The jockeying has already begun, and the race seems likely to be won by American and British firms: ExxonMobil, ChevronTexaco, Shell and BP. According to industry insiders, these giants are now the front runners in part because British and American troops are likely to end up in control of Baghdad, which can’t help but influence Iraq’s choice of business partners. More important, the world’s largest private oil companies are the only ones that can afford both to restore Iraqi oil production, which is now running at under half its 6 million-barrel-per-day capacity, and to develop its vast untapped fields. To protect the tens of billions they will need to pour into a postwar Iraq, the oil giants are likely to push a controversial form of contract that gives them an ownership stake in the oilfields and guaranteed relief from national tax and environmental laws for the life of the project. So far, oil companies have won these deals, known as production-sharing agreements (PSAs), mainly in weak states that don’t know better than to give away the store–but never in the big Middle Eastern countries. “The issue is not oil per se, but ultimately having the large international oil companies change the terms of their involvement in the region” through production-sharing agreements, says Saudi oil and security analyst Nawaf Obaid.
In a sense, Big Oil would like to turn the clock back to a time before the great wave of nationalizations in the 1970s, when global –giants known as the “seven sisters” were pushed out of much of the Middle East and Latin America. Today, all the world’s largest oil producers are state monopolies, which control the vast bulk of the most easily accessible fields from Saudi Arabia to Mexico. Private giants like ExxonMobil often get stuck with shaky service contracts, and they own reserves only in their home country or in ever more remote and dangerous regions, from the deep sea to Central Asia. Given the risks, oil companies began searching for ways to create as much long-term stability as they could get, and that’s where the production-sharing agreements first came in, shortly after the nationalizations began.
Often adopted as law by the host country’s Parliament, these deals override domestic environmental, tax and safety laws for years–sometimes for more than half a century. If conflicts arise between the companies and the government, they’re decided by private arbitrators in London or Paris, circumventing the local courts. Best of all for the company, the contract gives them an ownership stake that can be booked as an asset on their balance sheet, which tends to push up their stock price. The more developed and savvy oil states, however, regard such deals as a trap that restricts their sovereign power to write laws and control their own natural resources. From Mexico to the larger oil states of the Middle East, they have refused to sign PSAs. Under the pressure of U.N. sanctions in the 1990s, Iraq did sign or initial PSAs with French and Russian oil companies, but the same sanctions prevented those deals from being realized.
If the United States and its allies are running a future Iraq, expect the rules of oil to change dramatically. Iraq has 112 billion barrels of proven oil reserves–second in the world only to Saudi Arabia–plus an estimated 220 billion barrels in untapped wells. It could be a huge opportunity for multinationals to regain ownership control of black gold. A new government, backed by the United States and Britain and desperate for cash to rebuild, will likely go along. “The most natural thing will be for the Iraqis to go for PSAs,” says Robert Mabro, director of the Oxford Institute for Energy Studies. “Because it’s the one that the companies like.”
For a sense of how these deals operate, consider how they work in Central Asia. After the Soviet Union crumbled, its former satellites in the region were left with weak, corrupt governments that lacked the infrastructure to explore and extract the billions of barrels of oil buried in their fields. The big multinationals swooped in, and in 1994, a consortium of 10 oil companies led by British Petroleum signed a production-sharing agreement in Azerbaijan, known locally as “the contract of the century.” The agreement grants the companies exclusive rights to the oil pumped from the country’s three largest oilfields, for a fixed profit tax for the 30-year life of the contract. Adopted by the Parliament, the PSA supersedes local laws and exempts the companies from domestic taxes. Five years later the oil companies negotiated another deal with Azerbaijan, Turkey and Georgia to build a pipeline that will bring the Azeri oil to Western markets.
These sorts of agreements now govern oil and gas projects from Ecuador to Chad to Russia. They’re common now in West Africa, where poor countries with unstable governments have been eager to attract foreign investment. A new government in a postwar Iraq is likewise going to be desperate for that investment, but it will come at a price. “Iraq will need to provide the necessary incentives and assurances for companies to feel like they have security over their investments,” says Thad Grundy Jr., managing director of the Houston, Texas-based oil and gas law firm Grundy & Hayes, and a former Energy Department official in the first Bush administration. “If companies can be penalized by a new harsh tax law, then Iraq can’t expect to get much investment at all.”
But increasingly, oil-producing countries are getting wise to how much power they give up in these deals. In Russia, where a consortium led by Royal Dutch/Shell has a PSA to develop oilfields off the environmentally sensitive Sakhalin Islands, government officials have proposed restrictions on any additional tax breaks or regulatory passes for the consortium. In Kazakhstan last fall, the government tried to change the terms of a key agreement with a consortium led by ChevronTexaco, alarming foreign investors.
The major multinationals will be keen to avoid such rebellions in Iraq. They’ve reportedly met with the Bush administration and with Iraqi exiles and oil executives to express their concerns about the future of the Iraqi oil industry. Though it’s not clear just what was said, analysts assume a central issue is who will control the oil, and under what terms. To get the oil pumping, the occupation authorities will have to turn to top multinationals, and there will be plenty of competition. As a recent Deutsche Bank report notes, any support France, Russia and China lend to U.N. action in Iraq “may well come at the price of a proviso that they would have a post-Saddam economic role.” It’s not only the American companies that want a hand in writing the oil rules for postwar Iraq. It’s all of Big Oil.
