvement of foreign companies through the use of short-term technical service contracts (“TSC’s”), such as well logging, pipeline pigging, and the drilling and work over of wells.” It would appear, however, that by the end of the following year the Ministry had modified its position at least to a point satisfactory to the companies, although getting there was a tad bumpy.
In October 2000, the Iraqi Oil Ministry expressed frustration with the slow pace of progress by Russian and Chinese firms; and, in January 2001, Shell announced that it had held talks with the Iraqi Oil Ministry regarding "potential opportunities". In March 2001, the Deputy Oil Minister announced that Iraq might terminate contracts with the Chinese and Russian companies. In July 2001, angered by France's perceived support for the U.S. "smart sanctions" plan, Iraq announced that it would no longer give French companies priority in awarding oil contracts, and would reconsider existing contracts as well. Iraq also announced that it was inclined to favor Russia, which has been supporting Iraq at the U.N. Security Council.
In October 2001 a joint Russian-Belarus oil company signed a service contract and Lukoil was granted its concession to spend $4 billion to develop a "super" oil field in southern Iraq In December 2001, the Turkish Petroleum International Corporation won a U.N.-approved contract to drill for oil in northern Iraq. It would appear that Iraq and France also resolved their difference as a recent (Fall 2002) report by the Royal Institute of International Affairs states that France Russia and China all have “potentially massive oil pacts” with Iraq and that “Saddam [Hussein] is believed to have offered the French company Total Elf Fina exclusive rights to the largest of Iraq's oil fields.”
In short, twists, turns, bumps and bombs, by the end of 2001 Iraq appeared poised to solve its oil problems and U.S. companies were not part of the solution. As of March 2000, the U.N. Expert Report had concluded in the direst of terms that Iraq was wasting its assets in order to sell them. “Although the effort of the Iraq oil industry has been enormous, and is notable for its effort to reinstate production after severe damage in a very short time, the lack of means to keep this industry in good shape in terms of capital, equipment and material, and also from the point of view of human resources, is very apparent. .... The oil industry is degrading, safety is below conventionally accepted standards, the environment is endangered, and the ultimate recovery potential of oil and gas in the fields is jeopardized. The current situation, if left unchanged, will lead inexorably to the demise of the oil industry.” In short, Iraq was engaged in the petro-equivalent of slash and burn agriculture.
But by the end of the following year the issues were resolved. Although nothing prevented U.S. companies from continuing to be passive end-buyers of crude, they were not in on the big deals. Moreover, it would appear that U.S. companies also stood to loose on the spare parts business because new infrastructure developed by France, Russia or China would not typically use American machinery.
Little is known of the negotiations in Baghdad, but it much of the blame for the last place showing by American companies can be laid at Washington’s door. As Cheney complained throughout the Nineties, U.S. regulations had hobbled American companies. These policies did not prevent end-runs, but neither did put wind in anyone’s sails. Diplomats interviewed for the Washington Post in February 2000 said Washington had been a greater obstacle for American businesses than Baghdad. The United States had placed "holds" on more than 1,000 contracts valued at $1.5 billion under the oil-for-food program, including some held by American companies. The March 2000 Expert Report Appendix likewise showed that over and over again repairs and construction were blocked by US objections that a screw or an adhesive had “dual use” capacity.
© WCG, 2003
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