Daily Archives: January 9, 2007

Lettuce and Pickles

Posted by Cutler on January 09, 2007
Iraq / 3 Comments

Iraqi oil is back in the news.

The most recent flurry of chatter was prompted by an article in the Independent on Sunday entitled, “The Future of Iraq: The Spoils of War.”

The central focus of the article is on a draft hydrocarbons law that has the Iraqi oil industry operate under production sharing agreements or PSAs that provide very generous terms of international oil companies.

An article in the Turkish Daily News suggests that the PSA terms in the draft law will be extraordinarily generous:

According to the Production Sharing Agreement (PSA) system to be invoked by the draft, companies will have the right to retain 75 percent of their annual income from Iraqi oilfields, until they match their oil production costs. After then they will be able to pocket 20 percent of the annual income. Experts point to the fact that this is double normal market rates.

The Iraqi oil story is extremely import, but the “news” is not the PSA system.  I discussed negotiations over PSA terms in a couple of October posts (here and here).  Greg Muttittt and others made news with the PSA story back in November 2005 with a report entitled “Crude Designs.”

The centrality of oil to US plans in Iraq cannot be overstated.  I have always liked Chomsky’s way of framing that part of the story:

[W]e are under a rigid doctrine in the West, a religious fanaticism, that says we must believe that the United States would have invaded Iraq even if its main product was lettuce and pickles… Well, you know, if you have three gray cells functioning, you know that that’s perfect nonsense. The U.S. invaded Iraq because it has enormous oil resources, mostly untapped, and it’s right in the heart of the world’s energy system.

The problem, however, has always been and continues to be for the Bush administration to get the domestic Iraqi politics and regional geo-politics aligned in such a way to get the deals done and the oil flowing.

On this score, it should be noted that a draft law–even if adopted by the current Iraqi parliament–does not yet constitute “success.”  Here is one sober industry reaction (Simon Wardell, “Draft Oil Law: New Iraqi Law Will Reportedly Allow Large-Scale Investment by Western Oil Majors,” Global Insight Daily Analysis, January 8, 2007):

[T]he legislation is just the first of several steps which will be required before any wells are sunk. The security situation still presents a major challenge which no major is currently willing to face. While deals may be struck, they will be contingent upon an improvement in the security situation. There will also be major risks in pouring capital into Iraq’s oil sector due to the political instability. Even if the security picture improves, governments may change, and the status of PSAs may come under question at a later date, as they have in Russia. The lack of a political consensus in Iraq makes this risk more significant

The crux of the matter is that the political stability favored, if not required, by the Oil Majors was critically upset the day in May 2003 that the Bush administration adopted its de-Baathification policy and thoroughly undermined by the three major votes of 2005 that handed political power to Iraq’s Shiites and Kurds.

From the perspective of the foreign policy establishment, the preferred path for political stability in Iraq was then and continues to be benign dictatorship under Sunni minority control.

The proper model for a simple US oil grab is the Libya deal, not Iraq.  Saddamism without Saddam.

So the Bush administration has been scrambling to construct some kind of political stability, not only within Iraq but within the region, that would allow the oil to flow.

The News from Kurdistan

One key sticking point has been the locus of control over new oil field development within Iraq.  In other words, who gets to sign the contracts?

The Kurds have always hoped to win control for the Kurdish Regional Government in northern Iraq–and to include the oil-rich city of Kirkuk within that regional entity.

The news of an oil “breakthrough” in Iraq is mostly on the Kurdish front.

Shiite forces abanonded the Kurds on this issue.

Now, the Kurds appear to have conceded the point.

In late December 2006, the Kurdish Globe reported:

Oil has been a major issue dividing Kurdish and Iraqi authorities in post-war Iraq. KRG says it is constitutionally allowed to drill for oil in areas under its control, but Iraqi oil officials have threatened that KRG’s oil deals will not be “valid.”

Most of the oil wells are in southern Iraq, and the oil law allows KRG to talk with companies and make deals for oil production,” [Kurdistan Regional Government Prime Minister Nechirvan] Barzani said…

According to preliminary agreements between the KRG and federal authorities, a representative from the Baghdad government will attend talks between the KRG and oil firms. Once the KRG reaches a deal with a company to drill for oil in Kurdistan, the contract will be sent to Baghdad for assessment and approval by an Iraqi government committee. The contract will then be returned to the KRG and it will have 60 days to sign it…

“There needs to be some criteria according to which the (oil) contracts are investigated so as to know if there is any corruption in the deals or to what extent the company will implement its obligations,” Barzani said.

Note well: this is Barzani’s concession speech and it will not likely be greeted with thunderous applause in Kurdistan.  Barzani’s two justifications for centralized control–that most of the wells are in southern Iraq (and therefore a source of wealth for Kurds only under centralization) and that central authorities need to be able to investigate corruption–are very thin fig leaves, given the history of Kurdish demands for autonomy.  Look for an internal Kurdish split that would challenge Barzani for “selling out” the Kurds.

The Kurdish concession has regional implications insofar as Turkey has been firm in its opposition to Kurdish autonomy.  Indeed, just as the Kurds were conceding the point, Kirkuk oil began to flow in the pipeline to Turkey’s port of Ceyhan.  Perhaps it is no coincidence.

Note, too, that the future of Kurdish control of Kirkuk also looks increasingly fragile, with John McCain now leading a campaign to delay a referendum on Kirkuk that would likely establish Kurdish control of the city.

In the last instance, these Kurdish concessions are part of a larger campaign to restore centralized national political control in Iraq.

On the oil front, centralization is likely intended to appease Sunni rejectionists.  It will also please Muqtada al-Sadr who is a strident critic of Kurdish control of Kirkuk and of decentralization, more generally.  Is Sadr willing to trade privatization (i.e., production sharing agreements) for centralization?

If so, then the US will have effectively exploited the threat of Kurdish regional PSAs to extract comparable concessions from Iraqi nationalists.