I was on the blogger call with Tony Snow and Bret McGurk yesterday, and was actually pretty impressed by them. But the basic truth is that while they knew and acknowledged that we were getting our heads handed to us in Information War, they really didn’t strike me as having much of an idea as to what to do about it.
As one aspect, I asked about the report in the Independent (yes, Robert Fisk’s paper) that the new Iraqi oil law would both provide shares in national oil revenue to all Iraqis (great thing to do, three years too late), and that it would rely on “Production Sharing Agreements” with US oil companies to exploit the oil – PSA’s being a way that a nation might hypothecate it’s oil reserves in return for allowing them to be exploited.
There’s a bad history with national oil contracts like that in Iraq (and throughout the Middle east, to be honest); in 1925, the British-owned Iraq Petroleum Company had the exclusive franchise – which the British imposed on Amir Faysal (the king they had in turn imposed on Iraq).The terms of the agreement – as presented by the Independent – are quite generous to the oil companies:
It is also understood that once companies have recouped their costs from developing the oil field, they are allowed to keep 20 per cent of the profits, with the rest going to the government. According to analysts and oil company executives, this is because Iraq is so dangerous, but Dr Muhammad-Ali Zainy, a senior economist at the Centre for Global Energy Studies, said: “Twenty per cent of the profits in a production sharing agreement, once all the costs have been recouped, is a large amount.” In more stable countries, 10 per cent would be the norm.
While the costs are being recovered, companies will be able to recoup 60 to 70 per cent of revenue; 40 per cent is more usual. David Horgan, managing director of Petrel Resources, an Aim-listed oil company focused on Iraq, said: “They are reasonable rates of return, and take account of the bad security situation in Iraq. The government needs people, technology and capital to develop its oil reserves. It has got to come up with terms which are good enough to attract companies. The major companies tend to be conservative.”
OK, this is, plain and simple, a public relations disaster. And, if true, a moral disaster as well.
My question to Snow and McGurk (go over to Outside the Beltway for a full recounting of the call) was along the lines of “Is this true? And if so is this something the Administration supports?”
Snow, amusingly, answered “I’m not even going to fake it. Brent?”
Brent had read the article, said it was based on a very early draft, and that it had been shot down on Al Jezzera (I couldn’t find it searching…) – and he expects the Iraqi Parliament would be modifying the terms (note that he didn’t take a position).
I pointed out that this was doubtless all over the Arab and Iraqi press – and where was the Administration reply? Why wasn’t the Administration taking a strong position that we wouldn’t allow US oil companies to exploit the Iraqi people by entering into contracts reminiscent of 1920’s imperial exploitaton?
So I’m left with two concerns – does the Administration realize how bad issues like this make us look? And if they do, why can’t they take a lesson from political campaign management and create a message machine that looks at what’s out there and responds? Bueller? Anyone?
I am not surprised. Sadly. And I don’t trust that any american politician will bring this issue to a head in the near future. This is one of those things that congress intends to conviently ‘forget’ about, while interrogating baseball players.
AL, perhaps because there is a good case to be made for involving US oil companies. Based on what I’ve heard from troops and contractors, the state of Iraq’s oil infrastructure under Saddam was wretched — and that’s BEFORE the insurgents embarked on a deliberate attempt to destroy it.
Getting that country repaired (from the war damage, yes, but even more from the decades of neglect under the Ba’athists) will require a major infusion of capital investment by oil companies. What alternatives are you proposing for that to happen? And how would you reasonably think to counter the conspiracy theories that fly around the Arab world?
The best way to counter it is to get them up and running quickly, infuse the results into the economy and let the improvement speak for itself. I hear your frustration re: the Administration’s failures to engage in an info war, and I share it. But I’m also sceptical about how effective a PR campaign is likely to be be.
I’m not opposed to US oil companies being involved – but if it’s exclusively US companies who get to bid, and if the terms they bid on are as egregious as these appear to be … then I guess I am opposed.
A.L.
I understand. But you’re reading this in the Independent …. probably a good idea to take it with a good dose of salt until facts are actually established.
The Independent has a history of making claims which are inflammatory. If I were in the Bush administration, I’d avoid responding — especially if the story were incomplete, misleading or just premature (i.e. details not yet nailed down), especially with other actions going on in Iraq right now.
JMO
The oil companies are trying to exploit Muslim peoples to make money for themselves, the companies. They are asking for more money in return for more risk. The risk is very great, including the unstated risk of nationalization in one form or another.
Instead of this immoral exploitation, 😉 I advocate that we raise the issue of nationalization, that is socialism for the oil industry. This oil belongs to the Iraqi people!
It would be amusing to watch people who oppose the American position on everything coming out for the oil companies and against socialism. And if the idea takes on a life of its own, so much the better. Our enemies should have socialist economies for as long as what wealth they have can be thrown into the pile of resources to be used against us. A socialist oil industry would fund fewer jihadis in future, along with paying for less of everything else.
If Iraq could transition to a fully socialist oil industry, it would be create a virtuous cycle, as any talk of bringing the foreign oil companies back in later would be affected by the price of insecurity, with the threat on nationalization underlined again by history. Naturally if the profit the oil companies want is excessive (as though the risk factor was higher than in America), the heroic Iraqi people should refused their insulting offer, or as so often happens lure them in and extort and expropriate them again.
Two problems with that approach, I think.
(1) Capital. It’s just not there in Iraq right now. And if they borrow internationally, they’ll pay the same risk premium on the money.
(2) Corruption and factionalism in the government right now.
It was always the plan to leverage Iraqi oil to jumpstart the Iraqi economy and spread prosperity to the people quickly. The insurgents knew that and made a special point to try to disrupt oil production and export as much as possible. They realized that if we can help Iraq get those oil revenues quickly AND broker a setup in which the money goes to many and not to a few, it will reverberate through the whole middle east.
Well, we could compel the oil companies to deal with Iraq for compensation that does not cover the risk.
But wouldn’t it be better if Saudi Arabia lent Iraq the money without interest or compensation for risk?
That way we wouldn’t have to impose an irrational tax, and the Saudis wouldn’t be interfering with security of property by doing this, since what they have is more a system of privilege than of laws anyway.
Or you could simply put it out to bid, rather than prenegotiating contracts. And you could limit the term to less than 30 years given that all capex will be recovered as a part of the revenue split.
A.L.
#8 from Armed Liberal: “Or you could simply put it out to bid, rather than prenegotiating contracts.”
Another excellent idea. ( … no 😉 this time…)
Re: the “new” oil law.
“Brent had read the article, said it was based on a very early draft..and he expects the Iraqi Parliament would be modifying the terms”
So who the hell wrote this draft? It had to heavily influenced by the US gov. or oil industry representatives, perhaps one and the same.
Hey guys,i thought it wasn’t about the oil
Sure would raise that concern, wouldn’t it? That’s why it’s flatly wrong.
A.L.
I agree with A.L. on problem and solution (#8), but the problem needs emphasis. A sweetheart deal due to bad conditions now will become a point of populist anger when (or if you prefer if) the violence abates. This becomes the feeding ground of autocrats and dicators, not to mention troublemaking from across the border. It seems quite a part of the long war and unlike some of the things being discussed, its certainly not too late.
Re: #13 from PD Shaw: You’re right. I was inclined at first to treat this as a joke that could never become law, but not everyone will feel that way.
So we the taxpaying citizens are being taxed and put into debt bondage(plus the soldiers death) so the oil companies and their allies in the government can make triple portions. When Snow job won’t answer the question(as you say amusingly ha, ha, ha) you then comment that this makes us look bad. That is if you identify with a party and its leadership. If you report the facts from a skeptical, constitutional, liberty loving perspective you can recognize these R
epublicans as at least as destructive of liberty as the Democrats. We kept the Iraqi oil in the ground which has driven the price sky high, and now our companies want to help take it out. Liberals are generally inclined to government but through war and fear conservatives have turned from “isolationists and patriots” into internationalists and war lovers. Funny isn’t it.
compare to the production sharing agreements under hussein:
http://www.lukoil-overseas.com/press_6_5div__id_21_5div__id_21_1id_2346_.html
” The contract validity under the PSA terms is 23 years and can be extended for 5 years more. LUKOIL share of the project is 68,5%, the Iraqi party – 25%, Zarubezhneft and Mashinoimport – 3,25% each. “
“Their introduction would be a first for a major Middle Eastern oil producer. Saudi Arabia and Iran, the world’s number one and two oil exporters, both tightly control their industries through state-owned companies with no appreciable foreign collaboration, as do most members of the Organisation of Petroleum Exporting Countries, Opec.”
Iran’s oil industry is suffering badly and is flirting with PSA-like structures to revive their production capablility. ARAMCO was a US operation from the get go until nationalization. Even now “no appreciable collaboration” is ridiculous considering their engineers are overwhelmingly non-Saudi, and their downstream ops are JVS with all the majors administered offshore. Russia uses all kinds of PSAs as do major non-OPEC producers in the Caspian. PSAs are in fact the most common means of developing oil resources in emerging markets. this article seems pretty distorted to me.
good old economist piece on nationalized oil companies here:
http://www.mre.gov.br/portugues/noticiario/internacional/selecao_detalhe.asp?ID_RESENHA=252877&Imprime=on