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Oil: The Danger of Deals with Iraq

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  • Omar Tesdell
    OIL: The Danger of Deals With Iraq Several state-owned oil companies in Asia have contracts with Iraq to develop oilfields. But the agreements fate is
    Message 1 of 1 , Mar 1, 2003
      OIL: The Danger of Deals With Iraq

      Several state-owned oil companies in Asia have contracts with Iraq to
      develop oilfields. But the agreements' fate is uncertain if Saddam goes


      --------------------------------------------------------------------------------

      By Trish Saywell/SINGAPORE


      --------------------------------------------------------------------------------

      WHEN TALKS FIRST BEGAN between Malaysia's state-owned oil giant Petronas and
      Iraqi oil authorities six years ago for the development and production of an
      oilfield in Iraq's western desert, there were no direct flights to Baghdad.
      Company officials had to fly to Amman in Jordan and then make the arduous,
      12-hour journey to Baghdad by road.

      Talks are continuing, but now the threat of war is the hardship that
      negotiators face. In the years while Petronas has been talking with Iraq,
      many of the company's Asian counterparts have gone ahead and signed deals
      with Baghdad. The companies have thus added their names to a significant
      list of oil heavyweights, dominated by French and Russian companies, that
      have agreements with the pariah oil producer. These companies may have
      benefited from the fact that Western sanctions kept big competitors on the
      sidelines.

      Many companies that have reached deals with Iraq did so "because they can
      and because a large portion of the competition--the American and British
      companies--are largely excluded from the contest," says Iain Brown of oil
      consultants Wood Mackenzie in Scotland. He says the companies "have
      guaranteed themselves some share of the pie in what is probably the most
      prized place in oil right now."

      Or have they? With a possible United States-led attack on Iraq close at
      hand, a critical question looms: Will the deals signed during more than a
      decade of sanctions against Saddam Hussein's government be honoured if the
      Iraqi dictator is kicked out and a new government installed?

      "There's got to be a big question mark over the validity of these deals once
      there's a regime change," says Paul Stevens, professor of petroleum policy
      and economics at the Centre for Energy, Petroleum and Mineral Law and Policy
      in Scotland. "Will they be honoured? My instincts say, no, they won't. Who
      wants a bunch of Chinese and Russian oil technology when you can get a BP,
      an Exxon or a Shell? Iraq would be trying to get out of these sorts of
      agreements to get the major oil companies in."

      THE VALUE OF CONTRACTS
      The stakes are huge. The U.S. Department of Energy estimates Iraq has 112
      billion barrels of proven oil reserves, the second largest in the world
      behind Saudi Arabia, along with roughly 220 billion barrels of probable and
      possible resources. The true resource potential may be even larger, since
      years of war and sanctions have left the country relatively unexplored.

      United Nations sanctions have shut out foreign investment in Iraq's oil
      sector with the exception of a trickle that has accompanied the UN's
      six-year-old oil-for-food programme, under which income from oil sales is
      used in part for food and humanitarian supplies. Nonetheless, Iraq has
      awarded contracts to harvest proven fields as well as explore potential new
      wells.

      The fate of those contracts may well rest on political considerations, says
      a senior U.S. official in Washington who asked not to be identified. The
      official says a new Iraqi administration, when it comes to assessing whether
      existing contracts should be allowed to stand, might consider the
      relationships that companies and their governments had with Saddam.

      In 1997, China National Petroleum Corp., along with China North Industries
      Corp., signed a production-sharing agreement for the Al-Ahdab oilfield in
      southern Iraq. India's Oil and Natural Gas Corp. reportedly reached an
      agreement in 2000 to explore in the western desert, while Petrovietnam
      signed a development contract last April for the Amara field. Indonesia's
      Pertamina acknowledges that it has received permission to drill for oil in a
      section of the western desert. China National Petroleum and Petrovietnam
      refused to confirm or deny their contracts in Iraq and declined to be
      interviewed for this article. India's Oil and Natural Gas Corp. did not
      respond to repeated requests for comment.

      One concern is that Iraqi national oil authorities granted many of the deals
      on extremely favourable terms--sometimes offering returns on greenfield
      projects as high as 20%, according to a report by Deutsche Bank. Amy Jaffe,
      senior energy adviser at the James A. Baker III Institute of Public Policy
      in Texas, told the REVIEW: "Some people may argue that [Iraq] gave overly
      attractive, uncommercial terms to countries or state companies associated
      with certain countries to garner votes at the United Nations."

      According to a report that Jaffe helped to write for the Baker Institute and
      the Council on Foreign Relations, a Washington think-tank, the legality of
      Iraq's oil contracts awarded in recent years will have to be evaluated. "It
      may be advisable to pre-establish a legitimate (preferably United
      Nations-mandated) legal framework for vetting pre-hostility exploration
      agreements," says the report, which goes on to warn that potential legal
      delays in developing oil resources could hurt a new Iraqi government. Jaffe
      herself says: "It would be a tragedy if the Iraqi people were left with
      years of litigation over contracts signed by a regime where commercial
      interests were not the main ones."

      Valerie Marcel, senior research fellow at the Royal Institute of
      International Affairs, noted in a research paper that the future of these
      agreements may hinge on the result of negotiations with the U.S. and their
      countries' support for America's Iraq policy. But historical relations can
      be strong and the incumbents "may benefit from sympathetic oil-authority
      negotiators when Iraq's economy opens up to foreign investment."

      For its part, the U.S. government is anxious to deflect the suggestion that
      it would exploit Iraq's oil wealth. In January, Secretary of State Colin
      Powell told reporters that if the U.S. ended up in Iraq, it would hold the
      nation's oil "in trust" for the Iraqi people. Says the senior U.S. official
      who spoke to the REVIEW: "The principle will have to be that it is Iraq's
      oil . . . I'd be shocked if we'd try to take over their oil. It would create
      nationalist resentment." Wood Mackenzie's Brown argues that America may be
      similarly reluctant to impose its will on pre-existing oil contracts: "It
      would be very difficult for U.S. Inc. to come in and kick out what are Asian
      state companies."

      Oil-industry researchers and academics, however, say any of several
      scenarios is possible. Iraq could decide to develop new oilfields on its own
      without the help of foreign oil concerns. Companies could negotiate with
      each other. Or, they might be guided into new partnerships with bigger, more
      cash-rich oil giants. Says Marcel of the Royal Institute of International
      Affairs: "The Iraqi government might say: 'Well, we'll take away this
      contract but we'll put you in another field with this other company to joint
      venture.'"

      If Asian companies are concerned, they're not letting on. "The Iraqi people
      wanted this contract," insists Mohamad Harun, a spokesman for Indonesian oil
      firm Pertamina. "The contract has been ratified by the parliament. Of course
      it will be respected. It has to be honoured. We're not worried."

      Murray Hiebert in Washington and Leslie Lopez in Kuala Lumpur contributed to
      this article

      FEER, Issue cover-dated March 06, 2003

      [RJ]
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