Oiling the wheels of power in Iraq

FOUR western oil companies are in the final stages of negotiating contracts that will return them to Iraq – 36 years after losing their oil concession to nationalisation under Saddam Hussein.

Exxon Mobil, Shell, Total and BP – the original partners in the Iraq Petroleum Company, which had a virtual monopoly on all oil exploration in Iraq from 1925 to 1961 – are in talks with Iraq's oil ministry.

Along with Chevron and a number of smaller oil companies, they are seeking no-bid contracts to service Iraq's largest fields.

The deals, expected to be announced on 30 June, lay the foundation for the first commercial work for the major companies in Iraq since the invasion in 2003.

The no-bid contracts are unusual for the industry, and the firms are preferred to 40 other contractors from Russia, China and India.

It was an article of faith for many in the Arab world and among the British and American public that the United States – with the UK in tow – had gone to war in Iraq precisely to secure the oil wealth these contracts seek to extract.

In one memorable incident from the invasion, heavily armed US forces surrounded the oil ministry in Baghdad as a primary objective – yet the country's national museum went unprotected and many of its treasures were subsequently looted.

Sensitive to the impression that they were profiting from the war and already under pressure because of record high oil prices, senior officials from two of the companies, speaking only on the condition that they were not identified, said they were helping Iraq rebuild its decrepit oil industry.

The Iraqi government's stated goal in inviting back the major companies is to increase oil production by half a million barrels per day by attracting modern technology and expertise to the oilfields.

The revenue would be used for reconstruction, although the Iraqi government has had trouble spending the billions of dollars in oil revenues it now has, in part because of bureaucratic inefficiency.

Marnie Funk, a Shell spokeswoman, hinted at the kind of work the companies might be engaged in saying: "We can confirm that we have submitted a conceptual proposal to the Iraqi authorities to minimise current and future gas flaring in the south through gas gathering and utilisation.

"The contents of the proposal are confidential."

While small, the deals hold great promise for the companies.

"The bigger prize everybody is waiting for is development of the giant new fields," Leila Benali, an authority on Middle East oil at Cambridge Energy Research Associates, said.

The current contracts, she added, were a "foothold" in Iraq for companies striving for these longer-term deals.

The no-bid deals are structured as service contracts. The companies will be paid for their work, rather than offered a licence to the oil deposits. As such, they do not require the passage of an oil law setting out terms for competitive bidding. The legislation has been stalled by disputes between Shiite, Sunni and Kurdish parties over revenue sharing and other conditions.

"These are not actually service contracts," Benali said. "They were designed to bring western companies with experience managing large projects into Iraq."

Assem Jihad, the oil ministry spokesman, said the ministry chose companies it was comfortable working with under the charitable memorandum of understanding agreements, and for their technical prowess. "Because of that, they got the priority," he said.

In all cases but one, the same company that had provided free advice to the ministry for work on a specific field was offered the technical support contract for that field, one of the companies' officials said.

The exception is the Russian company Lukoil, claims a Saddam-era contract for the field and had been providing free training to Iraqi engineers, but a consortium of Chevron and Total, a French company, was offered the contract.

Industry tainted by colonialism

THE INVOLVEMENT of Western oil companies in Iraq remains a highly sensitive one, bringing as it does a baggage of colonialism and exploitation.

The Iraq Petroleum Company – until 1929 called Turkish Petroleum Company – was an oil company jointly owned by some of the world's largest oil companies, including Anglo-Persian Oil Company, the forerunner of BP, Royal Dutch/Shell, the American giant Standard Oil and the French company CFP, now Total.

The Iraq Petroleum Company had virtual monopoly on all oil exploration in Iraq from 1925 to 1961.

It has originally been proposed that Iraqis should be allowed to own up to 20 per cent of the business, and to their credit the British government lobbied for this, yet the oil companies themselves were against such an idea and successfully fought it off.

IPC retained its monopoly of exploration and development in Iraq until 1961, when the revolutionary government of General Qassem nationalised 99.5 per cent of its concession areas.

In 1971, the Iraqi government nationalised the remaining interests into the Iraq National Oil Company.

This resulted in major increases in revenues for the Baath party government under Saddam Hussein.

Given the current fears about oil production and reserves, Iraq remains an attractive country for large Western companies. David Fyfe, a Middle East analyst at the International Energy Agency, a Paris-based group that monitors oil production for the developed countries, said he believed that Iraq's output could increase from its current 2.5 million barrels a day to about three million, though it would probably take longer than the six months the oil ministry currently estimates.

Mr Fyfe's organisation estimated that repair work on existing fields could bring Iraq's output up to roughly four million barrels per day within several years. After new fields are tapped, Iraq is expected to reach a plateau of about six million barrels per day, Mr Fyfe said, which could suppress current world oil prices.