Crude Benchmarks

Posted by Cutler on October 31, 2006

Liberally sprinkled amidst the news about Iraq is ongoing talk of “partitioning” the country. An article in the New York Times today includes a rather prominent discussion of support for such a policy among Democrats like Senator Joseph Biden and adivsors like Peter Galbraith.

Are there any signs that the Bush administration is seriously considering such an option?

Perhaps Saudi resistance to such an idea is enough to give credence to the fact that it is actually an option under consideration.

I tend to think that the function of the partition chatter has little to do with real options on the table and much more to do with ongoing negotiations over the Iraqi hydrocarbons law that will govern relations with the oil industry.

The US is firmly committed to centralized national control over the development of new oil fields. In this, they have the support of Sunni Arab political forces along with nationalist Shiite forces in Southern Iraq, including those loyal to Moqtada al-Sadr.

The threat of partition, however, is being used to pressure these Sunni and Shiite forces to embrace particular oil policies that will be very unpopular with Iraqi nationalists, even as they are sought after by international oil majors.

The oil majors and the US are pressing for generous contract terms for foreign oil investment and use the threat of extremely generous regional contract terms on offer in the Kurdish north to extract similar concessions from Iraqi nationalists.

US pressure has not been subtle. An October 24, 2006 report in the Petroleum Review entitled “Iraqi Nadir” explains:

At the request of the US State Department, the USAID Agency has provided an advisor from consultancy firm BearingPoint INC (the former consulting arm of KPMG) to the Iraqi government of Prime Minister Maliki, to help in the drafting of a new petroleum law. Oil Minster Shahristani expects the new law to be ratified by the Iraqi parliament this year. This expectation might be somewhat premature, however, given that the economic policies pursued by the current government, influenced by the US, are not popular with the general public…

Most observers believe that the involvement of BearingPoint, as well as the International Monetary Fund (IMF) – as a condition of cancelling 30% of Iraq’s $39bn debt to the Paris Club of creditors – in drafting of the petroleum law is likely to result in handing over control of the development of Iraq’s oil fields to foreign oil companies. This policy, although supported by many in the government – namely Vice President Adel Abdul Mahdi and Oil Minister Shahristani, who see a major role for foreign oil companies in Iraq’s oil industry – is understood to be strongly opposed by the majority of Iraqi people and by the oil industry trade unions. It could be seen as confirming the belief that the war was about oil after all.

It is in the context of these negotiations that the US–with the help of Joe Biden and the Kurdish Regional Government, if not the autonomy-minded Shiites of SCIRI–uses the threat of partition to leverage concessions from Iraqi nationalists.

This is a game of chicken that Shiite and Sunni nationalists are playing as well as the oil majors.

The question is this: who will blink?

There is no way that the oil majors would support the actual partition of Iraq. This is a bluff. And they will have to weigh the popular backlash–in the context of ongoing insurgencies–to an oil regime that appears to strip Iraqis of national treasure.

A June 2, 2004 analysis from the World Market Research Centre captures the idea:

[The] most important task… is the establishment of a new state-owned Iraqi national oil company (NOC) to oversee the existing functional companies (without ruffling too many oil industry feathers) and to set in place a framework by which INOC can most effectively co-operate with private investors, without antagonising the Iraqi nationalist constituency. This will be the issue on which [the Oil] ministry performance will be assessed and the one that will be most integral to shaping Iraq’s oil and gas future in the coming years.

How much more will the US and the oil majors risk further antagonising the Iraqi nationalist constituency in the hope of leveraging more lucrative oil deals?

[Update: in the post above, I wrote: “There is no way that the oil majors would support the actual partition of Iraq. This is a bluff.”  I want to register my own doubts about this assertion.

I have seen no evidence to support the idea that the international oil majors favor partition.  Nevertheless, it would be a mistake to rule out the idea that at least some oil majors might be looking for favorable “rules of the road,” even if the rules apply only to regional roads, rather than national highways.

The issue is not Kirkuk oil.  The question is Basra oil.  Do any of the oil majors think they can get favorable terms from Hakim and SCIRI’s proposed autonomous southern Shiite region, even amidst resistance from Sadrists and Basra’s Fadhila party, to say nothing of Sunni Arab insurgency?

For now, this remains a question…]

1 Comment to Crude Benchmarks

  • The oil majors have not been doing such a good job since the start of the Iraq occupation. They have suffered serious setbacks in Russia as the Yukos affair and Sakhalin demonstrate. Iraq and Afghanistan are catastrophes of the first order. Russia is going to win more friends and influence more people supplying them gas and oil than the US will with its arrogant and militaristic approach to foreign policy. This seems to me to be a much bigger story than Iraq or the war on terror which could very well be covers or distractions to the central, main, essential ambition of the US which remains , after all , a continuing preoccupation with Russia.

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