Between the 30th of June and the 11th and 12th of December of 2009, the Iraqi government auctioned off much off Iraq’s proven crude oil reserves.
Among the oilfields that went under the hammer were the giant Rumaila oilfield with an estimated contents of 17 billion barrels (peak production expected to be around 2.9 million barrels per day), the West Qurna oilfields 1 and 2 with an estimated contents of 8.6 billion barrels and 12.9 billion barrels respectively (total peak production expected to be around 4.4 million barrels per day), the Majnoon oilfield with an estimated contents of 12.6 billion barrels (total peak production expected to be around 1.8 million barrels per day) and the Zubair oilfield with an estimated contents of 4 billion barrels (peak production expected to be around 1.1 million barrels per day).
The most striking outcome of the bidding process was that American oil companies were largely excluded from the deals struck. Only ExxonMobil (together with Shell) landed a deal with the Iraqi government to develop the West Qurna Phase 1 oilfield, and Occidental Petroleum is part of a deal between Eni of Italy and the Iraqi government for the Zubair oilfield. Most other contracts went to the oil companies of countries that were opposed to the American/British war in Iraq, most notably Russia and China. The Rumaila oilfield went to BP and CNPC from China; the West Qurna Phase 2 oilfield went to Lukoil from Russia and Statoil of Norway; and the Majnoon oilfield went to Shell and Petronas from Malaysia.
This outcome of the Iraqi oil auction is presented by some as a discreditation of the claim that the American invasion of Iraq in 2003 was about the Iraqi oil. Instead, it is said, the auction results prove that the invasion was, and has always remained, about bringing freedom and democracy to the people of Iraq. For most Iraqi oil deals went to Non-American companies.
The correctness of this assertion needs to be analysed.
The reality of Wars for Oil
The strategist is concerned with crude oil because it is a commodity of strategic importance, for various reasons. For instance, crude oil provides the energy that enables economic activity. And crude oil fuels the airplanes, rockets and tanks that are used to fight wars. That is why it can be said that crude oil is always on the mind of strategists, as access to crude oil can make-or-break economies (just ask the Chinese…) and win-or-lose wars. Because crude oil is this important in military and economic affairs, its market value is considerably higher than its production value. In Saudi-Arabia and Iraq, for instance, the production cost of crude oil is estimated between $1.00 – $2.00 per barrel. In the market this crude currently trades at around $65 per barrel. This is why the businessman is also concerned with crude oil, as it is a source of significant profits.
But of these two perspectives on crude oil, it being a tool for power and a tool for profit, clearly the first is by far the most important. Power establishes influence, and that can easily be used to establish profits. And crude oil is so much a tool for power that control over it can easily be used to establish profits far beyond the profits associated with the profits in pumping up the oil. That is why when it is said that wars are fought for crude oil, this should not be understood as meaning that wars are fought to enable certain businessmen rather than others to profit from crude oil. The meaning of the statement “wars are fought for oil” is that nations go to war with the intent to establish control over the flow of crude oil.
As such, the importance of the recent crude oil deals between the Iraqi government and certain oil companies does not lie in who exactly they allow to make a profit from the Iraqi crude oil. It lies in who is given control over the Iraqi oil.
The reality of the Iraqi oil deals
The contracts recently agreed between the Iraqi government and various oil companies differ markedly from what is the standard in the oil industry. Usually, governments and oil companies agree to so-called “Production Sharing Agreements (PSA)”. Under a PSA the government gives the oil company the rights to a certain share of the proven crude oil reserves, in return for pumping up (extracting) crude oil. The oil company can then do whatever it wants with its crude oil. Governments usually grant the oil company a share of the crude oil in the range of 30 – 70%.
The contracts in the case of the Iraqi crude oil, however, are “Service Contracts (ST)”. Under the ST an oil company is only contracted by the government to perform the service of pumping up the crude oil. For each barrel it pumps up, the oil company is then awarded a remuneration fee. But ownership of the crude oil remains in the hands of the government. The remuneration fees for the big fields that have been auctioned off are all fairly close to what the estimated cost is for operating fields in the Saudi-Iraq area ($1.00 – 2.00). The operators of the Rumaila and Zubair oilfields will receive $2.00 per barrel if they are able to significantly increase production. The operators of the West Qurna Phase 1 oilfield will receive $1.90 per barrel. The operators of the West Qurna Phase 2 oilfield will receive $1.15 per barrel. And the operators of the Majnoon oilfield will receive $1.39 per barrel. This means that the oil companies will have quite a struggle to make a profit on these deals. And if they are able to generate a profit at these remuneration rates, then these profits will be taxed by the Iraqi government at 35%.
The ST’s the Iraqi government has agreed with various international oil companies have left the control over the Iraqi oil firmly in the hands of the Iraqi government. The oil companies can lay no claim on the Iraqi oil whatsoever, as they merely have been contracted by the Iraqi government as service providers.
Also, these ST’s have as a consequence that by far the largest slice of the profit in pumping up crude oil will go to the Iraqi government. They will pay the oil companies no more than $2.00 for the service of pumping up the crude oil that in the market today is worth around $65, and they will tax whatever profits the oil companies are able to make.
America has only strengthened her positions through the Iraqi oil deals
It is quite clear, therefore, that through the recent auctioning of the Iraqi crude oil America has strengthened her position in Iraq.
America has full control over the Iraqi government, which means that through the established ST’s America has maintained full control over the Iraqi oil industry. Even though it will be run by primarily non-American oil companies. The ST’s between the Iraqi government and the international oil companies are structured in such a way, that control over the physical commodity crude oil remains in the hands of the Iraqi government, and thereby America.
Under these ST’s even the profits resulting from production of the commodity remains in the hands of the Iraqi government, and thereby America. The fact that through the ST’s the Iraqi oil industry is opened for investment for the first time in decades brings an important additional benefit for the American economy. Most services companies in the oil & gas industry, the companies that supply the oil production companies with the rigs, pipes and pump stations, are American. The top three in the industry, Schlumberger, Halliburton, and Baker Hughes, are all based in Houston, Texas, and should be expected to profit greatly from the renewed activity in Iraq.
At the same time, through allowing foreign oil companies to enter into Iraq, America will have built some goodwill with these other nations. The ST’s will give to the other capitalist nations the idea that America is “sharing the pie” and isn’t greedy. As far as the greater public is concerned the same kind of public relations can be build on the ST’s. The people can now be led to believe America was honest and sincere in its intention of bringing freedom and democracy to Iraq all along, and was not interested in the Iraqi oil.
Questions may be asked as to why, if the American intentions were only to deceive, did the international oil companies play the game and accepted the terms of these deals. The answer is that from the fact that America sought to establish benefit through the ST’s, it is not necessarily the case that the other countries and their oil companies lose a benefit through them. The oil companies are still likely to see important benefits in these deals, although they leave little profit margin, such as gaining a foot in the Iraqi door, through which they could work for getting more profitable deals in the future (large parts of Iraq are as of yet unexplored). Also, the oil companies could have accepted the terms of these deals hoping they will be able to renegotiate the terms at a later date.
Annex : The Iraqi oil fields awarded
1. Rumaila
Assigned to: BP (Great-Britain) and CNPC (China)
Remuneration Fee: $2.00 per barrel
Production Target: 2.9 million barrels per day
Current Production: 0.8 million barrels per day
2. West Qurna Phase 1,
Assigned to: ExxonMobil (America) and Shell (Great-Britain)
Remuneration Fee: $1.90 per barrel
Production Target: 2.5 million barrels per day
Current Production: 0.3 million barrels per day
3. Zubair
Assigned to: Eni (Italy), Occidental Petroleum (America) and Kogas (South-Korea)
Remuneration Fee: $2.00 per barrel
Production Target: 1.1 million barrels per day
Current Production: 0.2 million barrels per day
(For the following fields Current Production is either zero or negligible:)
4. Majnoon
Assigned to: Shell (Great-Britain / The Netherlands) en Petronas (Malaysia)
Remuneration Fee: $1,39 per barrel
Production Target: 1,8 million barrels per day
5. West Qurna Phase 2
Assigned to: Lukoil (Russia) en Statoil (Norway)
Remuneration Fee:$1,15 per barrel
Production Target: 1,8 million barrels per day
6. Halfaya
Assigned to: CNPC (China), Petronas (Malaysia) and Total (France)
Remuneration Fee: $1.40 per barrel
Production Target: 0.5 million barrels per day
7. Garraf
Assigned to: Petronas (Malaysia) and Japex (Japan)
Remuneration Fee: $1.49 per barrel
Production Target: 0.2 million barrels per day
8. Badra
Assigned to: Gazprom (Russia) and TPAO (), Kogas (South-Korea), Petronas (Malaysia)
Remuneration Fee: $5.50 per barrel
Production Target: 0.2 million barrels per day
9. Qaiyara
Assigned to: Sanongol (Angola)
Remuneration Fee: $5.00 per barrel
Production Target: 0.1 million barrels per day
10. Najmah
Assigned to: Sanongol (Angola)
Remuneration Fee: $6.00 per barrel
Production Target: 0.1 million barrels per day
www.iraqoilreport.com/oil/production-exports/complete-round-2-results-3371/