Iraq’s vast oil potential presents a game changer for oil markets given that the country could one day rival in terms of oil production.
Many would claim that unlocking Iraq’s oil potential was the primary goal of the U.S. invasion, and one would be naive to think that oil wasn’t at least part of the invasion calculus.
Yet the Iraqi oil revolution isn’t unfolding as many U.S. critics, or even U.S. war planners, imagined according to Professor Michael Schwartz, author of War Without End: The Iraq War in Context.
Post-invasion, Iraq is actually hard-bargaining their oil deals, offering relatively meager returns to winning bidders and keeping much of the profit potential to itself. The U.S. has been mostly left out as a result.
History News Network: The proposed contracts did not, in fact, offer them the kind of control over development and production that the Cheney task force had envisioned back in 2001. Instead, they would be hired to finance, plan, and implement a vast expansion of the country’s production capacity. After repaying their initial investment, the government would reward them at a rate of no more than two dollars for every additional barrel of oil extracted from the fields they worked on. With oil prices expected to remain above $70 a barrel, this meant, once initial costs were repaid, the Iraqi government could expect to take in more than $60 per barrel, which promised a resolution to the country’s ongoing financial crisis.
The result of such low-return investment opportunities has been a relative dearth of oil & gas multinationals involved in the bidding process. Multinationals didn’t stand a chance bidding for low returns against government-owned energy companies who are less interested in profit and more interested in simply securing oil supplies for their nations.
The major international oil companies initially rejected these terms out of hand, demanding instead complete control over production and payments of approximately $25 per barrel. This initial resistance began to erode, however, when the Chinese National Petroleum Corporation (CNPC), a government-owned operation, induced its partner, BP, the huge British oil company, to accept government terms for expanding the Rumaila field near Basra in southern Iraq to one million barrels a day.
The Chinese company, experts believed, could afford to accept such meager returns because of Beijing’s desire to establish a long-term energy relationship with Iraq. This foot-in-the-door contract, China’s leaders evidently hoped, would lead to yet more contracts to explore Iraq’s vast, undeveloped (and possibly as yet undiscovered) oil reserves.
Hence Iraq became a huge land grab for state-owned energy companies of all stripes, each willing to accept Iraq’s paltry returns on investment. The threat of Chinese domination, in particular, set off a stampede from other nations.
Perhaps threatened by the possibility that Chinese companies might accumulate the bulk of the contracts for Iraq’s richest oil fields, leaving other international firms in the dust, by December a veritable stampede had begun to bid for contracts. In the end, the major winners were state-owned firms from Russia, Japan, Norway, Turkey, South Korea, Angola, and — of course — China. The Malaysian national company, Petronas, set a record by participating with six different partners in four of the seven new contracts the Maliki government gave out. Shell and Exxon were the only major oil companies to participate in winning bids; the others were outbid by consortia led by state-owned firms. These results suggest that national oil companies, unlike their profit-maximizing private competitors, were more willing to forego immediate windfalls in exchange for long-term access to Iraqi oil.
Thus the U.S. invasion indeed unlocked Iraq’s oil production potential as many critics said had been the plan all along, but in the end the U.S. won’t have much control over it.
On paper, these contracts hold the potential to satisfy one aspect of Washington’s oil hunger, while frustrating another. If fully implemented, they could collectively boost Iraqi production from 2.5 million to 8 million barrels per day in just a few years. They would not, however, deliver control over production (or the bulk of the revenues) to foreign companies, so that Iraq and OPEC could continue, if they wished, to limit production, keep prices high, and wield power on the world stage.
In terms of reducing oil prices, more Iraqi production is good news nonetheless. Iraq’s desire to rebuild itself likely means that they’ll be trying to maximise oil income for years to come rather than restrict production to the extent OPEC may want. It’s just that state-owned energy companies with political interests will be producing most of it. Read the full Iraqi oil piece here >
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