Cheney, Rumsfeld and others who seem to view world politics as a ruthless game of Risk must be anticipating that the “privatization” of Iraq's key prize will be their ultimate vindication here at home. "The problem is that the good Lord didn't see fit to put oil and gas reserves where there are democratically elected regimes friendly to the interests of the United States," the former Halliburton CEO proclaimed to a Nightline audience in April of 2002.
So they must be expecting that the many shortsighted naysayers who are starting to get cold feet and call for withdrawal will some day look back and thank them for staying the course and securing the vast pool of untapped crude that lies beneath the sand near today's battlefields.
Many, that is, whose children haven't by then had their heads blown off.
Although there hasn't been much coverage in the U.S., last week the UK-based PLATFORM revealed the strategy to take over Iraq's oil in a new report, "Crude Designs."
According to the authors, it's not quite the ownership of oil reserves that western interests are after, but an arrangement that will allow governments and companies to deny that “privatization” is taking place at all.
The plan, which was developed by the State Department's Future of Iraq Project, and supported by key figures in the Oil Ministry, is to use highly complex contracts known as production sharing agreements (PSAs), which have existed in the oil industry since the late 1960s.
PSAs are an ingenious arrangement that leaves intact state ownership of the untapped oil, while inverting the flow of payments between the state and companies. Whereas in a concession system, foreign companies have rights to the oil in the ground, and compensate host states for extracting their resources (e.g. via royalties or taxes), under a PSA foreign companies are compensated for their investment in oil production infrastructure and the risks they take in extracting the oil. Under PSAs, the private companies will continue to operate as "contractors" -- a label that is misleading because it gives companies control over oil development and access to extensive profits.
"PSAs are effectively immune from public scrutiny and lock governments into economic terms that cannot be altered for decades," the authors contend. As Helmut Merklein, a former senior official of the Department of energy once explained, PSA's inevitably tend to give foreign oil companies excessive profits at the country's expense (the authors estimate those profits will be between 42% and 162%).
PSAs are also designed to deprive governments of control over the development of their oil industry. PSAs would, for example, exempt foreign oil companies from any new laws that might affect their profits, a principle that goes far beyond certain CPA orders which already grant U.S. companies immunity from civil lawsuits in Iraq. Under terms that are reminiscent of certain trade agreement provisions, for example, any disputes would be heard not in the country’s own courts but in international investment tribunals, which would rule on commercial grounds without considering the national interest or other national laws.
For that and other reasons, oil experts agree that the purpose of using PSAs is largely political. In Iraq’s case, the PSA contracts could be inked while the country still under military occupation. The use of PSAs has been endorsed by the current Transitional Government, while the new Iraqi Constitution includes vague provisions that would allow foreign companies in.
Yet the use of PSAs in Iraq would represent a major departure from the normal practice among large oil producers in the region. Saudi Arabia and Kuwait (not to mention Iran) also do not use any form of foreign company equity involvement in oilfileds. (Currently just 12% of world oil reserves are currently subject to PSAs.)
Although no one can predict what will happen, the pressure put on Iraq to adopt PSAs is substantial and has a lot to do with the coded language that talks about "spreading democracy" throughout the oil-rich region. The current government is fast-tracking the process and is already negotiating contracts with oil companies in parallel with the constitutional process, elections and passage of a Petroleum Law.