September 6, 2008

On Iraqi oil. Amer wrote this for Iraq Slogger:

"The Future of Iraq's Oil Industry: China and Russia May have The Lion's Share!

Most of the mainstream Western media reported – but gave little heed – to the recent agreements between the Iraqi Government and International oil companies to exploit Iraq’s vast oil resources. It was casually reported that "service contracts" were to be granted to a group of Western oil companies to refurbish and increase production in several Iraqi oilfields. Shortly thereafter, it was confirmed that oil contracts going back to the Saddam era (mostly with Chinese and Russian companies) to exploit several other oilfields will be revived - and revised - and will shortly enter into effect.

The importance of this news cannot be underestimated; these contracts – if fulfilled – will largely determine the future of Iraq’s oil industry, and by extension, its economic development. On the other hand, the shape and structure of these contracts reveal the "strategic" political deals that took place in the backrooms: the current contracts represent a major departure from the original US vision for Iraq’s oil future, and may be a reflection of the new balance of power in the "New Iraq."

Az-Zaman reported on the official granting of "exploitation rights" to the Chinese National Petroleum Corporation (CNPC) to produce oil from the Ahdab field (near the Iranian borders,) al-Ahdab, as described by the newspaper is "one of five strategic oilfields in Iraq" whose exploitation was contracted to Russian and Chinese companies by the previous regime during the late 1990s. Az-Zaman, reaching for the political angle, framed the story with the following title: "Chinese deal with Iranian mediation excludes US companies from investment in Iraq’s oil."

The title is somehow misleading – since US companies have already guaranteed large contracts in Iraq, but it does contain a grain of truth. Why would the United States (or its "ally", the Iraqi government) be interested in reviving oil contracts with nations that neither supported the US-led invasion in 2003, nor are considered allies of the US? Didn’t US officials clearly proclaim in the early months of the invasion that countries opposing the enterprise will have little access to Iraq contracts? What happened to the grand plans to privatize Iraq’s oil industry and use Western companies and expertise to quickly boost production in the framework of production-sharing contracts (PSCs)? Furthermore, the contracts handed out by Saddam to CNPC and Russian companies represent most of Iraq’s oil potential.

Iraq’s proven oil reserves can be roughly divided into A- reserves in already-producing oilfields and B- reserves in oilfields that have been discovered in the 20th century, but remained (for various reasons) unexploited. The largest proportion of Iraq’s oil reserves belongs to the second category. Most of Iraq’s oil production in the last half-century came from a handful of oil deposits that were discovered in the 1920s-1950s and that have been continuously producing ever since. These fields, such as Kirkuk and Rumaila, are considered to be "maturing," that is, their reserves are running out and any attempt to boost production (and compensate for the natural decline) will be progressively more expensive in the coming years. Some of these oilfields, such as Kirkuk, have had their oil reservoirs irreversibly damaged because of bad production practices in the past. Virtually all of the "service contracts" granted to Western oil companies are in those aging oilfields, while Russian and Chinese companies will be tasked with exploiting fresh reserves. Both categories of contracts are substantial, and possibly very lucrative, but it would seem ironic that, after America’s costly enterprise in the Middle East, the Chinese and the Russians will stand to control most of Iraq’s future oil production – hence Az-Zaman’s acerbic title.

What is more significant for Iraq is that all of the contracts are reasonably favorable to the country and its National Oil Company (or at least far better than the original visions floated after 2003, which spoke of Production-Sharing Contracts with unreasonably high margins for foreign companies.) In fact, the original Saddam contract with China was seen as "too favorable" and had to be revised down to a "service contract" (Saddam had originally offered generous production-sharing.) According to Az-Zaman, the Chinese operator will receive compensation for its investment costs in addition to an agreed-upon profit margin – the paper said that the Chinese company will receive around $6 for every barrel it extracts. The oilfield is expected to produce around 110,000 Barrels per day for a contractual period of 10 years.

Where does Iran come into the equation? The reason that prevented the signing of quick, massive, oil contracts with Western and US companies after the Iraq invasion was the tremendous opposition fielded against such contracts in Iraq. The oil workers Unions and Iraqi oil experts mobilized quickly and were very vocal in expressing their opposition to such plans; the raging public mood convinced the government that "political" oil deals will be very costly, and – maybe most importantly – pro-Iranian militias in the South made it clear to the oil industry that no oil will be profitably exported from Iraq under conditions unfavorable to a host of local and regional "actors." Once this new structure for the exploitation of Iraq’s oil was negotiated, probably many months ago – with limited Western involvement, large contracts for China and Russia and a larger participation on behalf of the Iraqi national oil companies - "sabotage" and attacks against Iraq’s oil installations suddenly died down!"