Over a barrel - useful background story on Iraq oil politics

Jurriaan Bendien J.Bendien at wolmail.nl
Sat Jan 4 14:59:30 MST 2003

(I missed this Guardian story before, but thought I would post it anyway as
useful information).

Over a barrel

The mother of all legal rows over who has the right to Iraq's lucrative
oilfields is likely if the United States wins its war for the country itself

Tom Cholmondeley
The Guardian, Friday November 22, 2002

All the players in the current quarrel can agree on one thing - Iraq has the
potential to become a great oil nation again. There is a huge gap between
the trickle of oil coming out of Iraq today and its capabilities.
According to Opec, the entire world's known oil reserves run to 1,000bn
barrels. Iraq claims a 10th of this, just over 100bn barrels. However, in an
interview before the current conflict, Taha Hmud Moussa, then Iraq's deputy
oil minister, said the oil "will exceed 300bn barrels when all Iraq's
regions are explored". If true, this means Iraq has a quarter of the world's
oil. The UK's North Sea reserves are 5bn barrels and we are the EU's largest
oil producer. Iraqi's oil is not miles offshore under a treacherous sea.
This makes it cheaper than the $3 to $4 barrel oil Britain produces - much

John Teeling, head of one of the few western companies to admit to working
in Iraq, is exultant. His Dublin-based company Petrel is keen to develop
unexplored oilfields. This oil could cost as little as 97 cents a barrel.
"Ninety cents a barrel for oil that sells for $30 - that's the kind of
business anyone would want to be in," he says. "A 97% profit margin - you
can live with that."

Last month, behind the closed doors of the Royal Institute of International
Affairs, leading oilmen, exiled Iraqis and lawyers held a meeting entitled
"Invading Iraq: dangers and opportunities for the energy sector". One
delegate said the entire day could be summarised with: "Who gets the oil?"
If America changes the regime you might expect US companies to get it. But
it may be more complicated than that.

History can reveal much of how this may end. Iraq's oil was originally
developed through a consortium called the Iraq Petroleum Company (IPC) -
split roughly a quarter share to BP, Shell, and the forerunner to Total,
with the remainder owned mainly by Standard Oil and Mobil. But, in 1972, it
was nationalised by the revolutionary Iraqi regime. Negotiations over
nationalisation were fierce, and Geoffrey Stockwell, who headed the IPC
team, had some extraordinary clashes with both Saddam Hussein and Iraq's
vice-president, Salih Mahdi Ammash. Ammash said Iraq would "go through any
battle with the companies that was necessary", and resort to "all means
necessary". The companies would also "lose Saudi Arabian and Kuwaiti oil
because if their Arab brethren did not stand by Iraq, they would use force
to stop this oil flow".

After a painful battle, the IPC finally signed the nationalisation agreement
on February 28 1973. Today, if "regime change" happens, we could see three
of the world's largest public companies - BP, Shell and ExxonMobil -
fighting for their old IPC possessions.

Back in the 1970s, the IPC was compensated for its lost oilfields, and that
would normally end any future rights they might have. However, they may well
try to show that the compensation deal was signed under duress. An incoming
Iraqi government could face a giant legal compensation case.

"If you argue there is something amounting to duress, then you could argue
the compensation agreement is invalid," says Professor Thomas Wälde,
formerly principal UN interregional adviser on oil and gas law. "If I were
their [the companies'] adviser, I would develop this into a bargaining chip
with the new government. It would play a role in the race for getting new

The stakes are high. Iraq could be producing 8m barrels a day within the
decade. The maths is impressive - 8m times 365 at $30 per barrel or $87.6bn
a year. Any share would be worth fighting for.

The stakes are equally high for the French, Russians and Chinese. It is
striking that the three countries which delayed America's new UN Iraq
resolution all have potentially massive oil pacts there. Saddam is believed
to have offered the French company Total Elf Fina exclusive rights to the
largest of Iraq's oil fields, the Majnoon, which would more than double the
company's entire output at a stroke. Meanwhile, Russia and China have sought
various deals on the supergiant West Kurna and Rumaila fields respectively.
Russian company Lukoil has been assured it will not lose its stake in the
20bn barrel West Kurna field.

Former CIA director James Woolsey, who is close to the Iraqi opposition
groups, recently told the Washington Post: "It's pretty straightforward.
France and Russia have oil companies and interests in Iraq. They should be
told that if they are of assistance in moving Iraq towards decent
government, we'll do the best we can to ensure the new government and
American companies work closely with them. If they throw in their lot with
Saddam, it will be difficult, to the point of impossible, to persuade the
new Iraqi government to work with them."

Experts on international law seem not to be on Woolsey's side, however, and
a new Iraqi government may have little choice but to work with Saddam's
current friends. "The majority opinion is that if a government creates a
[legal] title, it survives a change of government," says Prof Wälde. "The
idea that all the Iraqi oil industry is now going to be sold to Exxon, say,
or BP... is not going to work."

"Regime change does not change the acquired rights companies have in the
area," says Doak Bishop, vice-chair of the Institute of Transnational
Arbitration. "If the Russians and the French have legal rights in those
fields, then a regime change would not oust them of those rights, but it
could well get pretty messy."

Should "regime change" happen, one thing is guaranteed - shortly afterwards
there will be the mother of all legal battles.

Source http://www.guardian.co.uk/Iraq/Story/0,2763,845167,00.html

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