Reaping the spoils of war

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Posted by Jeff from ( on Saturday, February 01, 2003 at 10:35AM :

Reaping the spoils of war
Ousting Saddam could put U.S. oil giants in 'driver's seat'
By Lisa Sanders,
Last Update: 7:15 PM ET Jan. 31, 2003

HOUSTON (CBS.MW) -- Colin Powell says the United States plans to keep Saddam Hussein's oilfields "in trust" for the people of Iraq if the regime is ousted. But the secretary of state has yet to elaborate.
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That's because the Bush administration has to distance itself from the unseemly fact that a successful invasion would capture oil reserves that are second only to Saudi Arabia's, unleashing a black-gold rush for American companies.

Meantime, U.S. companies are "ready to hit the ground running," said energy analyst Peter Zeihan of Stratfor, an intelligence-consulting group based in Austin, Texas. "If I was the CEO of one of the super majors, I would have contingency plans ready and make sure the necessary parts are in the region."

Oil giants including ExxonMobil (XOM: news, chart, profile), ChevronTexaco (CVX: news, chart, profile), and ConocoPhillips (COP: news, chart, profile) are the most likely to lead any development efforts in a post-war Iraq, Zeihan said.

Analysts at Stratfor say the Bush administration has had discussions with American energy companies and the Iraqi National Congress, the country's main opposition group, about how best to rehabilitate and develop a nation that's sitting on top of an estimated 200 billion barrels of unexploited crude.

Washington even has a special unit planning for the post-war phase of business, according to a trade publication.

On Friday, Oil Daily reported that the State Department's "Future of Iraq" oil and gas working group would meet Friday and Saturday to discuss post-war management of the oil sector, including the possibility of privatizing the industry. State Department officials couldn't be reached for comment on the report.

Zeihan says that Baker Hughes and Halliburton, two of the world's largest oilfield service providers, would be at the head of the line to land contracts during the key initial phase of replacing technology and equipment and providing state-of-the-art engineering services.

Replacing outdated gear

"The first big stage will be refurbishment, and there have been no computers installed in the Iraqi oil industry since 1979," Zeihan said.

Representatives of Baker Hughes (BHI: news, chart, profile) and Halliburton (HAL: news, chart, profile), both based in Houston, denied they've discussed rehabilitation plans. Vice President Dick Cheney was chairman and chief executive of Halliburton before Bush made him his running mate in the 2000 presidential campaign.

Though companies in France, Russia and other countries had exploration or production agreements with Iraq, they've either been voided or were never signed. While the future of the contracts is unclear, the unwillingness of French and Russian leaders to back a U.S.-led incursion against Saddam is likely to come back to bite them in a post-war scenario, analysts say.

Despite calls for it to address the oil issue head-on, the White House is instead emphasizing the need to prevent terrorism and contain weapons of mass destruction. As Presidential spokesman Ari Fleischer put it on Thursday, "If this was a war for oil, the United States would be the one saying 'lift the sanctions, that way Iraq could pump oil.' This is about peace, and this is about protecting people in the region and the American people from Saddam Hussein, who has weapons that kill millions."

Observers say the adminstration has to focus on those issues as it struggles to line up key coalition partners.

"If the U.S. takes control of the fields, the American government has to be careful not to appear to seize the oil for their own benefit," said David Malone, president of the International Peace Academy, based in New York.

With its wells antiquated and its workers dispirited after more than a decade of economic sanctions, Iraq produces between 1.8 million and 2.5 million barrels of oil a day, compared to Saudi Arabia's 8 million barrels a day. Statfor analyst Zeihan says that just by refurbishing existing fields, Iraq could easily bring 5 million barrels a day online.

Phil Flynn, senior energy analyst at, said, "One of the main reasons that the Russians and the French are against (an invasion of Iraq) is that they've been making so much money off Iraqi oil and Iraqi oil deals," Flynn said. "They have a deep financial interest. And OPEC countries have a lot to lose on a regime change. If Iraq is pumping as much oil as Saudi Arabia, they could become a competitor."

Russia's scuttled deal

About two years ago, Iraq agreed to pay Russia's Lukoil $3.7 billion to develop the West Qurna field, an untapped western desert spot worth an estimated 15 billion barrels. But Baghdad voided the deal after the United Nations Security Council in November forced a fresh round of weapons inspections.

"Lukoil was happy with that," Zeihan said. "It's a pity they are never going to use it. Western firms will get first choice, and if Lukoil is smart, they should try to get a minority stake."

Another company that stands to lose prospects is the French company Total Fina Elf (TOT: news, chart, profile). Before it became part of Total, Elf negotiated a production-sharing contract with Iraq, which Total inherited.

"The agreements were never signed because the companies were careful to respect U.N. sanctions," said James Placke, a senior associate at Cambridge Energy Research Associates.

In addition, the national oil company of India has an exploration contract for the western desert. The Chinese National Petroleum Corp. negotiated a $700 million deal to develop Al-Ahdab field. "But it's too soon to forecast what will happen to those agreements," Placke said.

The chance of these companies holding on to their contracts is "directly proportional to their level of cooperation," Zeihan said. "The companies didn't pay out a cent. And a lot of these countries don't have the technical capabilities to do a lot of these things. It would take Lukoil years to develop West Qurna. It would take ExxonMobil six months."

While the issue of who will control the oilfields hasn't been resolved publicly, few would argue about the necessity of restoring the fragile Iraqi economy. Revenue from crude, the country's most valuable and plentiful asset, would be instrumental.

Industry experts say that experienced Iraqi managers would probably play a key role. And the U.S. is set to play the part of lead helper.

"It's not the U.S. practice to go in and steal oil or anything else from these countries," commented one oil executive who spoke on condition of anonymity. "The loser is better off at the end than at the beginning because we look out for them and help them rebuild."

For their part, representatives of both ExxonMobil and ChevronTexaco denied they'd had discussions about oilfield development with the U.S. government. ConocoPhillips officials declined comment.

Slighting supermajors

But Zeihan believes all three oil powerhouses have indeed spoken with the U.S. government. If they weren't asked to participate, he says, the companies should perceive it as a slight, given their status as world leaders in the industry.

Robert Ebel, energy program director for the Center for Strategic and International Studies, a Washington think-tank, said almost all the major oil and gas companies would evaluate Iraq's potential.

"Everybody knows they have this tremendous reserve potential," he said. "It's good quality oil, easy to produce, cheap to produce, and has easy access to the growth markets of the East and Southeast Asia. It doesn't mean they'll all be ready to sign on the dotted line. It's going to take a fair amount of negotiation."

Zeihan says that the unexplored western desert holds the most promise with enough estimated reserves to rival Saudi Arabia. There's also expansion potential in the existing fields of Kirkuk and Ramalia.

"The supermajors would really shine," Zeihan said. "It could be like Saudi Arabia all over again for the American companies. Long-term, I see America being in the driver's seat."
Lisa Sanders is a Dallas-based reporter for Reporters William Watts in Washington and Myra Saefong in San Francisco contributed to this report.

-- Jeff
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