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James Denselow

James Denselow

Posted: December 14, 2009 05:38 AM

Iraq hits Black Gold

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Read More: Iraq , Iraqi Oil , Oil , Home News

The timing could not have been worse. On Tuesday afternoon, set against the sleek backdrop of a London hotel, the vice-chairman of Iraq's oil and gas committee, Abdul-Hadi al-Hassani, told the BBC that the time is right to invest in Iraq as the government has "gone from strength to strength".

A short distance across town, Sir John Scarlett, head of MI6 and gatekeeper to some of the precious "intelligence" that triggered the war, refused to confirm or deny the report that an Iraqi taxi driver was responsible for the "45 minutes" WMD claim.

While the future and the past of Iraq were being discussed in London, Baghdad was burning in the present, as fire engines were still dousing the smouldering car wrecks and the ambulances were still carefully collecting the remains of some of the 127 people who had been blown up in the co-ordinated blasts that hit the capital.

Despite the progress in reducing levels of violence, clearly Iraq remains a highly dangerous and significantly underdeveloped place. In the first six months of this year only 25,000 Iraqis returned to the country and 4.6 million Iraqis remain internally and externally displaced. In the past six years the country's scores on press freedom and corruption perception indexes have got worse. February's statistics showed only 20% of Iraqis have access to sewage and 45% clean water.

Iraq may have turned a corner and be heading in the right direction but there is still a long way to go. For real change and development to occur Iraq's oil will clearly play a major role. The country currently produces 2.5m barrels a day (down from the 2.8m prior to the invasion) accounting for some 90% of the government's budget.

With little fanfare the second round of bidding for Iraq's oilfields is taking place this month, and a consortium led by Shell has now secured rights to develop the giant Majnoon oilfield. While diplomats seek to save the world in Copenhagen, this more traditional conference will seek to award concessions parcelling out the country with the third largest oil reserves, home to an estimated 115bn barrels of oil.

Oil minister Hussain al-Shahristani has estimated that with $50bn investment in infrastructural upgrades, Iraq will be able to produce 6m barrels a day by 2017.

However, the first round of oil bidding back in June turned out to be a bit of a disaster, with the major oil companies demanding far more for every barrel produced than the $2 offered by the Iraqis. Ironically for those who argued that the war was all about oil, the Chinese were part of the only concession to be agreed. A consortium of the China National Petroleum Corporation and BP signed a 20-year deal, promising to keep expenses down using low-cost Chinese labour and equipment. Many Iraqis were dismayed by the length of such contracts that "will put the Iraqi economy in chains and shackle its independence for the next 20 years. They squander Iraq's revenues."

Oil has been something of a curse in the Iraq's history, bringing with it greater levels of foreign interference and a history of governments who can exploit the theory of "no representation without taxation". There is a clear precedent for the dangers of rentierism found in the neighbouring states of Kuwait and Saudi Arabia.

In 1925 the Iraqi parliament ratified an oil concession agreement with the Turkish Petroleum Company, later to become the Iraq Petroleum Company (IPC), on terms most unfavourable to itself. By 1953 oil accounted for 49.3% of national income, although both production and prices were controlled by the IPC. In 1961 Abd al-Karim Qasim's famous Law 80 reclaimed unexploited areas of the IPC concession but it was only in 1972 that the industry was fully nationalised. The subsequent oil crisis of 1973 sent prices through the roof, greatly enhancing the power of the state and emboldening Saddam Hussein who would lead the country into disastrous wars with Iran and the Kuwait.

In March 2003 Paul Wolfowitz, then the deputy US defence secretary, said that Iraq could finance its own post-war construction and famously the oil ministry was one of the few buildings to be protected after the fall of Saddam.

While the failure of the neocons to predict what would happen in post-invasion Iraq is well documented, the future of the role of oil in Iraq is far from sure. Already what appears to be a multitude of "white elephants" are in the pipeline. A country that can barely feed and secure its own people and has been fighting back outbreaks of cholera is looking to build a mass transit system in Baghdad, a big wheel in the style of the London Eye, purchase F-16 warplanes and - more ominously considering the unpredictability of the region - nuclear power stations.

Oil, in conjunction with all this unaccountable spending, may retard the chequered growth of Iraqi democracy. The fact that senior Iraqi government figures are offering oil concessions despite the failure to agree on a national hydrocarbon law is a case in point. Hassani awkwardly explained this week how they were reverting to laws passed in Saddam's time instead in order to encourage investment.

With elections now scheduled for March it remains to be seen whether the present Iraqi government has enough vision or strength to avoid the temptations of short-term gain over securing longer-term interests.

 

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