Iraq is finally about oil

In the torrent of debate about the real reasons for the US invading Iraq, the most common theory was oil.

But how does the desire for oil actually pan out in a practical sense? It’s one thing for the US government to invade a country, but how does that relate to an energy company making money?

A good example was an Iraq oil deal that was agreed last week by American firm Exxon Mobil and British-Dutch firm Royal Dutch Shell.

Iraq has the third largest oil reserves in the world. And not only is it oil-rich, but it’s also one of the cheapest places to get it out of the ground because the oil is located so close to the surface.

Therefore, it’s an attractive proposition for oil companies who make money from getting it out of the ground and into people’s cars and products.

But due to all the public suspicion and scrutiny over the war, the new Iraqi government has been very weary of giving its oil away cheaply and crookedly.

In June it held the first round of bidding for its new oil fields. The competing companies included those from America, Britain, France, China, Russia, Brazil and Norway.

To make sure the oil companies could not put any undue pressure on them, and so the public could trust the process, the whole auction was televised live.

Naturally the oil companies were a little annoyed as it was not the way they were used to doing business. But it kept the process clean and gave little reason for terrorists to let off more bombs.

As it turned out, what Iraq was willing to pay the companies to extract the oil and what the companies wanted for it was quite different.

Only one contract was agreed on between Britain’s BP and China’s CNPC after they cut their price-per-barrel of extraction from $4 to $2 for the giant Rumaila field in the south. The other companies were not willing to budge.

Since then, backroom negotiations have been ongoing. Iraq needs the fields operating so they can earn much-needed revenue. The companies want the business. It was just a matter of finding common ground.

Last week, after months of such negotiations, the prize jewel West Qurna 1 oilfield was confirmed for Exxon and Shell. The US$50 billion deal was a blow to Lukoil of Russia who had signed an agreement to develop the field under Saddam Hussein, and had been lobbying intensely for weeks to retain it.

Exxon has promised to increase production in the field, one of the biggest in the world, from 270,000 barrels per day to 2.25 million within 7 years. The field has 15 billion barrels of proven reserves with a strong likelihood of more.

A smaller deal with Italian firm ENI was also reached last week for the Zubair oilfield.

It was not the price paid per barrel, however, that changed the tunes of the foreign oil companies – Iraq kept this at $1.90 to maintain public support. The real sweetener for the oil companies is the taxation change.

Iraq will now only tax the profit, instead of all income as was the case in June. Add to this the ability to charge the government for construction work on the necessary facilities, and there are ways to bump up revenue while also minimising their overall tax bill.

It also helps the companies get their foot in the door for fields that get opened up for bidding in the future.

The other key advantage of the contracts – one which is less discussed – is that of the power to control production quantities.

The global oil price is mostly governed by supply and demand – how much people want versus how much can be provided – with a small element determined by speculators betting on its rise and fall.

Oil companies around the world have a natural interest in the price being high. The main way they do this is to determine how many barrels are going to be produced each day.

If they want the price to go up to get more revenue, they produce less. If they want it to come down to stimulate buying, they produce more.

When the price was booming last year (peaking at $147 a barrel) oil companies made record profits – $45 billion for Exxon Mobil, the largest in world history, and $31 billion for Shell, the largest in British history.

Oil-producing countries, known as OPEC, set production quotas themselves so there are limitations on this. However, companies can still have a large influence over price if production decisions are written into their contracts.

There is no doubt the American and British companies were adamant they had to get something out of Iraq.

It was their politicians who helped put the Iraqi officials in power, and they helped fund the campaigns of those politicians back home. So they believed they were due a financial return in some form – however immoral it may seem.

But the concession on taxation is not the battle lost for the Iraqis. In fact, Iraq has gone about the process reasonably effectively.

Most crucially, they decided to keep the oil under government ownership, and contract out the extraction to foreign companies – something all other oil-rich countries in the Middle East do. This is to ensure the government gets a far larger slice of the pie so it can afford to start building the country’s future.

In contrast, the foreign companies wanted to own the oil fields themselves and pay a royalty fee per barrel to the Iraqi government – ensuring them a much larger slice.

Fortunately for the Iraqi people, their government withstood the pressure from the oil companies. It seems now they are striking a reasonably good balance between the interests of the country and making it viable enough for companies to invest.

All up they should land a few trillion dollars from the black stuff in the ground – providing the rules aren’t changed.

The second round of licensing is coming up in December and will be putting potentially five field contracts up for grabs. Iraqis will hope that the good balance is continued so the struggling country can get on with paying for its repairs.

By The Casual Truth