12 November 2004
Iraq plans to revive its national oil company, dismantled by Saddam Hussein, by the end of the year. But the structure and role of Iraq National Oil Co. are proving highly contentious, with arguments between Iraqi oil veterans, oil ministry officials and politicians in the interim establishment a reflection of the conflicting visions of Iraq’s future. Energy Intelligence Middle East correspondent Ruba Husari reports on the controversy, plus the high stakes involved.
When interim Prime Minister Iyad Allawi outlined his vision for the future of Iraq’s oil industry to the Supreme Council for Oil Policy in August, oil veterans welcomed the move. But what he had in mind for Iraq National Oil Co. (INOC) soon had everyone wondering whether Saddam Hussein’s old friend-turned-foe intended to use the country’s oil riches to consolidate his hold on power.
Allawi surprised oil veterans with plans to confine INOC to running currently producing oil fields while putting the development of all new fields in the hands of international firms and the Iraqi private sector. In another proposal that raised eyebrows, he suggested that INOC could be partly privatized at some stage in the future — a move considered taboo in regional producing countries.
It’s not clear who drafted the proposals, since the former exile has no background in oil. Some speculate the interim premier had input from other exiles familiar with the oil business, others that US oil advisers were involved. What is clear is that Iraqi oil technocrats who had been working on their own plans for reviving the dilapidated sector were not consulted, oil ministry insiders say.
“Allawi has obviously been ill-advised. No one creates a national oil company with limited authority in this way, especially since INOC proved its usefulness in the 1970s when it was adding reserves at a rate of 6 billion barrels per year,” says Tariq Shafiq, a founding vice president and executive director of the original INOC.
INOC was created in 1964 to settle a conflict between Iraq Petroleum Co. (IPC), holder of all Iraq’s oil concessions since the 1930s, and the government. The disagreement was eventually resolved in 1972 when the industry was nationalized and INOC became sole operator of all oil fields. That changed again in 1987, when, bent on decentralization, Saddam split INOC into a North Oil Co. and South Oil Co. and delegated its power to run the sector to the oil ministry.
“Iraq is too dependent on oil income to leave it in the hands of international oil companies. It’s not wise that Iraq’s oil production and export decisions are left in the hands of multinationals, whose interests are first and foremost to their shareholders,” Shafiq says. “Iraq and the international oil companies simply don’t have the same priorities.”
Allawi’s hints about privatization also drew fire from those opposed to the war against Iraq in the first place, reviving allegations that the US-led invasion was essentially motivated by oil. In the months leading up to the war, US neoconservatives suggested that Iraq’s oil sector should be privatized once Saddam was ousted.
In fact, prewar talk of “internationalizing” the industry, which culminated in the establishment of an international oil advisory board headed by former Shell Oil head Phil Carroll, fell silent in the war’s aftermath. Carroll envisaged a board composed of Iraqis and outsiders with energy, legal and financial expertise that could offer advice on matters such as international investment and privatization. But the fact Iraq already had its own able technocrats meant the board was deemed unnecessary, and Carroll failed to convince qualified Iraqis to join.
According to Shafiq, who recently did a study on Iraq’s exploration and production capacity for Petrolog & Associates, the capital requirements of development do not justify privatization. An investment cost of $5,000 per barrel per day would be recovered after a few months of production, even at prices of just $24/bbl, he says.
Production capacity now is around prewar levels of 2.8 million b/d, although production is limited to 2.5 million b/d, interim oil minister Thamer al-Ghadban says. The ministry plans to hike capacity to at least 3 million b/d in 2005 using a $3 billion development budget earmarked by the interim government.
Iraqi oil experts say Allawi’s plan amounts to a marginalization of INOC. It smacks of Saddam’s hostility to all centers of power that could potentially challenge his grip on the country and its economic lifeline. While Allawi wants to make INOC immune from political interference and run it as a professional company, experts say he is confusing independence with isolation.
“There’s nothing wrong with running a national oil company according to highly professional standards similar to those applied by international oil companies. But privatizing a national asset, the country’s biggest, is a totally different story,” says former Iraqi oil minister Issam Chalabi, who was INOC’s chairman when it was dismantled in 1987.
Chalabi, like other Iraqi oil veterans, believes INOC should play a pivotal role in managing the sector, and have full financial and decision-making independence. “There’s no point in creating INOC just for the sake of it,” he says.
Analysts say the proposals to marginalize INOC, as well as hints about privatization, suggest Allawi wants international firms to become the main players on the Iraqi oil scene, and that he is presenting himself as the champion of, and eventually gatekeeper for, Big Oil’s entry.
Oil has always been associated with political power in Iraq and for many always will be. Before becoming president, Saddam chaired the oil committee that negotiated foreign firms’ exit from the country ahead of full nationalization. After he took power, oil bankrolled his grip on the country and helped him buy friends at home and abroad.
Whatever Allawi has in mind, experience shows that it’s better for multinationals to work with national oil companies than against them. That was evident in Saudi Arabia’s recent opening of its upstream gas sector. An initial attempt to negotiate the entry of major US firms, including Exxon Mobil, was undermined by Saudi Aramco, which ferociously defended its turf. The opening only succeeded once the state giant was brought in as an equal partner.
Iraqi oil veterans say international partnerships are a must. Since nationalization more than 30 years ago, the country has had no access to modern technology or foreign investment. Over two decades of war and sanctions have left Iraq lagging many of its neighbors, stumbling along on the remnants of 1970s technology, and it desperately needs foreign help to bring it into the 21st century.
Iraqis have become more outspoken since Saddam’s ouster, particularly about the defects of Law 80 of 1961, which saw concession-holders stripped of most of their producing areas, and the way nationalization was subsequently handled. Although popular at the time, the total exclusion of international firms served to isolate Iraq, even as other regional producers that had nationalized created profitable partnerships. Today, Iraqi oil officials and veterans believe their salvation lies in establishing such partnerships, even though Allawi himself envisages no joint ventures.
“Excluding the national oil company from establishing joint ventures with international oil companies while awarding them deals to explore, develop and produce oil is detrimental not just because the country will not be able to benefit from the high rent, but also because it’s important for the transfer of technology and the training of national manpower,” Shafiq says. “Giving the Iraqi private sector a prominent role is a step in the right direction if it’s done in a gradual and balanced way, but it should not be at the expense of INOC.”
Opening the upstream to joint ventures could raise production capacity to at least 6 million b/d in a few years, according to plans drawn up since the 1990s. “The experiences of the 1950s and 1960s proved that it’s better if foreign firms operate jointly with the national company,” says Shafiq, who has lived in London for the past three decades. “Even Saddam Hussein realized that and decided to open up the sector in the mid-1990s when he invited international oil companies to come to Iraq.”
In a bid to undermine UN sanctions, Saddam courted international oil firms with lucrative deals, focusing on friendly countries. Russia and China were first to sign up for 25-year production-sharing contracts, followed by France, although Paris declined to finalize deals for the Majnoon and Bin Umar fields until sanctions were lifted. Other companies from India, Indonesia and Russia signed up for smaller deals, but these are likely to be scrapped by an elected government.
Right now, several oil majors are courting the oil ministry for major deals, although none will commit while the situation is so dangerous. Firms like ChevronTexaco, Royal Dutch/Shell and BP are offering free technical assistance to help overcome production problems, while several are bidding for a contract to study the two major reservoirs in Kirkuk and Rumaila, which will be awarded in November. But negotiations over big fields await the installation of a legitimate government and elected parliament.
In fact, next year’s planned parliamentary elections could become a stumbling block for Allawi. He has said he doesn’t want to waste time debating investment terms, believing production sharing contracts are best. International oil firms prefer these contracts, and they are also popular with Iraqi oil experts. Yet parliamentary approval of long-term contracts is a must in most oil-producing countries — and the experience of neighboring Kuwait isn’t hopeful.
After nationalization, state oil firms became monopoly concession holders, but the first Gulf War prompted regional oil powers, dependent on the US for protection, to look more pragmatically on the reentry of foreign oil companies — as a liberated Kuwait did in 1991. However, attempts to invite international firms to develop its northern fields — a scheme essentially designed to give the West, mainly the US, a stake in defending Kuwait — have been held up by parliamentary hostility.
In multi-ethnic Iraq, some political entities might view Allawi’s plans as a sell-out to the foreign powers to which he owes his position, and on which he relies for protection and survival. In fact, the future management of the country’s natural resources is already a bone of contention, with Kurds in the north pushing for inclusion of oil-rich Kirkuk in semi-autonomous Iraqi Kurdistan. Similar Shia attempts to gain autonomy for the southern oil province centered on Basrah could be fatal for the cohesion of the country and the central government, as well as for Allawi’s vision.
Oil ministry technocrats have drawn up their own blueprint for the industry, which is to be vetted by the interim cabinet before the end of the year. Al-Ghadban says the aim is to revive INOC as a state-owned holding company, with the existing North Oil Co., South Oil Co., Iraq Drilling Co. and Oil Exploration Co. as subsidiaries. INOC would operate on commercial lines, and would be in charge of all financial and technical aspects of oil and gas exploration, development and production on a day-to-day basis. The oil ministry would continue to set policy. The draft also suggests creating a board of directors chaired by the oil minister and including the chief executive of INOC and other top oil officials, al-Ghadban says.
Allawi believes INOC should fund capital investment internally, either through commercial borrowing against future production, or partner funding in joint ventures. He also says the state should not guarantee INOC borrowing. Shafiq says INOC should be encouraged to borrow commercially, and al-Ghadban agrees. “Even in the old days, INOC had the right to borrow funds and that’s an option we included in the draft,” al-Ghadban says. “But we also suggested that it be given the possibility of establishing subsidiaries inside and outside Iraq, as well as buying other companies both at home and abroad and integrating them.”
Judging by the proposals made so far, the scope and structure of the new Iraqi national oil company would be far more ambitious than existing models in the region. In attempting to create the ideal state oil firm, analysts say, Iraqi planners might be sowing the seeds of INOC’s destruction, since no company can exist if it ignores its regional environment.
By Ruba Husari, London
(Published in Energy Compass Nov.12, 2004)