[L-I] State-run oil company is being weighed for Iraq

Thanks to Richard Menec...

State-run oil company is being weighed for Iraq

By Chip Cummins

Wall Street Journal

January 7 2004

BAGHDAD – U.S. advisers and Iraqi oil officials, now studying how to 
organize Iraq's vast but dilapidated oil industry, are leaning heavily 
toward recommending the formation of a large state-run petroleum company. 
If adopted, the move could sharply curtail the role of international oil 
corporations for years.

Officials of the U.S.-led occupation have been pushing liberalization in 
most parts of the Iraqi economy. But in the politically sensitive oil 
sector, occupation advisers say they strongly support establishing a 
state-owned company similar to those in neighboring Saudi Arabia and Kuwait.

U.S. and Iraqi oil officials say they believe such a model can attract the 
massive foreign investment the industry needs. But international companies 
have been stymied by other state-controlled oil producers in the region, 
where political sensitivities about foreign interference in the oil sector 
have kept them out.

How Iraq develops its oil patrimony is one of the most important policy 
calls facing the country's emerging new political leadership. The U.S. 
advisers and career officials at Iraq's Ministry of Oil say they feel that 
keeping the industry in state hands is crucial to allaying widespread 
concerns here that the American-led invasion of Iraq was an oil grab. 
Iraq's oil industry boasts reserves of about 112 billion barrels, 
second-largest in the world after Saudi Arabia.

U.S. advisers and Iraqi technocrats believe Iraq shouldn't privatize any 
critical petroleum activities, such as production and sales, in the short 
term. Modeled on Saudi Arabia's Saudi Aramco or Kuwait's Kuwait Petroleum 
Co., an Iraqi national oil company would be run by a professional 
management team insulated from political interference in day-to-day 
affairs, but ultimately overseen by a politically appointed oil minister.

"Our preference is definitely in that direction," said Robert McKee, senior 
oil adviser for the occupying Coalition Provisional Authority. "It's just 
pragmatism," he said, citing the country's passionate nationalistic 
attitudes about oil.

Mr. McKee, a former vice president at ConocoPhillips, said all big 
decisions about the long-term shape of the industry will be left to Iraqis. 
That's a view that the Bush administration -- which didn't immediately 
comment on the thinking taking shape in Baghdad -- has been voicing since 
before the war began. But Mr. McKee's office has been preparing a study for 
the country's interim oil minister that he said will highlight "best 
practices" gleaned from other large state companies in the region.

The minister, Ibrahim Bahr al-Uloum, is meeting separately with Iraqi oil 
technocrats to study a restructuring, which he hopes to unveil during an 
international oil conference in Baghdad scheduled for February. Many of the 
most powerful of these technocrats say they also favor the state model.

The advisers' preference on oil-sector restructuring could set back the 
global industry's hopes of getting access to Iraq's huge oil reserves. 
Washington from the outset has made clear that the U.S. had no intention of 
seizing Iraq's oil. But the global oil industry has been hoping that the 
fall of Saddam Hussein would open Iraq to foreign investment. Those hopes 
rose in September, when occupation officials and the occupation-appointed 
Iraqi Governing Council pushed through a sweeping foreign-investment law 
for nonoil businesses. They are studying large-scale privatization of Iraqi 
state enterprises.

But in the oil sector, the advisers' pragmatic concerns about stabilizing 
Iraq are trumping free-market ideology. Political and ethnic strife are 
hammering the industry. Saboteurs are bombing pipelines in territory 
controlled by Mr. Hussein's loyalists. Kurdish leaders, who hold sway over 
rich northern oil fields, are jostling for revenue with the dominant 
Shiites in the equally endowed south.

The U.S. and Iraqi oil advisers say a politically independent state company 
would allow Iraqi oil professionals to ramp up production, improve 
operating standards and pursue maximum revenue for Iraq without inflaming 
nationalistic passions about foreign meddling. The company could strike 
limited deals with foreign companies that would bring in investment but not 
cede ownership of the country's oil to outsiders.

Saudi Arabia's Aramco, the state-owned oil titan, has turned the desert 
kingdom into the world's largest exporter of crude. But the technocrats who 
have led the company since nationalization in the 1970s have largely 
stiff-armed foreign participation. It was only in July that Riyadh signed 
its first major foreign exploration contract -- for natural gas, not oil -- 
since the kingdom nationalized the industry. Professionals at Kuwait 
Petroleum have been seeking permission to bring in foreign capital and 
technology for years, but have failed to win approval in part because of 
opposition from nationalistic parliamentarians.

Blocking foreign investment isn't limited to the Persian Gulf region. 
Mexico's vast oil fields have been all but closed to foreigners since that 
country privatized its oil industry in 1938. Ecuador invited foreign oil 
companies to bid on projects late last year, but has asked for extremely 
high royalties.

To be sure, Iraq is strapped for the kind of cash that foreign oil 
companies could bring. But so was neighboring Iran, whose huge oil industry 
was ravaged by a long war with Iraq in the 1980s. Iran has granted 
foreigners only a cameo role in its oil sector, offering contracts with 
relatively unattractive terms. Such limited opportunities likely won't 
quickly bring in the billions of dollars that experts estimate Baghdad 
needs to bring its oil industry up to international standards.

Some Western oil executives have reached a conclusion similar to that of 
U.S. and Iraqi oil officials: State ownership, even if that means limited 
foreign investment, makes the most sense for Iraq. John Browne, chief 
executive of BP PLC, says Iraq, like Saudi Arabia, might not need Western 
giants to run big projects. "A valid model for the stage that Iraq is at is 
to have a state oil company do it all," he said.

But the advocates of the cautious, state-owned model may face opposition 
from the Western-leaning former exiles now wielding considerable power 
inside Iraq. Ahmad Chalabi, a prominent Governing Council member with 
strong Pentagon backing, has championed a much firmer free-market line than 
the occupation's oil advisers or Iraqi technocrats.

In an interview this fall, Mr. Chalabi chided U.S. occupation officials. 
"They won't act in any way to give the impression that they came to Iraq 
for oil," he said. "This is a correct policy, of course, but this delays us."

Mr. Bahr al-Uloum, the interim oil minister, appears to share views similar 
to Mr. Chalabi's. The son of another prominent Governing Council member, 
Mr. Bahr al-Uloum is a New Mexico-educated petroleum engineer. He has 
aggressively courted foreign oil companies and publicly backed 
privatization of oil-related businesses such as refineries and pipelines. 
He also has recently purged a number of the senior oil technocrats who are 
counseling a more conservative approach.

Mr. Bahr al-Uloum's moves have inflamed many inside Iraq. Despite the 
unpopularity of Mr. Hussein, he is still largely praised for kicking out 
foreign oil companies that were seen as exploiting Iraq's natural wealth.

Oil, perhaps more than anything else, defines Iraq. Western powers, mindful 
of the region's petroleum potential, jostled over Iraq's borders years 
before oil was even discovered here in 1927. Nationalistic pride in that 
oil -- and hunger for a cut of the wealth it generates -- are two of the 
few traits shared by Iraq's mosaic of tribes and religions.

Mr. Hussein took away the last concession held by foreigners in 1972. The 
fruits of nationalization came quickly. Iraq boosted production just as the 
1973 Arab oil embargo sent prices soaring and revenue flooding in. But, 
beginning in 1980, war, oppression and then United Nations sanctions 
strangled the economy.

Mr. Hussein negotiated large exploration and development contracts with oil 
companies from China, France and Russia in the 1990s, in an attempt to 
dislodge U.N. sanctions. Those deals were never consummated.

Western policy makers "are trying to benefit from the transitional 
situation in Iraq now," said Moyassar Kassim, a professor of economics at 
Baghdad University. "We can't agree to give new rights to these big 
companies to own some of these oil projects," he said.

Mr. McKee, the senior occupation oil adviser, said he has the ability to 
force through short-term corporate-governance reforms. "It's going to be 
transparent, and it's going to be fair," he said from his cubicle in a 
cramped office in Mr. Hussein's former Republican Palace. He plans to lend 
the ministry a number of "mentors" -- a professional auditor and an oil 
trader, for starters -- to teach the Iraqis "core values" of international 
business, he said.

Thamar al-Ghadhban, a senior ministry official, said he and many other 
ministry officials are pushing for the reinstatement of the Iraq National 
Oil Co., the state entity disbanded by Mr. Hussein in 1987. Today, Iraq's 
oil industry is a crazy quilt of state-owned entities.

The key question remaining is who will hold the upper hand after July 1, 
when the U.S.-led occupation is scheduled to hand power to a sovereign 
Iraqi government. There is no guarantee Mr. Bahr al-Uloum will remain in 
his post, though the Pentagon-backed Mr. Chalabi is likely to remain a 
powerful figure.

-- 
Macdonald Stainsby
http://lists.econ.utah.edu/mailman/listinfo/rad-green
In the contradiction lies the hope
		--Brecht.



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