Beneath the bellows over Iran and the mayhem in
Iraq, the real struggle for Mideast dominance quietly unfolds. As petrostates
around the globe exert increasing command over their energy assets, Iraq is
on the verge of ceding theirs to the control of American and British oil companies.
If all goes as planned, the oil giants will have performed the heist of the
A little-known analysis
by Greg Muttitt in November 2005 for Global Policy Forum reveals the breathtaking
earnings to be generated by the "production
sharing agreements" [.pdf] ready for signing the day Iraq officially forms
its new government. These agreements, which in name imply revenue-sharing and
state control over the underground assets, in truth are vehicles so skewed in
favor of Anglo-American petroleum companies that they have no counterpart in
today's oil world.
According to Muttitt's conservative estimates, Iraq stands to lose between
$74-194 billion in these agreements over the life of the contracts, which will
most likely be in effect for 40 years. Instead of the average rate of return
of 12 percent generated by most oil field development investments today, these
arrangements will net between 42 and 162 percent. Not since Standard Oil won
a 60-year concession
from Saudi Arabia in 1933 for $35,000 has the oil industry been poised to make
so much money.
Types of Oil Agreements
As described by Muttitt, the oil industry essentially
operates under three models:
The Nationalized Industry Model: The state makes all of the decisions
and takes all of the profits. Foreign participation is limited to technical
service contracts. This model is used throughout the Gulf region and has been
Iraq's model since the early 1970s. A variant of this model is the risk service
model, in which the capital provider receives a fixed rate of return in exchange
for investment, sometimes in oil or gas paybacks (the system underlying many
The Concession Model: The state grants a private company a license
to extract oil in exchange for royalties and taxes.
The Production Sharing Agreement: The state theoretically controls the
oil while a private company extracts it under contract.
According to Muttitt,
"In practice, however, the actions of the state are severely constrained
by stipulations in the contract. In a PSA, the private company provides the
capital investment, first in exploration, then drilling and the construction
of infrastructure. The first proportion of oil extracted is then allocated to
the company, which uses oil sales to recoup its costs and capital investment
– the oil used for this purpose is termed 'cost oil.' There is usually a limit
on what proportion of oil production in any year can count as cost oil. Once
costs have been recovered, the remaining 'profit oil' is divided between state
and company in agreed proportions. The company is usually taxed on its profit
oil. There may also be a royalty payable on all oil produced."
Only about 12 percent of the world's oil reserves operate under production
sharing agreements (PSAs) according to the International
Energy Agency. None of the Mideast countries use PSAs – these structures
being more suited for exploring marginally profitable oil fields, where cost
vs. benefit is a question mark. Since the reserve levels of Iraqi oil and the
investment capital needed for field development can be readily estimated by
petroleum companies, PSAs are an unnatural choice for the Iraqi nation.
But they are an ideal choice for oil companies. One of the lures of PSAs in
Iraq is their ability to immediately "book" new reserves. To see how
critical this is one only need go back two years, when the market punished Shell
Oil for overstating
reserve levels by over 20 percent – drubbing its credit rating and stock
price. PSAs also guarantee a level of tax and regulatory predictability.
Add in super-sized profits, and PSAs become irresistible.
Most interesting is the lack of discourse on the subject. In fact, handpicked
Iraqi former prime minister Iyad
Allawi stated that these arrangements were not open for discussion, underscoring
the enormous importance of being part of the new government and signifying that
most of the deals are likely already determined.
And therein lies the rub. Until the new government is truly formed, none of
these deals can be signed.
Is it any wonder that the Bush administration
has told the Iraqis that it is at the end of its tether and to get on with the
task of forming a government? And can we have any doubt that U.S. bases will
be a permanent part of this inverted mercantilist
enterprise – one funded by the average
American, who sinks into penury while the most profitable
companies on the planet are about to rake in astronomical earnings?
According to Chris Cook, the former International Petroleum Exchange director
and founder of the Iranian Oil Bourse, the recent saber-rattling toward Iran
has nothing to do with its nuclear ambitions and everything to do with its interference
in the formation of an Iraqi government. He believes that by foiling the new
Iraqi government, "Iran and its Arab neighbors in the Gulf Cooperation
Council might pool some of the proceeds of recent energy sales and use them
by investing as 'capital partners' in Iraqi crude-oil production." In other
words, Iran could muscle out Anglo-American PSAs – an untenable prospect for
the Bush administration.
Looking back on Paul Bremer's decision to exclude oil from the Coalition Provisional
scheme and Dick Cheney's aggressive
fight to keep secret the deliberations of his energy task force, it is clear
that the PSA plan was brewing before the invasion. And when George Bush says
he'll accept nothing less than total victory in Iraq, we can now envision him
performing the triumphal act – bearing the gift of Mammon
to the world's richest class while fleecing
two nations at once.