What we’re up against – reporting on Iraq’s oil situation

I wish I had a dollar for every time I’ve seen factually false claims made in the mainstream media about the oil situation in Iraq. A lot of the mythology is being created with a view to justifying the discredited analysis that saw the US motivation for the war in terms of oil.

More than five years on since the overthrow of the fascist dictatorship of Saddam Hussein, a democratically elected federal government has so far failed to have a draft national oil law passed by parliament and, in light of the increases in the price of oil on the world market of a couple of mnoths ago, the Iraqi government decided to offer short term no-bid service contracts to Exxon Mobil, Chevron, Shell, Total, BP and a consortium of smaller companies with a view to boosting production. These technical service agreements were to be undertaken on a fee (rather than product share) basis but the Iraqi government has recently decided not to proceed with them, and the targetted increases in production cannot now be met.

What is truly fascinating is the way in which the mainstream media portrayed the prospect of such service agreements as part of a process of privatisation of Iraq’s oil. The Guardian (UK) is a case in point. The Guardian has a circulation of more than 350,000 and a six-monthly readership of 1.2 million. In July it published an article by Ewa Jasiewicz, a leading member of the anti-war group ‘Platform’, titled ‘Oil and troubled waters’. The sub-title said: ‘To the fury of ordinary Iraqis, the country’s oilfields are being privatised’. This article is consistent with the Guardian’s overall opposition to the war and may be read here: http://www.guardian.co.uk/commentisfree/2008/jul/09/iraq.tradeunions?commentpage=1&commentposted=1

I wrote a comment on the Guardian’s site pointing out the bleeding obvious: service agreements do not transfer ownership of a resource. Nor are they another form of agreement in disguise, such as a Production Sharing Agreement.

The article received 20 comments, including a few that were critical of the article.

Foilist, who has worked in the oil industry under both PSA and privatised systems, for example, sent in a comment that argued:

I am very disappointed in the very poor reporting in the media about the different legal frameworks for oil & gas production around the world, that allow Production Sharing Agreements (PSAs) to suddenly become ‘privatisation’ and Technical Service Agreements (TSAs) to become stalking horses for PSAs and people like Ewa Jasiewicz, to get away with claiming (as she did in the linked Observer piece about TSAs) that the other Gulf states had kept production in government hands. If the media actually bothered to consult an unbiased, academic source (like CEPMEP at Dundee University, or the Oxford institute for Energy Studies) , they would discover that PSAs are the most popular legal framework for oil & gas development in the developing world, and that actually Bahrain has oil PSAs, as does Qatar, both of which are Gulf states, and that many other Gulf states such as Abu Dhabi, Qatar and even Saudi Arabia are signing PSAs for non- associated gas. And I also seem to remember a few months ago Platform pointing to TSAs in Iran as the way forward for Iraq’s oil industry, and now apparently, TSAs are PSAs in disguise and PSAs are really just privatisation in another name…

You’d think this would require refutation, especially on the part of Ewa Jasiewicza. But, no, the original falsehood is left standing.

Foilist then commented again and it’s worth reading the full comment as it is very informative:

As someone who has worked under both the PSA and the licence & tax (AKA ‘privatised’) legal frameworks, I can say that under the PSA system, the international oil company, as operator, has day to day control over the oil or gas field (ie which well to shut in, which well to open up a little, which well to close in a little), but the host government (usually in the shape of the National Oil Company) has strategic control over the field: whether to spend capital drilling more wells or de-bottlenecking the surface production facilities for example. Also, the NOC, as the majority owner of the field, gets to approve the overall development plan put together by the international oil company and has approval over major contracts awardded in the PSA: ie which drilling contractor to hire, who to pay to build the pipeline or whatever.

PSAs are popular in the developing world as they move all the risk onto the international oil company, gain access to the international oil company’s capital and expertise and probably most important, get the oil revenue as oil, a tradable commodity, rather than as a local curreny tax (which is the case in the licence & tax system), which may not be negotiable internationally. The oil companies like them because in return for taking all the risk they get a share of the reward which includes being able to book the reserves. One of the complaints about TSAs is the international oil company takes all the risk but doesn’t share the reward. And despite what some people say, there is always risk in oil exploration & production: the only person who knows for sure that the oil is there is Mr Drill Bit , and even in Iraq, where the risk of not finding oil is low, there is still a lot of production risk: will the oil flow easily? will lots of wells be needed? will expensive artificial lift be needed? will the wells have to be serviced regularly?. Of course, the oil companies like the licence and tax system best, because then, as well as the risk / reward balance, they can count the infrastructure as an asset too, and can make money selling the field on if they want (Shell have just sold North Cormorant for example), which is impossible under a PSA.

There’s a reason why only three countries in the world have a wholely nationalised oil industry, and why of those three countries, one is gradually moving towards PSAs and one is trying to come up with some kind of ‘not PSA’ that has the same features as a PSA…. PSAs offer the advantages of a licence & tax system to the host country, while retaining soverignty and control over the natural resource.

The response from Ewa Jasiewicza?

Silence.

The on-line Aljazeera magazine is another case in point. As far as Production Sharing Agreements are concerned, Aljazeera magazine said last year that  “The Iraqi Oil Law states that the ownership of new oil fields will give the foreign company 30-years ownership and 80 percent of the proceeds from the oil produced. The Iraqis would get the remaining 20 percent”. (See: http://www.aljazeera.com/news/newsfull.php?newid=51996#

The author clearly does not understand that (a) the Iraq oil law has yet to be passed by parliament and (b) that the usual split between investor and the state is the reverse to what is claimed: 80 percent goes to the state and 20 percent to the investor.

I duly sent in a comment of correction but so too did ‘John from Armenia’ who pointed out: Please re-read the draft law again because you are mistaken. Eighty percent or more goes to iraqi’s Twenty Percent or less goes to the company. This is industry standard.

(Actually John is mistaken to suggest that the draft law stipulates a contract model – it does not – but his point about the ‘industry standard’ is spot on).

One of my own comments said: John from Armenia has already corrected the erroneous claim that under a standard Production Sharing Agreement eighty percent of oil revenue would go to the oil company and only twenty percent to the Iraq government. It’s actually the other way around. In the case of the oil law of the Kurdistan region, which has resulted in more than a dozen Production Sharing Agreements being contracted with foreign oil companies, the share is even more favourable to the government. Only fifteen percent will go to the oil companies. The other benefit to government is that Production Sharing Agreements place the exploration and investment risk with the companies. There are many other benefits too, such as technology sharing, infrastructure development, training of locals, and in the Kurdish example, an environment fund. Iraq’s draft oil law should be passed, as it is the key to modernisation, national reconciliation and economic growth.

Are these people – the writers and the editors who publish them – consciously perpetuating falsehoods in order to justify a discredited analysis?

Why don’t they try to defend their positions? Why the silence once their falsehoods are exposed?

And, by the way, Iraq has finally entered into a 20 year fixed-price deal with a big foreign oil company to develop the al-Ahdab oil field in southern Iraq. It’s a big deal, valued at around $3 billion.

The company?  Exxon?  Chevron?  Shell?  Total?

No, none of the above.

The deal is with the China National Petroleum Company.

Now why would a government that is supposedly a ‘puppet’ of the US not grant such a lucrative long-term contract to US Big Oil?

The Iraqi government was democratically elected and represents a sovereign state that is not a puppet of anyone.

Hopefully, other major oil companies will enter the scene once a draft national oil law is accepted by the parliament. While the security situation has improved considerably, the absence of a new national oil law, and the conflict between the Iraq Oil Ministry and the KRG, is a significant disincentive to the majors to invest.

In the meantime, expect the falsehoods to continue.

And do your bit to expose them!

Barry

11 Responses to “What we’re up against – reporting on Iraq’s oil situation”


  1. 1 Ian Yarran

    How do we start a thread on the economic crisis. It is the economy that seems to be something that you continue to ignore. Why? 
    I can’t believe that you can ignore it.  This affects ordinary people. Are you revolutionaries or philosophical commentators?

  2. 2 Matthew C Harrison

    Barry, I think you’d be more successful writing a letter to the editor of the Guardian, and possibly al Jazeera, than inhabiting the comments section with your insights.  While I have from time to time seen other bloggers take up interesting ideas from comments sections, I have never seen the actual publication do so.I continue to find your analysis of the role of oil in the invasion plans, as well as in the post-war reconstruction plans, thoughtful and refreshingly fact-based.  It is so difficult to find any meaningful coverage of Iraqi law that yours is doubly appreciated.

  3. 3 James

    Hi, I found your blog on this new directory of WordPress Blogs at blackhatbootcamp.com/listofwordpressblogs. I dont know how your blog came up, must have been a typo, i duno. Anyways, I just clicked it and here I am. Your blog looks good. Have a nice day. James.

  4. 4 Cyberman

    “The deal is with the China National Petroleum Company.  Now why would a government that is supposedly a ‘puppet’ of the US not grant such a lucrative long-term contract to US Big Oil? “   Yes that is a good question.  But the answer you’ve given is a little naive. You may not have noticed , you certainly haven’t opened a thread on the topic,  but US capitalism is currently teetering on the edge of an abyss. The Chinese are conservatively estimated to hold US$1 trillion of US federal treasury securities.  The last thing that the US now need is the Chinese  converting all these into Euros or gold or whatever. So, I would say that the Chinese are in a pretty good position to call the shots. Wouldn’t you?

  5. 5 byork

    cyberman has in the past taken the line that the Iraqi government is a puppet of the US and that the war was about an oil grab by Big Oil, mainly US-based oil companies. The ‘hypothesis’ has failed dismally – the Iraqi government is quite willing to ‘hand over control’ of one of its signfiicant oil fields to the Chinese national oil company rather than an American-based one. It’s not a question of China’s relative economic strength but rather a question as to why a supposedly ‘US puppet’ government would open up to an oil company owned by the government of a country that opposed the war in the first place. There’s nothing naive in seeing this as Iraq acting in accord with its government’s perception of its own national interests. Cyberman cannot deal realistically with this question because it undermines his entire argument about the reason and outcome of the war. A lot hangs on the need to portray the Iraqi government as a puppet regime. However, for the ‘puppet’ hypothesis to be credible, the Iraqi ‘puppets’ would have acted in accord with US oil interests rather than Chinese ones. They would have, by now, passed the national oil law that, according to the belief on planet cyber, was being rushed through at the behest of big oil. They would have bent over backwards to offer favourable terms of investment to US companies, in order to give them the edge over rivals. The stuff about conveting to Euros is typical rightwing conspiratorial ‘analysis’ to gloss over a failed point of view. If Iraq had a US puppet government, that government would simply have found ways to block Chinese investment. The reality is that the US-based companies are reluctant to invest in Iraqi oil fields until such time as a new national oil law is promulgated that will allow them to know the scope and nature of any investment and their rights and repsonsibilities. The security situation is still a problem, but nowhere near as significant as it has been in the past. So much the cybermna’s fantasies on the lastsuperpower site about the developing ‘national liberation’ movement in Iraq. (Watch him now ignore it). It’s kinda funny really. Just how wrong on how many aspects can someone be?  Whatever happened to the civil war? Probably still raging along with the growing national liberation movement – in his mind. By now he may realize that the conspiracy stuff serves little purpose in the real world. Those of us who supported the US-led military intervention on the side of the Iraqi people against fascism have been proven correct and should be making much more noise about it. Barry

  6. 6 Cyberman

    It more a question of simple economics than a conspiracy theory. The US economy is technically bankrupt. If it were a company  the business would be closed down and  the assets  sold off to part pay  debts. Their debts are unpayable in total. If the trillions of dollars of US$ treasury bonds were ‘cashed in’, and it wouldn’t matter a jot if it were for Euros, Gold or anything else, the US$ would suffer a similar fate as did the German Mark in the 1920’s or the Zimbabwean dollar is currently suffering.There is a fair chance that their economy will pull through the current crisis but the Americans need all the support they can get from the Chinese and everyone else to whom they owe money.The war certainly was, as Alan Greenspan famously conceded,  about oil. It has all failed dismally due, primarily,  to a general US economic weakness.  The US have patched up their position in Iraq with a series of pragmatic deals with local militias and ethnic groups, and certainly their losses are much less than a few years ago. Their sights have been very much lowered. So much so that they are just hanging on for the next two or three years so that they can leave with some fig leaf of respectability to cover their general embarrassment. What the US will leave behind in Iraq will, in all probability, be hardly any better than they found. The collapse of their financial institutions and their economy means that at present they are acting as little more than mercenaries for the new Chinese empire. The balance may yet shift again in future but, ultimately, it will be determined by a mixture of both economic and military power.

  7. 7 byork

    Just doesn’t address the question of how a puppet government would act against its string-puller’s interests.  Also, as predicted, ignores the previous claims about a growing national liberation movement. Pathetic and not worth getting back on the merry-go-round over.  Barry
     
     

  8. 8 Cyberman

    Hi Barry,Maybe you haven’t grasped what I was saying? Let me try to explain  another way. The puppeteer may be controlling the strings to the Iraqi government but he , in turn, is under a financial obligation to pull them a certain way.A growing National Liberation movement?  At the moment the disparate groups in Iraq see no need for a general unification of their forces to expel the invader, instead they are jockeying for best position when they do  leave. An agreement may still happen, though, if the USA renege, (change their plans if you would like a more polite term) on their commitment to pull out of Iraq in the next three or four years.

  9. 9 byork

    If the US oil companies had won the first big contract, it would have been hailed as proof that the Iraqi government is a ‘puppet regime’, that the US is the ‘puppeteer’. When that doesn’t happen, and the first big contract goes to a company of a country that opposed the war that created the conditions for the new democratic government, then that too is held up as evidence of subservience to the US and proof that the US is the ‘puppeteer’. This is just pap.There is no growing national liberation movement in Iraq and there has been no need for one. The ‘disparate groups’ in Iraq are joining the democratic political process that the US invasion helped create. cyberman’s ‘national liberation movement’ remains the delusion it always was – exisiting only in his mind and that of like-thinkers. The people who set up the lastsuperpower site and who went against the tide should be feeling buoyed by the way the ‘draining-the-swamps’ analysis has been proven right. The cyberpeople are very frustrated at the moment and I must admit that I’m loving it. Barry

  10. 10 epiCham

    Great post.

  11. 11 ANNIE

    Very informative.

Leave a Reply

*